1. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Chapter 08 Dividends: Past, Present, and Future

2. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Cash Dividends Distribution from earnings Regular quarterly dividends Extra dividends Irregular dividends Dividends paid in property

3. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Payout Ratio Dividends/earnings Stability of the payout ratio Stability of dividend payments

4. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Payout Ratio The retention ratio: earnings retained/earnings or 1 - payout ratio

5. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Distribution of Dividends Date of record Stock trading ex dividend Ex-dividend date Distribution date

6. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Stock Dividend Does not affect proportionate ownership Does not affect assets Does not affect liabilities Does not affect total equity

7. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Stock Dividend Dilution of existing shares Price adjusts for a stock dividend A 10% stock dividend –Causes a $20 stock price to fall to $18.18 ($20/1.1)

8. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Stock Split Does not affect proportionate ownership Does not affect assets Does not affect liabilities Does not affect total equity

9. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. The Stock Split Does affect the stock's price A 2 for 1 stock split –Causes a $80 stock price to decline to $40 ($80/2)

10. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Dividend Reinvestment Plans Cash dividends used to purchase additional shares Additional cash contributions may be allowed Expenses often paid by the firm Are automatic; an easy means to save

11. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Stock Repurchases Corporations with cash may reduce the number of existing shares through buy back programs The decrease in outstanding shares may –Increase earnings per share –Increase the price of the stock

12. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Stock Repurchases and Capital Gains Stockholders do not have to sell their shares Sales are –Realized capital gains –Subject to capital gains taxation

13. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Corporate Liquidations Corporate liquidations are rare Company –Ceases operations –Pays off its liabilities –Distributes its remaining assets to stockholders

14. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Estimation of Growth Rates An estimate of the firm's dividend growth rate is used in the dividend- growth model Estimates often based on accounting data Historical earnings or dividend payments

15. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Estimation of Growth Rates Return on equity times the retention ratio: –g = ROE x RR Use of initial and terminal values –D 0 (1 + g) n = D n

16. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Estimation of Growth Rates Averaging the annual percentage change in the dividend payment or in earnings Use of regression analysis Analyst’s estimates are available through the internet

17. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. Impact of Increased Growth on Stock Prices Increased growth should increase a stock’s price Increased growth at the expense of dividends may reduce a stock’s price

18. Copyright © 2003 South-Western/Thomson Learning. All rights reserved. What Do Investors Want? Growth or income Question of what is the best use of the funds - retention versus distribution