Chapter 11.5 Flashcards
Setting a Dividend Payout
When was the best known survey of dividend decisions published in and who was it published by?
In 1956 (more than 60 yrs ago) by John Linter
How many managers did the survey of dividend decisions by John Linter ask? What did he ask them?
Mangers at 28 industrial firms on how they set their firm’s dividend payouts
What are the 4 key conclusions from John Lintner’s study?
- Firms tend to have long-term target payout ratios
- Dividend changes follow shifts in long-term sustainable earnings
- Managers focus more on dividend changes than on the level (dollar amount) of the dividend
- Managers are reluctant to make dividend changes that might have to be reversed
What idea are the results from John Litner’s survey consistent with?
That managers tend to use dividends to distribute excess earnings and that they’re concerned about unnecessarily surprising investors with bad news
How has a more recent study, published in 2005 updated Litner’s finding?
Authors conducted survey of 384 financial execs and personally interviewed 23 other managers
Found that managers continue to be concerned about surprising investors with bad news
Maintaining level dividend payouts is as important to execs as the investment decisions they make
Authors also found, as Litner did, that expected stability of future earnings affects dividend decisions.
Is the link between earnings and dividends stronger or weaker today than when Litner conducted his survey?
Weaker today than when Litner conducted it
In response to the increased use of stock repurchases, what did the authors of the 2005 study ask managers? What did they find?
About their views on repurchases
Found that rather than setting a target level for repurchases; managers tend to repurchase shares using cash that’s left over after investment spending
Why do many managers prefer repurchases? (as found in the 2005 study)?
- Repurchase programs are more flexible than dividend programs
- They can be used to time the market by repurchasing shares when management considers a company’s stock price too low
What did managers who were interviewed in the 2005 study appear to believe about institutional investors?
Institutional investors don’t prefer dividends over repurchases or vice versa
In other words: choice between these 2 methods of distributing value has little effect on who owns the company’s stock
What is a potential pitfall when studying dividend policy decisions?
Getting too caught up in the details and losing sight of the overall strategic importance of dividend decisions.
What is a company’s dividend payout decision largely about?
How the excess value in a company is distributed to its stockholders
What question is central to choosing a payout?
How much value should be distributed
What is extremely important when managers choose their firms’ dividend payout?
That they choose in a way that enables them to continue to make the investments necessary for the firm to compete in its product markets
What 5 practical questions should managers consider when selecting a dividend payout?
- Over the long term, how much does the company’s level of earnings (cash flows from operations) exceed its investment requirements? How certain is this level?
- Does the firm have enough financial reserves to maintain dividend payouts in periods when earnings are down or investment requirements are up?
- Does the firm have sufficient financial flexibility to maintain dividends if unforeseen circumstances wipe out its financial reserves when earnings are down?
- Can the firm quickly raise equity capital if necessary?
- If the company chooses to finance dividends by selling equity, will changes in the number of stockholder have implications for control of the company?
