Pcf 2 dividend policy 10 11


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Pcf 2 dividend policy 10 11

  1. 1. Dividend PolicyWhat are dividends?Why do companies pay dividends?Does dividend policy affect value?Why could dividends affect value?What are the influences on the dividend decision?
  2. 2. What are dividends?Cash payments to shareholdersPaid out of after-tax profitsInterim dividendFinal dividendFinal dividend voted on at AGM
  3. 3. Dividends can be paid from past and present earnings but cannot be paid from any capital reserveCompanies whose external liabilities exceed their assets cannot legally pay dividends.Profits vs cash flow
  4. 4. Why do companies pay dividends?Reward to shareholders?What is the Total Shareholders’ Return (TSR) made up of?Why else might companies pay dividends?
  5. 5. Do all companies pay the sameamount of dividends?Amount paid is discretionaryZero dividend policy% of after-tax profitConstant dividend or constantly growing dividend
  6. 6. Marks and Spencer plc (M&S Annual Report 2009) Year 2009 2008 2007 2006 2005 EPS 32.3p 49.2p 39.1p 31.3p 17.6p (basic) Div 17.8p 22.5p 18.3p 14.0p 12.1p per share
  7. 7. Marks and Spencer dividendsWhat do you notice about M&S dividends?What do you think has influenced the level of dividends paid to shareholders?
  8. 8. What influences the level ofdividend? Variability of profits But dividends are cash flows Investment opportunities Ability/willingness to raise external finance Influence of investors Nature of business/stage of business in lifecycle Market expectations?
  9. 9. Alternatives to cash dividends Scrip dividends Saves cash Lowers gearing Share repurchase Reduces liquidity Increases underlying share value Non-pecuniary benefits Discounts Complementary goods/services Eg Channel Tunnel, Legal and General
  10. 10. Do dividends affect Value?Residual Theory Dividend payments depend on the investment opportunities available to the firm This implies that investors are indifferent between dividend payments and increases in share prices due to reinvested earnings The dividend decision is a passive decision??
  11. 11. Dividend IrrelevanceModigliani and Miller 1961 the value of the firm is determined by the earnings power of its assets and the split between dividends and retained earnings is irrelevant.Shareholders can manufacture their own level of dividendsAssumptions no tax no transaction costs
  12. 12. Why might Dividends affect Value?Dividends may be preferred to an increase in share price Certainty LiquidityTax impact Different tax treatments between dividends and capital gains Clientele effect
  13. 13. The Clientele EffectDividends themselves do not affect share priceCompanies with particular dividend policies attract groups of investors according to their tax situationA change in dividend policy will bring about a change in share price due to the demand and supply by different investor groups for that type of investment.
  14. 14. Why might Dividends affect Value?Dividends as a basis for company valuation Dividend Valuation Model (Gordon) MP of a share = PV of future dividend payments P0 = D1/(ke – g) P0 = Current Share Price D1 = next yr’s dividend ke = cost of equity g = annual growth rate of divs
  15. 15. ExampleShareholders require a 12% return on their investment and the company has just paid a dividend of 80p per share. Dividends have grown on average by 3.4% per year. What is the theoretical share price using the dividend growth model?
  16. 16. Why might Dividends affect Value?Something else? Market expectations Signalling Information asymmetry
  17. 17. Signalling EffectsDividends carry information to the market (information asymmetry)Dividends are usually stableA change in dividend policy may make investors believe that management is announcing a change in future profitability but …..
  18. 18. Do dividends affect share prices(value)?All research is inconclusiveDividend policy can be observed and share prices can be observedButOther factors cause movements in share pricesIt is difficult to separate out the clientele effect from the signalling effect
  19. 19. What have we discussed today?Influences on dividend paymentsThe debate about the link between dividends and share price (value)Why we cannot answer the question about the link between dividends and value