S2 - dividends Flashcards
what is dividend policy
investment and dividend decisions are interlinked financing decisions
No ideas = invest money by increasing dividends
Ideas = lower dividends to use internally generated monies that are cheap
Consider some practical constraints
what is payment of dividends
interim dividend paid during the year
Final dividends after year end after shareholder approval at AGM - usually larger
what are practical constraints
Legal
companies act specifies that companies must pay dividends only out of realised profits
Can include realised profits the company has made in previous years
Regulatory and governmental
impact ability to pay payments
Regulator may require specific levels of reinvestment
Can be targeted with taxes on declared profits - restricting capacity git potential dividends in that year
Contractual or obligation based
dividends restrictions can be a contractual clause in debt covenants written into bonds
Liquidity
must have enough cash - dividends are a cash outflow
Either raise cash from internal free cash flows or from taking on debt
Unexpected events
what is dividend policy v share repurchase
suitability hypothesis - CEOs are substituting share buybacks for dividends as a form of corporate payout policy
Avoids immediate taxation effects
Both return value to shareholders
Both are cats outflows
Both are part of an overall corporate pay out strategy
what is policy and shareholder wealth
dividend policy should aim to maximise shareholder wealth
Only happens if P1 + D > P0
what is dividend irrelevance - Modigliani and milar
argued that share prices were determined by future earning potential not dividends paid now
Share value is determines by investment policy not the amount of earnings distributed
A rational investor is actually indifferent to capital gains and dividends
Argue that dividends represent a residual payment
They don’t say that companies will never pay a dividend
