corporate finance dividend policy · 2019-05-07 · 1 corporate finance dividend policy javier...

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CorporateFinanceDividendPolicy

JavierEstradaSpring,2014

1.Introduction• Limitationsoftheanalysis

2.ConEd&Telefónica• Circumstancesanddecisions

3.OtherImportantIssues• Clienteles• Growthopportunities• Signals• Smoothing• Taxes• Sharerepurchases

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

IntroductionDividendpolicyisnota‘number‐crunching’topic Thisimpliesthatsolutions/decisionsaremuchmoreopentointerpretationthaninpreviouscases

Dividendpolicyistheissueweknowtheleast inCorporateFinance Anoptimalpolicymaybedifficulttodetermine

• Therearegoodreasonstopay/avoiddividends• Someinvestorswant/avoiddividends

Ideally,whatistheoptimaldividendpolicy?• DPRsuchthatthesharepriceismaximizedDPRforwhichinvestorsarewillingtopaythemost

• ButthereisnomodeltodeterminesuchDPR

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

IntroductionWhatwedoknow Basictrade‐off

• Reinvestingv.Payingout Empiricalregularities

• Dividendsmoothing• Relationshipbetweendividendyieldandincome

Relevantvariablestoconsider• Environment(Macro/Industry/Company)• Clienteles(Whatdoshareholderswant/expect?)• Growthopportunities(Thecriticaltrade‐off)• Signals(Theimplicitmessageconveyed)• Dividendhistory(Smoothing)• Taxes

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesClienteles Companiescanusetheirdividendpolicyto…

• please theirclientele• target aclientele(Telefónica)

Critical(cash)trade‐off Reinvesting(andgrowing) Payingout Go

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesSignalsWhatinformationdoesmanagementconveywithitsdividendpolicy?• ConEd Thecompanyisindeeptrouble(Thestockpricetanked)

• Telefónica Thecompanyhasgreatgrowthopportunities(Thestockpricesoared)

• Moregenerally Go

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesSmoothing Dividendsaresticky(lessvolatilethanearnings) Go

Model(Lintner)• DPSt =α⋅(TDPR)(EPSt)+(1–α)⋅DPSt‐1 TDPR:Targetdividendpayoutratio α:Adjustmentrate

• Notethat… ifα=0⇒ DPSt =DPSt‐1(Dividendsareconstant) ifα=1⇒ DPSt =(TDPR)(EPSt‐1)(DividendsarejustasvolatileasEPS)

• Empirically,LintnerfoundTDPR=50%andα=0.3DPSt =(0.15)⋅EPSt +(0.7)⋅DPStHencesmoothingissubstantial

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

OtherRelevantIssuesTaxes Dividendsareusuallytaxedatthepersonaltaxrate

• Forwealthyindividualsthepersonaltaxratetypicallyismuchhigherthanthecapitalgainstaxrate Go

Dividendsversussharerepurchases Asdiscussed,dividendstendtobesmoothed Buybacksarefarmorevolatile/unpredictable Go

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Appendix

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

CriticalTrade‐Off

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

CriticalTrade‐Off

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Signals

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Smoothing

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Taxes

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Taxes

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

Taxes

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

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JavierEstrada

IESEBusinessSchool

BarcelonaSpain

MBACorpFinSpring,2014

ShareRepurchases

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