Payout Policy Flashcards
Payout Policy
Payout policy refers to all cash distributions made by the firm to its shareholders:
Dividends: distribution of cash (or stock) to its shareholders, in proportion to their number of shares
Share repurchases: the firm buys stocks from shareholders
Paying out dividends: timeline
1) Declaration date
2) Cum-dividend date
3) Ex-dividend date
4) Record date
5) Payment date
Declaration date
- Announcement of next dividend, record and payment date
- Firm is legally obliged to make the payment
- “Market reaction date”
Cum-dividend date
- Last day when shares are traded with the right to receive the dividend
- Usually 3 days before the record date
Ex-dividend date
- Day after cum-dividend date
- Shareholders buying shares on or after this date do not receive dividend
Record date
- Company records shareholders who are entitled to receive a dividend
- No price change on this date
Payment date
- Dividend checks are mailed out
- 2-4 weeks after record date
- No price change on this date
Stock dividend
Dividends are “paid out” as additional stock. This increases the number of shares outstanding, reducing the share price
“Paid in kind”
Cash dividend
Regular dividend:
Paid in regular intervals –> expected to be maintained in the future
Special dividend:
Paid irregularly, e.g. as part of particularrly good operating year
Dividend per Share (DPS)
Dollar amount per Share
Dividend Yield
DPS / Share Pirce
Expected return on stock = dividend yield + price appreciation
Dividend Payout ratio
Dividend paid as a percentage of the net income of the firm
Retention Ratio
RR = 1 - Dividend Payout Ratio
Share repurchases / stock buybacks
- Kept in the firm’s treasury (treasury shares)
- May be resold
Stock buybacks & elimination of shares
The number of shares outstanding reduces –> firm equity is reduced
ATTENTION: Market value repurchase vs. book value reduction
Methods to buyback shares
- Repurchase tender offer
- Open market repurchases
- Privately negotiated repurchase
Repurchase tender offer
Methods to buyback shares
- Prespecified price and number of shares to be repurchased
- Validity period
- Stockholders can submit tenders
- Usually used for large buyback programmes
Open market repurchase
Methods to buyback shares
- Firms make announcement and by back in the market at preveiling conditions
- Can be used to “steer” financing mix over long period
Privately negotiated repurchase
Methods to buyback shares
- Usually only used with large stockholders
- Potential means to eliminate “activist” stockholders or (re)consolidate firm control
Stock buybacks > dividends
- More flexibility (timing - not lump-sum payment, tractability, reversal through SEO)
- Control management (eliminate shareholders or increase inside ownership)
- Stock stabilization (to support stock - market making)
- Value extraction (undervalued shares)
Pension funds
Taxes
- Usually tax-exempt to encourage retirement savings
- Inidivduals are only taxed once they receive pensions
Mutual funds
Taxes
Not taxes directly, but taxed at personal level with corresponding marginal tax rate, once the individual receives dividend.
Corporations
Taxes
- Corporations are protected from taxes, depending on ownership stake
- Intention to avoid double taxation –> individuals are taxed
Tax Clientele Effect
- Clustering of similar stockholders
- Firms with high payout ratios attract institutional investors
- Stockholders in high tax brackets select investments in firms with low payout ratios
Signalling effect of dividends
- Signal to convey “real positive” (cannot be easily imitated) information to the market
- Increasing dividends is viewed as a powerful signal (stickiness indicates long-term commitment)
carry stronger weight than stock repurchases as long-term, no reversal
Stock split
- Increase the number of shares outstanding by reducing its nominal value
- No new shares being issued
- No money ever changes hand
- Increases liquidity in the market
Paying dividends und MM
A firm’s total market value is independent of its dividend policy if markets are perfect
- The value of the firm only depends on fundamentals
- The payout policy is completely irrelevant
- Investors can create any payout stream through perfect financial markets (undo cash distributions/”in kind” distribution or home-making dividends)
