Lecture 9 - How to decide on the payout Flashcards

1
Q

Why has the portion of firms that payout a dividend actually decreased?

A

Many newly listed firms are startups & growth companies that will not pay a dividend

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2
Q

When can dividends be paid by a company in Australia?

A

Traditionally, dividends could only be paid out of profits - now the firm must also be in a positive net asset position to pay dividends

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3
Q

Who are dividends determined by and who will they be paid to?

A

Dividends are determined by the board of directors

Paid to shareholders who are registered on a particular record date

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4
Q

How many days before the record date are shares sold cum dividend. What does this mean?

A

Cum dividend = share sold with the dividend attached

Sold cum dividend UNTIL two business days before the record date (then becomes ex-dividend)

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5
Q

What is the sequence from shares being declared to being paid?

A

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

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6
Q

What is a stock dividend? What impact will a stock dividend have on share price?

A

Stock dividend - instead of issuing cash - issue more shares
Results in a LOWER price per share (given the same firm assets still exist)

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7
Q

What is a dividend reinvestment plan (DRP)

What are the benefits for the shareholder & firm?

A

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

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8
Q

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 ***

A

Dividend can be = Dividend amount / (1- reinvestment rate)

Number of shares issued under DRP = Dividend Amount/ DRP price

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9
Q

What are some of the issues for companies in relation to DRPs

A
  • 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
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10
Q

What is an underwriting agreement used for in DRPs?

A

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

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11
Q

What other 2 practices have companies engaged in in relation to DRPs?

A

1) Purchasing shares on market for DRP

2) Discontinued the practice of rounding up

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12
Q

What are the two types of share buybacks?

A

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

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13
Q

How are off market share repurchases conducted in Australia?

A
  • 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)
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14
Q

When are buybacks more likely to happen?

A

Profits are high and surplus cash is available

Mature and profitable firms

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15
Q

What do the stylised factors for dividend payouts (Brav, Graham, Harvey & Michaely) state? (3 factors)

A

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)

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16
Q

How do managers smooth dividends?

A

They use an adjustment rate to the target dividend ratio: (Adjustment rate * (target ratio * EPS) - Div0)

17
Q

What impact will a dividend cut have for firms?

When will dividends be cut?

A

Share price will fall.

Therefore - only when profits have fall sharply and to be continued at depressed levels

18
Q

What are two reasons firms will repurchase stock?

A

1) They have unwanted cash

2) They wish to change their capital structure

19
Q

What did Partington’s (1985)Australia find in relation to dividend signals?

A
  • Managers want to pay dividends > signal of future profitability & to support share price
  • Firms set desired dividends and investments
  • If desired dividends and investments cannot be met & internal financing insufficient - remainder will be financed with debt
  • If cannot obtain funding, either reduce both div & investment or even just investment (to maintain dividend payment)
20
Q

What did the findings of Healey and Palepu (1988) find in relation to firm performance when dividends increase and decrease?

A

Increases: when div paid for 1st time: earnings rose 43% in that year and continued to rise
Cuts: Found that earnings of companies that stopped paying dividends fell over the next four quarters

21
Q

How does the information context for dividends vary in Japan? How is this reflected in the changes in dividend payouts?

A

Japan companies & shareholders have a much closer relationship and information shared more easily.
Japanese companies are more prone to cut dividends when a fall in profitability (but effect on share price is not as immediate)

22
Q

What do share repurchases potentially signal in relation to investments & share value?

A
  • The firm is running out of positive NPV projects to invest in (but shareholders relieved to see cash being returned)
  • Signal that the share is undervalued - therefore may be bought back at a premium from existing investors?
23
Q

What is the formula for calculating the dividend yield?

A

Annual Dividend/ Share price

24
Q

What is the payout ratio formula?

A

Div paid out per share / EPS

25
Q

What impact will the payment of a stock dividend have on stock price?

A

Decrease stock price by the % of the stock repurchased per share

26
Q

What does a share buyback indicate?

A

That there are no good positive NPV projects to invest in & that the share price is too low