Dividends Flashcards
when do you decide that you should give dividends
if you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business
what does how much cash you return as dividends depend on
current and potential investment opportunities
how to calculate dividend payout
dividends/net icoem
how to calculate dividend yield
dividends per share /stock price
what does the dividend payout calculate
the percentage of earnings that the company pays in dividends
what does the dividend yield calculate
the return that an investor can make from dividends alone
what are the two types of ways firms can pay cash to shareholders
pay cash dividends
share buybacks
what is the difference between growth stocks and income stock
growth stock is bought so its value grows over time and can be resold for higher
income stocks are stocks from firms that give dividends, earnings made while you still have ownership of the stocks
how did dividend payments change with the pandemci
companies have less earnings
more uncertainty
cash dividends are more attractive
why are dividend payments sticky
once given they are expected to continue
dividend payments are attractive to pension funds
what is a cash dividend
a payment by the firm to its shareholders
why might dividend payments be restricted
retained earnings fall below a certain minimum level
which comes first
- interest and tax
- dividends
interest and tax
what are the 4 types of cash dividends
regular
extra cash dividend
special cash dividend
liquidating dividend
what is a regular cash dividend
cash payments made directly to stockholders, usually each quarter
why are extra and special cash dividends different
indication that they are once off and will not be repeated in the future
when do liquidating dividends happen
when some or all of the business has been sold
what are all the dates included in a dividend payment
declaration date
ex dividend date
date of record
date of payment
what is the declaration date of a dividend
board declares the dividend and it becomes a liability of the firm
what is the ex dividend date
after that date, even if you buy shares, you won’t receive the dividend
when the ex dividend date is announced, what usually happens to the share price
drops by about the amount of the dividend
what is the date of record
holders of record are determined
these will receive the payment
what is the date of payment
cheques are posted
what is a stock repurchase / share buyback?
when the company buys shares back from shareholders for cash
how does the balance sheet change when dividends are paid
cash side (assets) reduces
ownership equity reduces
the shareholders now have shares in a smaller firm
what type of tax are shareholders liable to when dividends are given out as share buybacks
capital gains tax
rather than income tax
how does the balance sheet change with share buybacks
total shares decrease
cash stays the same
who decides who gets their shares as buybacks rather than cash
shareholders
what are the two questions a financial manager must ask about their payout policy
when they should return the cash
how they should return the cash
to shareholders
what three factors need to be passed to pay out dividends
- is there a positive cash flow
- is there a prudent debt policy
- is there sufficient cushion for cutbacks
what are the three factors effecting how the firm decides to pay back their cash to shareholders
tax
information content
flexibility
what type of tax is paid on sale of shares
capital gains tax
what type of tax is paid on dividends by investor
income tax
which type of tax is lower in most places
- capital gains
- income tax
capital gains
what signal does stock repurchases show from management
management believes current price is low
does the stock price increase or decrease when repurchases are announced
increase
what sort of information content is signaled by announcing the initiation or changing of level of cash dividends
announcing/more - firm has no new investment opportunities
decreasing - firm isn’t making as much retained earnings
what is a dividend payout ratio
firm pays a percentage of their earnings as dividends. so if earnings increase, so too would dividends
if a firm intends to reduce their dividends for reinvestment purposes, how can they minimise the negative signalling
flag early to shareholders your intention
which give the firm more flexibiilty
- buybacks
- cash dividends
share buybacks
how do share buybacks make the dividend discount model harder to use
hard to predict when buybacks will occur and number of shares repurchased
what is a stock dividend or a stock split
distributions of additional shares to a firm’s stockholders
a larger stock dividend is usually greater than what percentage
25%
what is a common reasonining for firms to give stock dividends
return stock price to a more desirable trading range
what is dividend policy
the decision to pay dividends or repurchase shares versus retaining funds to reinvest in the firm
why do dividends matter to the value of stock
value of stock is present value of future dividend
how does a firm reinvesting now mean that they could pay higher dividends in the future
they will grow in size and could make more earnings
what do modigliani and miller propose in their irrelevance proposition
timing of dividend payments are irrelevant to share value and should only be offered after all attractice investment projects have been invested
if the company can offer them the required return by reinvesting, the shareholders are indifferent between capital growth and dividend
what are the assumptions for modiglilani and millers dividend irrelevance proposition
- there are no taxed
- there are no transaction costs
- all investors can borrow and lend at the same risk free rate
- all investors have free access to all relevant information
- investors are indiferrent between dividends and capital gains
why is is not true that the investors are indifferent
why can dividend policy increase firm value
- certainty of return
- prevents managers from wasting funds
- provides information (signaling)
- attracts natural clientele
what is uncertainty resolution
there is no guarantee that the higher future dividend payments will actually happen
instead, shareholders are happy enough to just get dividends now
may not be an actual risk but a perceived risk
how can owners gain more control over the use of the money in the firm
demand a higher payout ratio
how does owners insisting on a higher payout ratio control managers
with less financial slack they have less flexibility and must ask to raise external capital for investments
what signals do dividend increases send
management have good long term prospects for the company
as dividends are sticky
what sort of signals do dividend cuts send to the investrors
bad news, the firm is earning less
what sort of signals does announcing first dividend payments send to the investors
mixed
could take as a bad signal - that the firm has runout of investment opportunities
also means the firm is steadying out to a more stable and more sustainable growth
who are the type of clientele that prefer income stocks
retirees, pension funds
who are the type of lclientele that prefer growth stocks
wealthy middle aged investors
why do firms consider their clientele when it comes to dividend policy
knowing your investors means you can target a certain group
inconsistency will lead to a lack of popularity with each group
what are the reasons for low dividends
costs of raising external funding
dividend restrictions eg debt contracts
how would a firm convince the shareholders that they will not be paying dividends
- use the money instead to reinvest into the firm
- should be indifferent if the rate is over the minimum expected
- however they do like certainty of return and sooner returns have less perceived risk
why would a firm choose to do share buybacks over cash dividends
less sticky (flexibility for both firm and shareholder) tax treatments attract certain clientele dilute shares not share too much information content
why does dividend policy matter despite what M&M say
- signalling and information content
- attract a certian type of clientele
- prevents managers from wasting funds
- certainty of return
- shareholders could reinvest elsewhere and get more for their money
why would some companies choose not to pay dividends
no flexibility
use money to reinvest
Theoretically, why are investors indifferent to dividend policy
they can reinvest dividends to get more shares
or sell shares to raise cash
i.e. they can replicate either payment method on their own
(homemade dividend)
what tax is paid on dividends received
income tax
dwt = 25%
what tax is paid when investor sells shares
capital gains tax
for long term investors - which is a better option, dividends or share repurchases
share repurchases
as CGT can be deferred until the asset is sold, which could be indefinitely
why does volume of trade increase around period from dividend declaration date to ex dividend date
some shareholders will be selling their shares - to avoid income tax
others who will get lower or no tax will be buying shares to benefit from the dividend
the reverse is done ex dividend date
