Tài chính doanh nghiệp - Chapter 14: Dividends and dividend polcy

14-1Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin14-2Key Concepts and SkillsUnderstand: Dividend types and how they are paidThe issues surrounding dividend policy decisionsThe difference between cash and stock dividendsWhy share repurchases are an alternative to dividends14-3Chapter Outline14.1 Cash Dividends and Dividend Payment14.2 Does Dividend Policy Matter?14.3 Establishing a Dividend Policy14.4 Stock Repurchase: An Alternative to Cash Dividends14.5 Stock Dividends and Stock Splits14-4Cash DividendsRegular cash dividend = cash payments made directly to stockholders, usually each quarterExtra cash dividend = indication that the “extra” amount may not be repeated in the futureSpecial cash dividend = similar to extra dividend, but definitely won’t be repeatedLiquidating dividend = some or all of the business has been soldReturn to Quick Quiz14-5Dividend Payment ChronologyDeclaration Date – Board declares the dividend and it becomes a liability of the firmEx-dividend DateOccurs two business days before date of recordIf you buy stock on or after this date, you will not receive the upcoming dividendStock price generally drops by approximately the amount of the dividendDate of Record – holders of record are determined, and they will receive the dividend paymentDate of Payment – checks are mailedReturn to Quick Quiz14-6The Ex-Dividend Day Price Drop Figure 14.2 14-7Does Dividend Policy Matter?Dividends matter The value of the stock is based on the present value of expected future dividendsDividend policy may not matterDividend policy is the decision to pay dividends versus retaining funds to reinvest in the firmIn theory, if the firm reinvests capital now, it will grow and can pay higher dividends in the future14-8Illustration of IrrelevanceWharton CorporationAll equity firm with 100 shares outstandingInvestors require a 10% return.Expected cash flow = $10,000 each yearPlans to dissolve firm in 2 yearsFirm can either:A. Pay out dividends of $10,000 per year for each of the next two years ($100 per share), orB. Pay $11,000 this year, raising the other $1,000 by issuing stock (or bonds), then pay an amount in year 2 sufficient to provide new shareholders with a 10% return14-9Illustration of IrrelevanceWharton Corporation14-10Factors Favoring a Low PayoutTaxes:Individuals in upper income tax brackets might prefer lower dividend payouts, with their immediate tax consequences, in favor of higher capital gainsFlotation costs:Low payouts can decrease the amount of capital that needs to be raised, thereby lowering flotation costsDividend restrictions: Debt covenants may limit the percentage of income that can be paid out as dividends14-11Factors Favoring a High PayoutDesire for current income:Individuals in low tax bracketsGroups that are prohibited from spending principal (trusts and endowments)Uncertainty resolution:No guarantee that the higher future dividends will materializeTaxes:Dividend exclusion for corporationsDividends versus capital gains irrelevant to tax-exempt investors14-12Clientele EffectsInvestor preference:Some investors prefer low dividend payoutsSome investors prefer high payoutsInvestors will buy stock in companies that meet their dividend preferencesWhat do you think will happen if a firm changes its policy from a high payout to a low payout? or vice versa?Return to Quick Quiz14-13Stock RepurchaseCompany buys back shares of its own stockOpen market = company buys its own stock in the open market Tender offer = company states a purchase price and a desired number of shares to be boughtTargeted repurchase = firm repurchases shares from specific individual shareholdersRepurchase vs. cash dividend:Repurchase returns cash from the firm to the stockholdersSame as cash dividend in the absence of taxes and transactions costsReturn to Quick Quiz14-14Tax Effects of Stock RepurchasesCash dividends:No investor control over timing or sizeTaxed as ordinary incomeRepurchase: Allows investors to decide if they want a current cash flow Taxed only if:They choose to sell ANDThey reap a capital gain on the saleGain may qualify as lower taxed capital gains if shares owned more than one year.14-15Dividend SummaryAggregate dividend and stock repurchases are massive and have increased steadily.Dividends heavily concentrated among a small number of large firmsManagers very reluctant to cut dividendsManagers smooth dividends, raising them slowly as earnings grow.Stock prices react to unanticipated changes in dividends14-16Information Content of Dividends & RepurchasesChanges in the dividend signal management’s view concerning the firm’s future prospects Stock repurchases signal that management believes the current stock price is lowTender offers send a more positive signal than open market repurchases because the company is stating a specific stock priceStock prices often increase when repurchases are announced14-17Pros and Cons of Paying DividendsCash dividends underscore good results and provide support to stock priceDividends may attract institutional investorsStock price usually increases with a new or increased dividendDividends absorb excess cash and may reduce agency costsDividends are taxed to recipientsDividends can reduce internal sources of fundingMay force firm to forgo positive NPV projectsMay require external financingOnce established, dividends cuts are hard to make without adversely affecting a firm’s stock price.ProsCons14-18Factors that Affect Dividend DecisionsSurvey ResultsManagers:Try to avoid reducing dividends per shareTry to maintain a smooth dividend from year to yearConsider the level of dividends per share paid in recent quartersReluctant to make dividend changes that might have to be reversed in the future14-19Stock DividendsDistribute additional shares of stock instead of cashIncreases the number of outstanding sharesSmall stock dividendLess than 20 to 25%If you own 100 shares and the company declared a 10% stock dividend, you would receive an additional 10 sharesLarge stock dividend – more than 20 to 25%Return to Quick Quiz14-20Stock SplitsEssentially the same as a stock dividend except expressed as a ratioFor example, a 2-for-1 stock split is the same as a 100% stock dividendStock price is reduced when the stock splitsCommon explanation for split is to return price to a “more desirable trading range”14-21Reverse Stock SplitsReverse Split reduces number of shares outstandingFor example, a 1-for-5 stock split replaces every 5 shares of stock with one shareReasons:Transactions costs may be less for investorsLiquidity might be improvedToo low a price not considered “respectable”Exchange minimum price per share requirements14-22Quick QuizWhat are the different types of cash dividends? (Slide 14.4)How is a dividend paid? (Slide 14.5)What is the clientele effect? (Slide 14.12)What are stock dividends, and how do they differ from cash dividends? (Slide 14.19)How are share repurchases an alternative to dividends, and why might investors prefer them? (Slide 14.13)Chapter 14END