Lecture 9 - How to decide on the payout Flashcards
Why has the portion of firms that payout a dividend actually decreased?
Many newly listed firms are startups & growth companies that will not pay a dividend
When can dividends be paid by a company in Australia?
Traditionally, dividends could only be paid out of profits - now the firm must also be in a positive net asset position to pay dividends
Who are dividends determined by and who will they be paid to?
Dividends are determined by the board of directors
Paid to shareholders who are registered on a particular record date
How many days before the record date are shares sold cum dividend. What does this mean?
Cum dividend = share sold with the dividend attached
Sold cum dividend UNTIL two business days before the record date (then becomes ex-dividend)
What is the sequence from shares being declared to being paid?
1) Shares will be declared
2) 3 days before the record date - last ex-dividend date
2) 2 days before record date - this will be the ex dividend date
3) Record date
4) Payment date
What is a stock dividend? What impact will a stock dividend have on share price?
Stock dividend - instead of issuing cash - issue more shares
Results in a LOWER price per share (given the same firm assets still exist)
What is a dividend reinvestment plan (DRP)
What are the benefits for the shareholder & firm?
A plan that enables shareholders to have their dividends directly reinvested into the company
Shareholders:
- Lower transaction costs
- Usually issued at a discount to market price
Firm:
- Allows the firm to retain their internal cash flow
- Allows demand for higher dividend payouts to be met, without needing extra cash
What is the formula for working out how much a firms dividend can be if a 20% DRP investment rate is achieved?
** What is the formula for working out how many shares will be issued under a DRP ***
Dividend can be = Dividend amount / (1- reinvestment rate)
Number of shares issued under DRP = Dividend Amount/ DRP price
What are some of the issues for companies in relation to DRPs
- Means that existing shareholders suffer whenever a price discount is offered
- Discount price may be more expense than issue costs incurred in a regular share issue
- May mean that more cash is being retained than can be investment
What is an underwriting agreement used for in DRPs?
Guarentees the DRP participation rate. E.g. if 50% - guarantees that 50% of dividends will be DRP and not need cash to be paid out
What other 2 practices have companies engaged in in relation to DRPs?
1) Purchasing shares on market for DRP
2) Discontinued the practice of rounding up
What are the two types of share buybacks?
1) On market: Similar to normal investor: company will simply buy its own shares on the market
2) Off market: Buy back at fixed price and will be offered to some or all shareholders
How are off market share repurchases conducted in Australia?
- Shareholders will submit offerings declaring how many shares they wish to sell at a series of prices specified
- Firm calculates the lowest price it can buy the desired number of shares (all shares will be bought at the same price)
When are buybacks more likely to happen?
Profits are high and surplus cash is available
Mature and profitable firms
What do the stylised factors for dividend payouts (Brav, Graham, Harvey & Michaely) state? (3 factors)
1) Managers are reluctant to make dividend changes - in case dividends will need to be rescinded in the future
2) To avoid reduction in payout - dividends are smoothed (follow change in the long run sustainable earnings)
3) Managers focus more on changes to dividend (rather than changes in $ amount)
