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1 Chapter 13 - Dividends Returns from price change and dividends Issues: payout ratio, dividend stability considering reinvestment opportunities and shareholder.

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Presentation on theme: "1 Chapter 13 - Dividends Returns from price change and dividends Issues: payout ratio, dividend stability considering reinvestment opportunities and shareholder."— Presentation transcript:

1 1 Chapter 13 - Dividends Returns from price change and dividends Issues: payout ratio, dividend stability considering reinvestment opportunities and shareholder preferences Payout ratio=Dividends per Share Earnings per Share Currently 35%; historically about 50%

2 2 What to Do With The Money? Corporate cash holdings – $2 trillion and growing rapidly Choices: Reinvest in new products? Pay dividends? Make acquisitions? Do stock buybacks?

3 3 Dividend/Retention Trade-off

4 4 Dividends & Stock Price Major change in tax law: both dividends and long-term capital gains 15% –Makes part of chapter irrelevant Still an issue – should company reinvest profits in itself to take on new projects providing high returns and growing stock price or pay earnings to shareholders? –Reinvestment opportunity – residual theory

5 5 Other Approaches Residual dividend theory – “leftovers” Clientele effect Information effect; communications tool Expectations effect – revise perceptions? Empirical evidence – very mixed but may slightly favor nonpayers but recently challenged

6 6 Dividends in Practice Usually quarterly as approved by Board of Directors Legal restrictions Liquidity position Other sources of financing Earnings predictability

7 7 Other Dividend Matters About 75% of S&P 500 pay dividends Dividend Yield currently 1.6% Dividend Reinvestment Programs Reinvest dividends by buying same stock Dividends have been increasing but not as fast as profits and stock prices

8 8 Alternative Policies Constant payout ratio Small regular plus year-end extra Stable amount per share – most common –Usually profits grow faster than dividends –“Wait until we’re certain” attitude Yearly dividends since 1885 – Eli Lily –GE (1894), PPG (1899), Pfizer (1901)

9 9 Stock Dividends and Splits New shares issued on pro rata basis to current shareholders No economic consequences Accounting differences only –Split: new shares 25% over existing –Stock dividends – increase under 25% Reverse splits – reduce number of shares –Should increase price and avoid delisting

10 10 Stock Repurchases Boosts EPS (price?); uses excess cash –IBM $44 billion in 1995 to 2001 Buy as an “undervalued investment” –Don’t have to complete; effect on price? –Can’t go on forever – Pac-Man Buybacks must be publicly announced –Analogy: buybacks = dating; div = marriage Bottom line: it’s capital restructuring


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