1. FIN 614: Financial Management Larry Schrenk, Instructor

2. 1.Free Cash Flow Distributions 2.Types of Dividends 3.The Dividend Process 4.Distribution Policy

3. Free cash flow (FCF) Interest payments (after tax) Stock repurchases Stock repurchases Principal repayments Dividends Sales revenues Operating costs and taxes Required investments in operating capital − − = Free Cash Flow: Distributions to Shareholders Purchase of short-term investments Sources Uses

4. Many companies pay a cash dividend Public companies often pay quarterly Sometimes firms will pay an extra cash (ad hoc) dividend The extreme case would be a liquidating dividend Companies will often declare stock dividends No cash leaves the firm The firm increases the number of shares outstanding Similar to stock splits Some companies declare a dividend in kind Wrigley’s Gum sends a box of chewing gum Dundee Crematoria offers shareholders discounted cremation

5. 25 Oct. 1 Nov.2 Nov.5 Nov.7 Dec. Declaration Date Cum- Dividend Date Ex- Dividend Date Record Date Paymen t Date … Declaration Date : The Board of Directors declares a payment of dividends Cum-Dividend Date : Buyer of stock still receives the dividend Ex-Dividend Date : Seller of the stock retains the dividend Record Date : The corporation prepares a list of all individuals believed to be stockholders as of 5 November Payment Date : Dividend is paid to shareholders

6. The level of cash distributions to shareholders The form of the distribution (dividend vs. stock repurchase) The stability of the distribution

7. The percent of total payouts as a percentage of net income has been stable at around 26%-28%. Dividend payout rates have fallen, stock repurchases have increased. Repurchases now total more dollars in distributions than dividends. A smaller percentage of companies now pay dividends. When young companies first begin making distributions, it is usually in the form of repurchases. Dividend payouts have become more concentrated in a smaller number of large, mature firms.

8. IndustryDiv. Yield % Recreational Products0.97 Forest Products1.88 Software2.42 Household Products1.73 Food2.39 Electric Utilities4.43 Banks2.56 Tobacco1.69 Source: Reuters.com, May 2012

9. FIN 614: Financial Management Larry Schrenk, Instructor