The document discusses different perspectives on corporate dividend policy. It outlines the facts about dividend payouts including types of dividends and how they are distributed. It then discusses two schools of thought on dividends: the dividend irrelevance theory proposed by Miller and Modigliani, which argues that dividends do not affect firm value; and the good-bad signaling theory, which posits that dividends can signal management confidence or financial health. The document also notes the increasing trend of share repurchases compared to dividends and debates whether repurchases or dividends are better for investors.
What is Dividends
Types of cash dividends
Procedure for Dividend Payment
Ex-Dividend Date Is Important
Do Dividends Matter ?
DIVIDEND THEORIES
DIVIDENDS AND THE REAL WORLD
Dividends And Signaling
CLIENTELE EFFECT HYPOTHESIS
DIVIDEND POLICY PRACTICE
Residual dividend policy
DIVIDEND AND INVESTMENT POLICY
KEY FACTORS THAT INFLUENCE DIVIDEND POLICY
Dividend Policies involve the decisions, whether-
To retain earnings for capital investment and other purposes; or
To distribute earnings in the form of dividend among shareholders; or
To retain some earning and to distribute remaining earnings to shareholders.
The term ‘Dividend’ is derived from the Latin word ‘dividendum’ which means ‘that which is to be divided’. DividendsDividend is that part of the profits of the company which is distributed amongst its shareholders. It differs from interest in the sense that it does not arise out of contractual obligations. Copy the link given below and paste it in new browser window to get more information on Dividends and its Determinants:- http://www.transtutors.com/homework-help/finance/dividends.aspx
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
Some of the major different theories of dividend in financial management are as follows: 1. Walter’s model 2. Gordon’s model 3. Modigliani and Miller’s hypothesis.
On the relationship between dividend and the value of the firm different theories have been advanced.
What is Dividends
Types of cash dividends
Procedure for Dividend Payment
Ex-Dividend Date Is Important
Do Dividends Matter ?
DIVIDEND THEORIES
DIVIDENDS AND THE REAL WORLD
Dividends And Signaling
CLIENTELE EFFECT HYPOTHESIS
DIVIDEND POLICY PRACTICE
Residual dividend policy
DIVIDEND AND INVESTMENT POLICY
KEY FACTORS THAT INFLUENCE DIVIDEND POLICY
Dividend Policies involve the decisions, whether-
To retain earnings for capital investment and other purposes; or
To distribute earnings in the form of dividend among shareholders; or
To retain some earning and to distribute remaining earnings to shareholders.
The term ‘Dividend’ is derived from the Latin word ‘dividendum’ which means ‘that which is to be divided’. DividendsDividend is that part of the profits of the company which is distributed amongst its shareholders. It differs from interest in the sense that it does not arise out of contractual obligations. Copy the link given below and paste it in new browser window to get more information on Dividends and its Determinants:- http://www.transtutors.com/homework-help/finance/dividends.aspx
Dividend policy
What is Dividend?
What is dividend policy?
Theories of Dividend Policy
Relevant Theory
Walter’s Model
Gordon’s Model
Irrelevant Theory
M-M’s Approach
Traditional Approach
Referred to:
Prasanna Chandra
Some of the major different theories of dividend in financial management are as follows: 1. Walter’s model 2. Gordon’s model 3. Modigliani and Miller’s hypothesis.
On the relationship between dividend and the value of the firm different theories have been advanced.
RUNNING HEAD: TEAM 1 TASK 9 1
TASK 9
Team 1:
Adetolani Adeosun
Lawrence Henderson
Ayoub Mfinanga
Brittany Raines
Matthias Wurster
Memo to CFO
Executive Summary:
Goodwill is an intangible asset that is recorded when a company purchases another company. The amount the company pays beyond the book value of these assets is recorded as a separate asset known as “goodwill”. Acme Iron is considering buying Martin & Sons for $60 million. Martin & Sons has $4.2 million in net working capital. The firm has total assets with a book value of $48.6 million and a market value of $53.4 million. Goodwill is calculated by taking the sum of the market value of assets and net working capital and subtracting that number from the cash acquisition. Based on the following calculation, Acme’s amount of goodwill will be recorded on its balance sheet as $2.4 million. Goodwill is recorded as a noncurrent asset on the balance sheet. Acme does not have the liquidity available to finance this acquisition using cash, so they will have to issue debt or equity for the same. This will reduce liquidity risk. A liquidity issue could damage Acme’s finances to the point where bankruptcy is a potential. A company experiencing liquidity problems is an indicator that there are underlying problems in its practice and this leads to an investment risk.
Analysis:
Goodwill = cash acquisition – (market value of assets + net working capital).
= $60 million – ($53.4 million + $4.2 million)
= $60 million - $57.6 million
= $2.4 million
Goodwill recorded is $2.4 million.
I recommend that the whole consideration should not be paid in cash rather issue debt or equity for the same which reduces liquidity risk.
Yes, there is a liquidity issue which could damage their finances to the point that bankruptcy becomes a potential.
Conclusion:
Goodwill will be reported at $2.4 Million. Paying for this investment using debt or newly issued equity will reduce the liquidity risk of the investment, so this is recommended. This investment should not threaten bankruptcy as long as liquidity is maintained using the above recommended financing options.
RUNNING HEAD: TEAM 1 TASK 8 1
TEAM 1 TASK 8 7
TASK 8
Team 1:
Adetolani Adeosun
Lawrence Henderson
Ayoub Mfinanga
Brittany Raines
Matthias Wurster
Memo to CFO
Executive Summary:
It is the opinion of this advisory committee that a share repurchase be done instead of a dividend distribution. Strictly by increase in EPS, a share repurchase will add more value than a dividend distribution. As shown below, a dividend distribution of the $5,000,000 would add $0.3333 to EPS, while the share repurchase adds $0.3378 per share. This along with tax savings to our shareholders makes the share repurchase the better option. This is even more advisable if it is likely our share price will increase i ...
Fundamentals of Corporate Finance. Chapter 17 Payout Policy. 1) Wh.pdfammanelectronic
Fundamentals of Corporate Finance. Chapter 17 Payout Policy
. 1) What are the two ways corporations pay out cash to shareholders?
2) What companies are more likely to pay dividends?
3) What companies are not likely to pay dividends? Give examples.
4) Name and describe the 4 dividend dates.
5) What do states prohibit in regards to dividends?
6) Companies are not allowed to pay dividends past what point?
7) Describe stock dividends and stock splits.
8) What is stock repurchases?
9) Name and describe the 4 methods of stock repurchases.
10) What is green mail?
11) What are some manager’s dividend policies? Describe \"smoothing dividends\".
12) Describe good and bad news regarding stock dividends.
13) What does Modiligliani and Miller\'s argument state?.
Solution
1(I) Dividends: This is the most common way to payout cash to shareholders. Dividend is paid
annually & the decision to payout dividends totally depends upon the management of the
company.
(II) Repurchase of Shares: This is another way to payout cash. The repurchase can be done in
multiple ways. The most common way is to buy the shares back from the open market on the
prevailing prices. The other way is accelerated buy-back.
2) Companies with no better projects & future investment plans are more likely to payout
dividends as the company doesn’t have any future projects, which can earn higher return than the
market return & hence, they prefer to payout most of the profit through dividend.
3) Companies with a promising future projects, which have potential to generate higher returns,
are very less likely to pay dividends as it’s always better to invest in a project with higher returns
as it will stimulate growth & increase the value of the company.
4)(I) Declaration Date: The date, when dividends are announced by the board of directors.
(II) Date of Record: The date, on which the company will determine its shareholders, or
\"holders of record,\" and the company will use this date to establish to whom it will send
financial reports, proxy statements and other information.
(III) Ex-dividend Date: After the company sets the date of record, the ex-dividend date is set by
either the stock exchange or the National Association of Securities Dealers. If an investor
purchases a stock on or after its ex-dividend date, he or she will not receive the declared cash
dividend; instead, the seller of the stock will be entitled to that dividend. Investors who purchase
the stock before the ex-dividend date will receive the dividend.
(IV) Payment Date: The date, on which the declared dividend will be paid.
5) Legal-Capital: States prohibit corporations to pay cash dividends from its “Legal Capital”. It
refers to the sum of assets contributed to a company by shareholders when they are issued shares.
Capital Surplus Account: Corporation are prohibited from paying dividends using the funds from
the capital surplus account.
Retained Earnings: States also prohibit corporations from paying dividends using their ret.
In this presentation, we discuss share repurchases and everything you need to know about them. We also present some insightful quotes from the world's best investors on the proper implementation of share repurchases in real-world scenarios.
The dividend policies of an organization have a significant bearing on the market value of stocks. Companies must distribute dividends in line with the industry standards and previously distributed dividends by the company. The shareholders will otherwise perceive this variability negatively. It casts suspicion on the financial health and motives of the management (signaling effect). In aggregate, an inefficient dividend decision mechanism would adversely impact the valuation of the company.
Table of Contents
What are Dividend Decisions?
Impact of Dividend Decisions on Price
Factors affecting Dividend Decisions
Cash Requirement
Evaluation of Price Sensitivity
Stage of Growth
Good Dividend Policy
Importance of Dividend Decisions
Q. How much Dividend should a Company Distribute to its Shareholders?
Q. What will be the Impact of Dividend Decisions on the Share Prices of the Company?
Q. What is the Consequential Impact of Inability to Maintain Dividend Year after Year?
Types of Dividend Decision
Stable Dividends
Constant Dividends
Alternate Dividend Decisions
Factors affecting Dividend Decisions
Cash Requirement
The financial manager must take into account the capital fund requirements while framing a dividend policy. Generous distribution of dividends in capital-intensive periods may put the company in financial distress.
Evaluation of Price Sensitivity
Companies chosen by investors for their regularity of dividends must have a more stringent dividend policy than others. It becomes essential for such companies to take effective dividend decisions for maintaining stock prices.
Stage of Growth
Dividend decisions must be in line with the stage of the company- infancy, growth, maturity & decline. Each stage undergoes different conditions and therefore calls for different dividend decisions.
Good Dividend Policy
What Constitutes a Good Dividend Policy?
There does not exist a single dividend decision process that works for every organization. A decision suitable for one company may prove fatal for another company. For example, businesses with a consistent order book such as telecom and banking are expected to pay regular dividends. It may impact the stock prices if they do not pay dividends regularly. On the contrary, sectors of pharmaceutical and technology are highly research-oriented. These require huge cash expenses to further their operations. Therefore they cannot afford to pay a regular dividend. Investors of such stocks earn income mainly through capital appreciation. In essence, there are a lot of factors affecting dividend policy or decisions.
We can refer to the following renowned theories on Dividend Policy:
Modigliani- Miller Theory on Dividend Policy
Gordon’s Theory on Dividend Policy
Walter’s Theory on Dividend Policy
A good financial manager must, therefore, answer the following questions before taking crucial dividend decisions
Importance of Dividend Decisions
While deciding the distribution of dividends, management has to answe
This ppt is prepared to make familiar with the dividend policy which includes Types of Dividend policy, Procedure for declaring dividend, Why do companies declare dividend
Dividends of a corporation are declared by itsSolutionDividend.pdfaksamobilecare
Dividends of a corporation are declared by its
Solution
Dividends of a corporation are declared by its Board of Directors
A divedend is a distribution of a portion of a company\'s earnings, decided by the board of
directors, to a class of its shareholders. Dividends can be issued as cash payments as shares of
stock or other property.
Breking Down Dividend
The Dividend rate may be quoted in terms of the dollar amount each share receives(Dividend Per
Share OR DPS) or It can also be quoted in terms of a percent of the current market price, which
is referred to as the Dividend yield.
A company\'s net profits can be allocated to Shareholders via a dividend or kept within the
company as retained earnings. A Company may also choose to use net profits to repurchase their
own shares in the open markets in a share buyback. Dividends and share buy-backs do not
change the fundamental value of a company\'s shares. Dividend payments must be approved by
the shareholders and may be structured as a one-time special dividend, or as an ongoing cash
flow to owners and investors.
Mutual Fund and ETF shareholders are often entitled to receive accrued dividends as well.
Mutual funds pay out interest and dividend income received from their portfolio holdings as
dividends to fund shareholders. In addition, realized capital gains from the portfolio\'s trading
activities are generally paid out(Capital gain Distribution) as a year end Dividend.
Company that Issue Dividends
Start-ups and other high-growth companies such as those in the technology or biotechnology
sectors rarely offer dividends because all of their profits are reinvested to help sustain higher-
than-average growth and expansion. Larger, established companies tend to issue regular
dividends as they seek to maximize shareholder wealth in ways aside from Supernormal Growth.
Companies in the following sectors and industries have among the highest historical dividend
yields basic materials, Oil & Gases, Bank & FInancial, Healthcare & Phramacetucals.
Arguments for Issuing Dividends
The Bird-in-hand arguments
for dividend policy claims that investors are less certain of receiving future growth and capital
gains from the reinvested retained earnings than they are of receiving current (and therefore
certain) dividend payments. The main argument is that investors place a higher value on a dollar
of current dividends that they are certain to receive than on a dollar of expected capital gains,
even if they are theoretically equivalent.
In many countries, the income from dividends is treated at a more favorable tax rate than
ordinary income. Investors seeking tax-advantaged cash flows may look to dividend-paying
stocks in order to take advantage of potentially favorable taxation. The clientele effect
suggests especially those investors and owners in high marginal tax brackets will choose
dividend-paying stocks.
If a company has a long history of past dividend payments, reducing or eliminating the dividend
amount may s.
Assignment Chapter - Q & A Compilation by Niraj ThapaCA Niraj Thapa
My name is Niraj Thapa. I have compiled Assignment Chapter including SM, PM & Exam Questions of AMA.
You feedback on this will be valuable inputs for me to proceed further.
I express my sincere respect to the authors and my teachers from whom I remain updated in this segment. Due care have been taken so as not to violate the copyright issues.
2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
Ethnobotany and Ethnopharmacology:
Ethnobotany in herbal drug evaluation,
Impact of Ethnobotany in traditional medicine,
New development in herbals,
Bio-prospecting tools for drug discovery,
Role of Ethnopharmacology in drug evaluation,
Reverse Pharmacology.
The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
Welcome to TechSoup New Member Orientation and Q&A (May 2024).pdfTechSoup
In this webinar you will learn how your organization can access TechSoup's wide variety of product discount and donation programs. From hardware to software, we'll give you a tour of the tools available to help your nonprofit with productivity, collaboration, financial management, donor tracking, security, and more.
This is a presentation by Dada Robert in a Your Skill Boost masterclass organised by the Excellence Foundation for South Sudan (EFSS) on Saturday, the 25th and Sunday, the 26th of May 2024.
He discussed the concept of quality improvement, emphasizing its applicability to various aspects of life, including personal, project, and program improvements. He defined quality as doing the right thing at the right time in the right way to achieve the best possible results and discussed the concept of the "gap" between what we know and what we do, and how this gap represents the areas we need to improve. He explained the scientific approach to quality improvement, which involves systematic performance analysis, testing and learning, and implementing change ideas. He also highlighted the importance of client focus and a team approach to quality improvement.
How to Make a Field invisible in Odoo 17Celine George
It is possible to hide or invisible some fields in odoo. Commonly using “invisible” attribute in the field definition to invisible the fields. This slide will show how to make a field invisible in odoo 17.
We all have good and bad thoughts from time to time and situation to situation. We are bombarded daily with spiraling thoughts(both negative and positive) creating all-consuming feel , making us difficult to manage with associated suffering. Good thoughts are like our Mob Signal (Positive thought) amidst noise(negative thought) in the atmosphere. Negative thoughts like noise outweigh positive thoughts. These thoughts often create unwanted confusion, trouble, stress and frustration in our mind as well as chaos in our physical world. Negative thoughts are also known as “distorted thinking”.
The Indian economy is classified into different sectors to simplify the analysis and understanding of economic activities. For Class 10, it's essential to grasp the sectors of the Indian economy, understand their characteristics, and recognize their importance. This guide will provide detailed notes on the Sectors of the Indian Economy Class 10, using specific long-tail keywords to enhance comprehension.
For more information, visit-www.vavaclasses.com
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
1. THE DIVIDEND DECISION
FACTS ABOUT PAYOUT THE PAYOUT CONTROVERSY GOOD-BAD SCHOOL
I will be talking from finance perspective only, and let me assure I am not biased. Primarily I will be discussing the
above three mentioned topics. Let me introduce you on my topic of interest. Initially see the big picture.
The Big Picture Detailed
2. FACTS ABOUT PAYOUT: Generally, dividends are paid annually in India while the same are paid quarterly in
United States. Dividend decision is the decision relating whether to return cash to its stockholders and, if so,
then how much. Even the owner of a private company/ firm has to visualize the same (ie, decision about how
much cash he or she plans to withdraw from the business and how much to reinvest.)
Payout policy presents 2specific questions -how much cash should the corporation pay out to its shareholders? and the
next is mode of distribution –either by dividends or by buy back.
Some companies used to pay dividends, but then fell on hard times and ceased to do so. Most non–dividend payers are
young growth companies that have never paid a dividend and will not pay one in the foreseeable future (say Berkshire
Hathaway, Amazon, and Google & smaller growth firms too)
Types of Dividends Some of them are:
(i) Cash Dividends (ii) Stock Dividends [ Here, No. of shares increases & generally per share price decreases] (iii)
regular dividend [annually/semi –annually/quarterly] (iv) special dividend [paid in addition to regular dividends-
but are paid irregularly](v) Liquidating dividends [nature-return on capital rather than ordinary income]
As clarified from the data companies instead of paying a dividend use the cash to repurchase stock and such shares
are kept in the company’s treasury and may be resold if the company needs money. As discussed on the stability
of dividends in comparison to Buy Back, announcement of a share repurchase is not a commitment to continue
repurchases in later years. So the information content of a repurchase announcement is less strongly positive than
the announcement of a dividend increase. We do have number of methods for buy back, however, buy back may
take place via direct negotiation with a major shareholder.
Interestingly, many countries have banned this method at times, consequently, firms started accumulating large
amount of cash and started investing at lower rates had the same cash be in the hands of the investor. At present
many countries have relaxed this mechanism. I inform you some economies allowing repurchase. But many of
these limitations have now been removed. Japan allowed repurchases in the year 1995, Sweden in 2000 &
Germany in 1998. Many multinational giants now repurchase huge amounts of stock. In 2007 the Spanish bank
BBVA, BP, Royal Dutch Shell, and Glaxo Smith Kline all spent huge sums on buying back their stock.
Study shows that on average repurchase resulted in an abnormal price rise of 2%. What investors may think
on buy back decision? Do they appreciate?
Investors may applaud repurchases if they worry that managers would otherwise fritter away the money on
perks or unprofitable empire building.
Repurchases can also reflect management optimism, perhaps their view that their company’s shares are
underpriced by investors.
Stock repurchases may also be used to signal a manager’s confidence in the future.
The graph shows the % of companies in European Union
paying dividends or repurchasing, it is clear that
dividend payouts are declining while repurchasing are
increasing from 1997. Research shows that dividends
are more stable than repurchases. I don’t think
talking about “How Firms Pay Dividends” would be a
value addition as we all are aware on this. The
announcement of the dividend states that the payment
will be made to all stockholders who are registered on a
particular record date.
3. A survey in 2004 talks:
i) Managers focus more on dividend changes than on absolute dividend levels. Hence, paying a dividend of $2.00
per share is an important financial decision if last year’s dividend was $1.50, but no big deal if last year’s
dividend was also $2.00.
ii) Managers “smooth” dividends. Dividend changes follow shifts in long-run, sustainable earnings. Transitory
earnings changes are unlikely to affect dividends.
iii) Managers do particularly worry about having to rescind a dividend increase and, if necessary, would issue
shares or borrow to maintain the dividend.
I, being an investor have the mentality that announcement of dividend increase is a good news, even more
managers do not increase the dividends unless they are confident that the payment can be maintained. Now I am
confident that my company is confident in generation future profits.
The information content of dividends implies that dividend increases predict future profitability, but evidences
are rarely found.
What this news create is that it results in share price rise as the market expects growth in the companies while the
news relating to dividend cut off results in reduction of share price. This means market is efficient as it forecasts the
future with the news.
What should corporations do- DIVIDENDS OR REPURCHASE [CONTROVERSY]
Announcements of dividends and repurchases can convey information about management’s confidence and so
affect the stock price. But eventually the stock price change would happen anyway as information seeps out
through other channels. Does payout policy affect value in the long run?
On the right are conservatives who argue that investors pay more for firms with generous, stable dividends. On
the left, another group argues that repurchases are better because repurchases mean higher stock prices, and
capital gains have been taxed at lower effective rates than dividends. And in the center, a middle-of-the-road party
claims that the choice between
dividends and repurchases has no effect on value. [I will be discussing 2 schools of thoughts on dividends on
upcoming para]
DIVIDENDS ARE IRRELEVANT
This school of thought is propounded by Miller and Modigliani and says that dividends do not really matter
because they do not affect firm value [ie, stockholders are indifferent between receiving dividends and
earning capital gains (price appreciation)] which is based on two assumptions. The first is that there is no tax
disadvantage to an investor to receiving dividends relative to capital gains, and the second is that firms can raise
funds in capital markets for new investments without bearing significant issuance costs.
The thought is simple since they say that in totality investors get the same. In case a higher dividend is paid it
results in low capital appreciation and vice versa, provided tax on dividends and tax on capital gains are same. In
India dividends are exempt in the hands of investors. If these assumptions do not hold true, then investors
who need cash urgently might prefer to receive dividends.
Now if the company wants to up the dividend without changing their investment policy or capital structure, then
there is the need of extra cash which must come from somewhere. If the firm fixes its borrowing; the only way, it
can finance the extra dividend is to sell more shares.
Alternatively, rather than increasing dividends and selling new shares, the firm can pay lower dividends. With
investment policy and borrowing fixed, the cash that is saved can only be used to buy back some of the firm’s
existing shares. Thus any change in dividend payout must be offset by the sale or repurchase of shares.
4. Proof of Irrelevance
Let us consider a Balance sheet of a firm pre and post payout based on market values.
Assumptions for simplicity:
-Consider there is no debt.
-Net Working capital is enough to meet the business operations.
-All of its fixed assets are paid for.
-Surplus cash is left over cash.
-Market is perfect [ stocks are fairly priced]
We do have choices- you may go for dividend payments or repurchase the stock
Now let us say the company goes for paying dividend to its shareholders. $1 per share can be paid as dividend out
of surplus cash. The stock price will be $ 10 per share. Finally, a shareholder has $1 (dividend) plus $10 (value of
stock) =$11 in his hand.
Say, it goes for buy back. Maximum buy back shall be = [1 million/ $11 per share] = 90,909 shares. Post
repurchase no. of shares outstanding shall be 909,091. Now share price becomes 11 [ie 10 million divided by
909091 shares]. Again share holder has $11 in his hand.
Hence, at the end the shareholder’s wealth is the same with dividends as with repurchases. This is what
MM proved in their article in 1961.
It’s all rumor to say that “Repurchases do guarantee a higher stock price” which we proved in the above example.
Repurchases also reduce the number of shares outstanding, so future earnings per share are higher than
if the same amount were paid out as dividends.
WHAT WE LEARNT
If MM are correct and payout policy does not affect value, then the choice between dividends and repurchases is
merely tactical. A company will decide to repurchase if it wants to retain the flexibility to cut back payout if valuable
investment opportunities arise. Another company may decide to pay dividends to assure stockholders that it will run
a tight ship, paying out free cash flow to limit the temptation for careless spending. Firms should never give up a
positive NPV project to increase a dividend (or to pay a
dividend for the first time). This situation exists in a perfect market. I don’t like to create a debatable situation in
this short write up on the topic whether market is rational or irrational. Robert Shiller & Eugene Fama both
being Nobel Prize Winners have contradictory views on the market. You may refer their research papers &
books on the said topic.
What We Know And Do Not Know About Dividend Policy -Some Survey Evidence About Dividends
Policy Statements % who
agree/strongly
agree
1 We try to avoid reducing dividends per share 93.8%
2 We try to maintain a smooth dividend from year to year 89.6%
3 We consider the level of dividends per share that we have paid in recent
quarters
88.2%
4 We are reluctant to make dividend changes that might have to be reversed in
the future
77.9%
5 We consider the change or growth in dividends per share. 66.7 66.7%
6 We consider the cost of raising external capital to be smaller than the cost of
cutting dividends
42.8%
7 We pay dividends to attract investors subject to “prudent man” investment
restrictions
41.7%
Adapted from Table 4 of A. Brav, J. R. Graham, C. R. Harvey, and R. Michaely,
“Payout Policy in the 21st Century,” Journal of Financial Economics (2005).
5. SCHOOLS OF THOUGHT very brief
Interestingly we have 2 schools of thoughts - DIVIDENDS ARE BAD SCHOOL & DIVIDENDS ARE GOOD SCHOOL
Dividends have historically been taxed at much higher rates than capital gains in the United States. Based on this tax
disadvantage, dividend payments reduce the returns to stockholders after personal taxes. Stockholders, they posited, would
respond by reducing the stock prices of the firms making these payments, relative to firms that do not pay dividends.
Consequently, firms would be better off either retaining the money they would have paid out as dividends or repurchasing
stock. In 2003, the basis for this argument was largely eliminated when the tax rate on dividends was reduced to match the
tax rate on capital gains. If this is the case dividends are good in India as dividends are exempt in the hands of shareholders.
If a company does not have excess cash, and/or has several good investment opportunities (NPV>0), returning money
to stockholders (dividends or stock repurchases) is bad.
Notwithstanding the tax disadvantages associated with dividends for most of the last hundred years in the United
States, firms continued to pay dividends and many investors viewed such payments positively. This gave rise to a
thought that argues dividends are good and can increase firm value. Some of the arguments used are questionable,
but some have a reasonable basis in fact.
If a company has excess cash, and few good investment opportunities (NPV>0), returning money to
stockholders (dividends or stock repurchases) is good.
Even you have these thoughts if you are playing with the live data. See here:
There are much more to express on the topic – I request the readers to consider this be an introductory topic. I
am thankful to my teachers, authors, writers, their books and various publications from whom I remain updated
in this segment. I must acknowledge my finance guru CA Rajiv Singh, Prof. Aswath Damodaran, RWJ, Brealey-
Myers-Allen for this write up. The data and references are facts & based on authentic sources research papers.
Thank you for reading!!!
Niraj Thapa
niraj_thapa@hotmail.com