清华五道口金融学院公司金融内部课件 考研必备 6.Payout Policy
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Payout Policy
Topics Covered
• • • • • • Cash versus share dividends. Dividend dates. M&M again! When are dividends relevant? Dividend policy in practice. Stock repurchases, splits and dividends.
• Tax: • Tax exempt owners (pensions, life insurers, trusts, endowments, etc.) prefer high payout because they don’t pay dividend taxes. • Signaling arguments (asymmetric information between firm and shareholders). • Dividends signal a rise in earnings and cash flows lead to stock price increase • Free cash flow issues. • Paying dividends reduces free cash flows and thus lowers agency costs of equity.
1. 2. 3. 4. Avoid passing on positive NPV projects to pay dividends. Avoid cutting or reducing dividends. Avoid the need to sell equity. Maintain the target Debt / Equity ratio.
• Paying dividends means less internal cash available for other uses. • Paying dividends means borrowing money to invest in new projects.
• Historically firms pay out dividends in both good times and bad times.
11
Fundamental Concept
In perfect capital markets, without taxes, dividend policy is irrelevant
12
Taxes and Dividends
In a tax-free world, cash dividends are a wash between the firm and its shareholders. Cash: stock issue Cash: dividends Taxes Gov.
To Re-cap
• Shareholders that owned the shares on the close of business May 12, receive the dividend May 31. • Shareholders that acquired their shares on May 13 or after, are not entitled to get this dividend.
15
These are clientele effects arguments
Fundamental Concept
Many factors in the real world make dividend policy relevant
16
Practical Implementation of a Dividend Policy: Guiding Principles
wenku.baidu.com
14
Real World Relevance – Factors Favouring a High Payout
• Investors’ desire of current income: • Transaction costs of creating home made dividends. • Uncertainty resolution: • “Bird-in-the-hand” argument: Investors prefer cash dividend now to uncertain capital gain in future.
• As a result, price drops on ex-dividend date.
9
M&M On Dividends
• In the absence of transactions costs and taxes, dividend policy is irrelevant and does not affect shareholder wealth. • Once again, “perfect market” assumptions are necessary:
Stock Holders
Firm
In a world with taxes, the government gets a cut.
13
Real World Relevance - Factors Favouring a Low Payout
• Dividend taxes, imposing an immediate tax burden on investors. • Firm has unusually good investment prospects. • Cost if have to issue new equity in future.
Dividends Earnings
Dividend Payout 0.5177 0.3139 0.4433 0.3763 0.4747 0.5255
Dividends Price
Stock Exchange Index Statistics
5
Why Distribute?
• Once firm has investor’s money, why pay a dividend? Why not firm keep it? • If firm is committed to a dividend, but dividend now = PV of dividend later, then why do investors care when it is received? • Answer – Agency costs.
• They would expect to pay less for their shares.
• Shareholders buying on the ex-dividend date or after will be willing to pay less since they don’t get the dividend.
6
Dividend Dates
• Declaration date. • Ex-dividend date.
• 2 days prior to the Record date. (T+3) • Share price will fall by the amount of the dividend on ex-dividend day.
• Record date. • Payment date.
7
Dividends and Stock Price
Price D = $0.50
Po = $52.35 Pex = P0 – D = $51.85 Share trades at $52.35 until ex dividend day After Ex dividend day, shareholder of record gets $0.50 dividend, and share trades at $51.85.
3
Distributions
• Firms make distributions to their shareholders 2 ways: • Cash distributions.
• Cash dividends. • Stock repurchases.
• Share distributions.
• No taxes.
10
Example
• PAN AM Airlines has 0.6M shares outstanding and the current share price is $90. PAN AM wants to pay a cash dividend of $5 per share. Assume perfect capital markets. a) What is the value of the company before the dividend? b) What is the value of the company after the dividend? c) What is the stock price after the dividend? d) How is shareholder wealth affected by the dividend?
• Stock dividends. • Stock splits.
4
Cash Dividends – Empirical Findings
Year 2006 2007 2008 2009 2010 2011 End of Year Earnings Index Values 4213.61 4713.54 5927.03 6699.44 6485.94 8413.75 194.62 342.27 245.04 293.05 227.63 210.18 Dividends 100.76 107.44 108.63 110.27 108.05 110.46 Dividend Yield 2.39% 2.28% 1.83% 1.65% 1.67% 1.31%
• Why pay dividends & incur costs to issue securities in the future?
• • • • •
Bond covenants and other restrictions. Growth and control issues. Short term cash position. Inherent firm risk. Restrictions on foreign transfers.
• Dividends reduce free cash flow and so reduce managerial waste. • Forces management to run tight ship. • Forces managers to face scrutiny of capital markets when new project financing needed.
2
Why Do We Care About Dividends?
• Dividend policy is a decision to give money back to shareholders and NOT invest in a new project. • Affects the firm’s capital budgeting decision:
3 business days 2 business days Announcement (Declaration date) Last cumdividend day – May 12th Ex dividend Day – May 13th Day of Record Payment Day Time May 15th May 31st Taxes complicate things a bit. Empirically, the price drop is less than the dividend and occurs within the first few minutes of the ex-date. 8
Topics Covered
• • • • • • Cash versus share dividends. Dividend dates. M&M again! When are dividends relevant? Dividend policy in practice. Stock repurchases, splits and dividends.
• Tax: • Tax exempt owners (pensions, life insurers, trusts, endowments, etc.) prefer high payout because they don’t pay dividend taxes. • Signaling arguments (asymmetric information between firm and shareholders). • Dividends signal a rise in earnings and cash flows lead to stock price increase • Free cash flow issues. • Paying dividends reduces free cash flows and thus lowers agency costs of equity.
1. 2. 3. 4. Avoid passing on positive NPV projects to pay dividends. Avoid cutting or reducing dividends. Avoid the need to sell equity. Maintain the target Debt / Equity ratio.
• Paying dividends means less internal cash available for other uses. • Paying dividends means borrowing money to invest in new projects.
• Historically firms pay out dividends in both good times and bad times.
11
Fundamental Concept
In perfect capital markets, without taxes, dividend policy is irrelevant
12
Taxes and Dividends
In a tax-free world, cash dividends are a wash between the firm and its shareholders. Cash: stock issue Cash: dividends Taxes Gov.
To Re-cap
• Shareholders that owned the shares on the close of business May 12, receive the dividend May 31. • Shareholders that acquired their shares on May 13 or after, are not entitled to get this dividend.
15
These are clientele effects arguments
Fundamental Concept
Many factors in the real world make dividend policy relevant
16
Practical Implementation of a Dividend Policy: Guiding Principles
wenku.baidu.com
14
Real World Relevance – Factors Favouring a High Payout
• Investors’ desire of current income: • Transaction costs of creating home made dividends. • Uncertainty resolution: • “Bird-in-the-hand” argument: Investors prefer cash dividend now to uncertain capital gain in future.
• As a result, price drops on ex-dividend date.
9
M&M On Dividends
• In the absence of transactions costs and taxes, dividend policy is irrelevant and does not affect shareholder wealth. • Once again, “perfect market” assumptions are necessary:
Stock Holders
Firm
In a world with taxes, the government gets a cut.
13
Real World Relevance - Factors Favouring a Low Payout
• Dividend taxes, imposing an immediate tax burden on investors. • Firm has unusually good investment prospects. • Cost if have to issue new equity in future.
Dividends Earnings
Dividend Payout 0.5177 0.3139 0.4433 0.3763 0.4747 0.5255
Dividends Price
Stock Exchange Index Statistics
5
Why Distribute?
• Once firm has investor’s money, why pay a dividend? Why not firm keep it? • If firm is committed to a dividend, but dividend now = PV of dividend later, then why do investors care when it is received? • Answer – Agency costs.
• They would expect to pay less for their shares.
• Shareholders buying on the ex-dividend date or after will be willing to pay less since they don’t get the dividend.
6
Dividend Dates
• Declaration date. • Ex-dividend date.
• 2 days prior to the Record date. (T+3) • Share price will fall by the amount of the dividend on ex-dividend day.
• Record date. • Payment date.
7
Dividends and Stock Price
Price D = $0.50
Po = $52.35 Pex = P0 – D = $51.85 Share trades at $52.35 until ex dividend day After Ex dividend day, shareholder of record gets $0.50 dividend, and share trades at $51.85.
3
Distributions
• Firms make distributions to their shareholders 2 ways: • Cash distributions.
• Cash dividends. • Stock repurchases.
• Share distributions.
• No taxes.
10
Example
• PAN AM Airlines has 0.6M shares outstanding and the current share price is $90. PAN AM wants to pay a cash dividend of $5 per share. Assume perfect capital markets. a) What is the value of the company before the dividend? b) What is the value of the company after the dividend? c) What is the stock price after the dividend? d) How is shareholder wealth affected by the dividend?
• Stock dividends. • Stock splits.
4
Cash Dividends – Empirical Findings
Year 2006 2007 2008 2009 2010 2011 End of Year Earnings Index Values 4213.61 4713.54 5927.03 6699.44 6485.94 8413.75 194.62 342.27 245.04 293.05 227.63 210.18 Dividends 100.76 107.44 108.63 110.27 108.05 110.46 Dividend Yield 2.39% 2.28% 1.83% 1.65% 1.67% 1.31%
• Why pay dividends & incur costs to issue securities in the future?
• • • • •
Bond covenants and other restrictions. Growth and control issues. Short term cash position. Inherent firm risk. Restrictions on foreign transfers.
• Dividends reduce free cash flow and so reduce managerial waste. • Forces management to run tight ship. • Forces managers to face scrutiny of capital markets when new project financing needed.
2
Why Do We Care About Dividends?
• Dividend policy is a decision to give money back to shareholders and NOT invest in a new project. • Affects the firm’s capital budgeting decision:
3 business days 2 business days Announcement (Declaration date) Last cumdividend day – May 12th Ex dividend Day – May 13th Day of Record Payment Day Time May 15th May 31st Taxes complicate things a bit. Empirically, the price drop is less than the dividend and occurs within the first few minutes of the ex-date. 8