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Dividend Policy股利政策

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• Should the firm pay out money to its shareholders?

• Source of capital: debt, preferred stocks, common stocks, and retained earnings.

• If we think dividend policy as an issue if capital structure policy, dividend policy is irrelevant.

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Three issues

• 1.Describe various kinds of dividends and how dividends and how dividends are paid.

• 2.Discuss whether dividend policy matters

• 3.Strategies implement a dividend policy

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Type of dividends股利種類

1.regular cash dividends 正常 (現金 )股利

2.extra dividends超常股利

3.special dividends特殊股利

4. Stock Dividends股票股利

5.liquidating dividends清算股利

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Type of dividends釋例

嘉聰公司每年發放現金股利 1元，因該公司所處的產業每四年有一個景氣循環的高峰，公司三年可以分發現金股利 0.5 元。在第 7年時，公司因在股巿中賺了不少營業外投資所得，公司以特別股利型式發放每股 0.8元給股東。在第 9年時，公司想說為追求成長，因而以正常股利 1元，加股票股利每股 0.5 元（等於每 100股配 5股）方式發放。到第 10年時公司卻突然因經營不善宣布倒閉，清算結果每股可得現金 25元。

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1 2 3 4 5 6 7 8 9 10

正常股利 1 1 1 1 1 1 1 1 1

超額股利 0.5 0.5

特別股利 0.8

股票股利 0.5

清算股利 25

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Ada Corp: The dividend payout ratio 1993-1997

Year Net income # of shares Dividends paid out to shareholdersEPS DPS Dividend payout ratioRetention ratio

1993 18370 2640 8976 6.96 3.40 48.86% 51.14%

1994 22150 2646 10319 8.37 3.90 46.59% 53.41%

1995 26910 2654 11943 10.14 4.50 44.38% 55.62%

1996 32340 2660 13566 12.16 5.10 41.95% 58.05%

1997 34940 2673 14969 13.07 5.60 42.84% 57.16%

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0

2

4

6

8

10

12

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Year 1993 1994 1995 1996 1997

EPS

DPS

9

Dividend payment

|------------------------+------------------------+----------------------------|Th. Mon. Fri. Mon.Jan. 15 Jan. 26 Jan.30 Feb. 16Declaration Ex-dividend Record Paymentdate date date date

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• Declaration date: to announce

• Ex-dividend date: Date four business days before the date of record.

• Date of record

• Effect of ex-dividend

• before ex-date, stock price is $10

• is going to pay dividend of $1 per share

→after ex-dividend date, stock price is about $9

• If there are no frictions in markets, we expect that the value of a share of stock will go down by about the dividend amount when the stock goes ex-dividend.

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Whether dividend policy matters

• Dividend policy is the time pattern of dividend payment.

• Example

• Two-period, 100 shares, r=10%, ash flows for each period is $10,000.

• Case 1: dividends pay out per period are set equal to the cash flow of $10,000

• the firm value=173.55*100=17,355

55.1731.1

100

1.1

100

)1()1( 2221

0

r

D

r

DP

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• Alternatively, case 2

• Want to pay $110 at period 1

Period 1 period 2

• cash flow 10000 10000

• dividends 11000

• borrow 1000 -1100

• 11000 8900

÷100 110 89

• , the same

• The value of the stock is not affected by the switch in dividend policy. Dividend policy makes no difference.

55.1731.1

89

1.1

1102

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Homemade dividends• Assuming the firm choose case 2 dividend policy, but a

shareholder prefers 100,• 100 for each period.

period 1 period 2

dividends 110 89

buy stocks 10 11

net cash flow 100 100

• firm case1, a shareholder prefers case 2

period 1 period 2

dividends 110 89

buy stocks 10 -11

net cash flow 100 100

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• Dividends are relevant

• Dividend policy is irrelevant.

• Dividend policy by itself can not raise the dividend at one date while keeps it the same at all other dates. Rather, dividend policy merely establishes the trade-off

• between dividends at one date and dividends at another date.

• →M&M Dividend Irrelevance Theory

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股利無關例題二：自行調整收入

Example 2

# of shares owned 50000DPS 1current share price 20dividend payment 50000sell shares 2631.58share left 47368.42dividend income 47368.42capital gain 52631.58total income 100000

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preferred income shares sold dividend income capital income

100000 2631.578947 47368.42105 52631.57895

90000 2105.263158 47894.73684 42105.26316

80000 1578.947368 48421.05263 31578.94737

70000 1052.631579 48947.36842 21052.63158

60000 526.3157895 49473.68421 10526.31579

50000 0 50000 0

40000 -526.315789 50526.31579 -10526.31579

30000 -1052.63158 51052.63158 -21052.63158

20000 -1578.94737 51578.94737 -31578.94737

10000 -2105.26316 52105.26316 -42105.26316

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The dividend relevant theory

bRr

EbP

0

0

)1(

(1-b) dividend payout ratio

E=EPS

r0=the required rate of return on equity capital

R=the rate of return on the firm's reinvested earnings

r0>R An increase in (1-b)amplies an increase in the price of the firm's shares

r0<R An increase in (1-b)amplies an decrease in the price of the firm's shares

r0=R The market price of the firm's shares is independent of its dividend policy

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EPS 2b 60%(1-b) 40%r0 20%R 16%P0 7.69

r0 12%R 4% 8% 12% 16% 20%(1-b) 10% 2.380952381 4.166666667 16.66666667 -8.33333333 -3.33333333

20% 4.545454545 7.142857143 16.66666667 -50 -10

30% 6.52173913 9.375 16.66666667 75 -30

40% 8.333333333 11.11111111 16.66666667 33.33333333 #DIV/0!

50% 10 12.5 16.66666667 25 50

60% 11.53846154 13.63636364 16.66666667 21.42857143 30

70% 12.96296296 14.58333333 16.66666667 19.44444444 23.33333333

80% 14.28571429 15.38461538 16.66666667 18.18181818 20

90% 15.51724138 16.07142857 16.66666667 17.30769231 18

100% 16.66666667 16.66666667 16.66666667 16.66666667 16.66666667

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Taxes: Tax Differential Theory所得稅差異論• Compare:

– a: dividend income tax,

– b: capital gain tax.

• If a<b, low dividend payout.

• For some corporate investors, they have 70% dividends tax-free, and

• Tax-exempt investors, like pension funds, they all require high dividends.

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Case 1 case 2

Dividend income tax rate 40% Dividend income tax rate 40%Capital gain tax rate 40% Capital gain tax rate 25%

Firm A Firm B Firm A Firm B

# of shares 1000 1000 1000 1000Share price 2 2 2 2Dividends 0.15 0.1 0.15 0.1Capital gain 0.05 0.1 0.05 0.1Total dividends 90 60 90 60Total capital gain 30 60 37.5 75After tax return 120 120 127.5 135

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dividend incoome tax rate 40%Firm A Firm B

capital gain tax rate 10% 135 150

20% 130 140

30% 125 130

40% 120 120

50% 115 110

60% 110 100

70% 105 90

80% 100 80

90% 95 70

020406080

100120140160

0% 20% 40% 60% 80% 100%

Firm A

Firm B

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Gorden: Bird-in-the-hand theory一鳥在手論Gorden argues that a high-dividend policy benefits stockholders because it resolves uncertainty. Forecasts of dividends to be received in the distant future have greater uncertainty than do forecasts of near-term dividends. Stock price should be low for those companies that pay small dividends now in order to remit, high ,less certain dividends at later dates.

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• Investors prefer larger cash dividends to smaller cash dividends. This conclusion is based on the bird-in-the-hand fallacy.

• Fallacious argument: Dividends represent cash in hand, whereas reinvesting that cash in the hope of greater dividends in the future is a risky prospect. Hence, shareholders are better off with the dividend.

• Rebuttal: If cash flows are priced correctly in the market, then the present value of the larger riskier future dividends is equal to the present certain dividend. Any shareholder that decides otherwise can undo the firm's dividend decision.

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Two special issues

1.Information content of dividends:– The market's reaction to a change in corporate

dividend pay out

2.The clientele effect: – Stock attracts particular groups based on

dividend yield and the resulting tax effects.

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The agency cost/contracting model

Increases in this variable Impact on dividend payoutAsset growth rate ReducedPositive-NPV investment opportunities ReducedCapital intensity of the production process IncreaseFree cash flow generated IncreaseNumber of individual sharesholders IncreaseRelative :tightness" of ownership coalition ReducedSize of largest bloc-holder Reduced

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Establish a dividend policy

• 1.Residual dividend policy– Policy under which a firm pays dividends only after meeting its invest

ment needs while maintaining a desired debt/equity ratio.

• 2. Dividend stability

• 3. A compromise dividend policy *avoid cutting back positive NPV projects to pay a dividend

*avoid dividends cutting

*avoid the needs to sell equity to pay a dividend

*maintain D/E ratio

*maintain a target dividend payout ratio

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III. Residual dividend policy

A firm will pay dividends after all its investment projects have been financed. shares Example

The residual dividend policy leads to the maximization of the firm's share price. 800,000Step 1. Determine the firm's optimal amount for investment. $1,000,000Step 2. Determine the target debt/equity ratio. equity ratio 60%Step 3. Determine the amount of equity required to finance the investment projects $600,000 of the firm so as to maintain the target debt/equity ratio. Net income

Step 4. Use the reserves to supply part or all the equity required. Pay dividends 1600000 $1,000,000 only if there exists more earnings than those required for financing the investment. $1.25

Residual dividend policy釋例

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shares 800000Investment 1000000debt ratio 40%Equity ratio 60%Equity financing 600000Net income 1600000Available dividends 1000000DPS 1.25

Investment Dividend availableDividends DPS

1000000

1000000 1000000 1000000 1.25

1500000 700000 700000 0.875

2000000 400000 400000 0.5

2500000 100000 100000 0.125

3000000 -200000 0 0

3500000 -500000 0 0

4000000 -800000 0 0

4500000 -1100000 0 0

5000000 -1400000 0 0

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Stock repurchase

• Buttle Wilson and Co. has $50 m. available for distribution. Buttle has 10 m. shares outstanding. It expects to earn $2.50 a share, and the current market value per share is $25. The firm has unused cash that could be used to pay a cash dividend of $5 per share, implying an ex-dividend value of $20 per share.

• Alternatively, the firm could use the $50 m. to repurchase 2 m. shares ($50,000,000/$25). Following the share repurc

hase, each share would be worth

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• Following the distribution of the $50 m. whether through a stock repurchase or through a dividend payment, the firm's shares will trade at a P/E ratio of 8 (= $20/$2.50).

• Under the dividend alternative, the EPS is unchanged at $2.50, because the $50 m. paid out were unused, and the number of shares is unchanged. Each shareholder gets (EPS x P/E = $2.50 x 8 =) $20 + $5 = $25 in total value. Under the share repurchase alternative, the projected EPS is higher at

• However, shareholder value is (EPS x P/E =) $3.125 x 8 = $25, once again. The higher EPS is exactly offset by the drop in the P/E ratio from ($25/2.5 =) 10 before the stock repurchase to 8 afterwards.

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Reasons for share repurchase in an imperfect market:VALUE ENHANCING REASONS

• Tax considerations:

Gains to individual shareholders from share repurchases are taxed at the capital gains rate, which is usually smaller than the tax rate on cash dividends. However, a regular policy of repurchasing shares could be disallowed by the IRS for favorable capital gains treatment.

• Eliminate Small Shareholdings:

The cost of servicing a small shareholder account is roughly the same as that of servicing a large shareholder account. Hence repurchasing shares of small stockholders could reduce overall stockholder service costs.

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• Increase Leverage:

If the firm wishes to increase debt in its capital structure, it could borrow funds and use the proceeds to repurchases shares or offer it sshareholders the opportunity to exchange their shares for a new debt issue.

• Exploit Perceived Undervaluation:

If a firm's stock is perceived by the management to be undervalued, repurchasing shares at a favorable price could increase the wealth of the firm's remaining shareholders. However, if investors believe that the share repurchase is being undertaken for this purpose, share prices will jump to reflect market belief in a higher share value. If so, the true wealth of the firm's remaining shareholders would not increase; however, the market value of their shareholdings will increase, which can be valuable for shareholders who desire liquidity.

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VALUE DECREASING REASONS

• Consolidation of Insider Control:

Firms sometimes purchase stock from contentious minority stockholders, sometimes at a premium (greenmail).

At other times, they may do so to reduce public float--to reduce the percentage of stock held by persons not affiliated with the insider group.

Stock repurchases may also be designed to reduce the attractiveness of the company as an acquisition candidate, thus enhancing management's security.

These objectives may not be consistent with firm value maximization.