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Stock Returns:
Return =
P1 - Po + D1
Po
Stock Returns:
Return =
P1 - Po
Po
P1 - Po + D1
Po
D1
+
Po
Stock Returns:
Return =
P1 - Po
Po
P1 - Po + D1
Po
D1
+
Po
Capital Gain
Stock Returns:
Return =
P1 - Po
Po
P1 - Po + D1
Po
D1
+
Po
Capital Gain
Dividend Yield
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Return =
P1 - Po
Po
D1
Po
Do Dividends Matter?
Other Considerations:
1) Residual Dividend Theory:
The firm pays a dividend only if it has
retained earnings left after financing
all profitable investment
opportunities.
This would maximize capital gains for
stockholders and minimize flotation
costs of issuing new common stock.
Do Dividends Matter?
2) Clientele Effects:
Different investor clienteles prefer different
dividend payout levels.
Some firms, such as utilities, pay out over
70% of their earnings as dividends. These
attract a clientele that prefers high
dividends.
Growth-oriented firms which pay low (or
no) dividends attract a clientele that prefers
price appreciation to dividends.
Do Dividends Matter?
3) Information Effects:
Unexpected dividend increases
usually cause stock prices to rise, and
unexpected dividend decreases cause
stock prices to fall.
Dividend changes convey information
to the market concerning the firms
future prospects.
Do Dividends Matter?
4) Agency Costs:
Paying dividends may reduce agency
costs between managers and
shareholders.
Paying dividends reduces retained
earnings and forces the firm to raise
external equity financing.
Raising external equity subjects the firm
to scrutiny of regulators (SEC) and
investors and therefore helps monitor the
performance of managers.
Do Dividends Matter?
5) Expectations Theory:
Investors form expectations concerning
the amount of a firms upcoming
dividend.
Expectations are based on past dividends,
expected earnings, investment and
financing decisions, the economy, etc.
The stock price will likely react if the
actual dividend is different from the
expected dividend.
Dividend Policies
1) Constant Dividend Payout Ratio: if
directors declare a constant payout
ratio of, for example, 30%, then for
every dollar of earnings available to
stockholders, 30 cents would be paid
out as dividends.
The ratio remains constant over time,
but the dollar value of dividends
changes as earnings change.
Dividend Policies
2) Stable Dollar Dividend Policy:
the firm tries to pay a fixed dollar
dividend each quarter.
Firms and stockholders prefer
stable dividends. Decreasing the
dividend sends a negative signal!
Dividend Policies
3) Small Regular Dividend plus YearEnd Extras
The firm pays a stable quarterly
dividend and includes an extra yearend dividend in prosperous years.
By identifying the year-end dividend
as extra, directors hope to avoid
signaling that this is a permanent
dividend.
Jan.4
Declare
dividend
Jan.30 Feb.1
Ex-div. Record
date
date
Mar. 11
Payment
date
Dividend Payments
1) Declaration Date: the board of
directors declares the dividend,
determines the amount of the dividend,
and decides on the payment date.
Jan.4
Declare
dividend
Jan.30 Feb.1
Ex-div. Record
date
date
Mar. 11
Payment
date
Dividend Payments
2) Ex-Dividend Date:
Jan.4
Declare
dividend
Jan.30 Feb.1
Ex-div. Record
date
date
Mar. 11
Payment
date
Dividend Payments
2) Ex-Dividend Date: To receive the
dividend, you have to buy the stock before
the ex-dividend date. On this date, the
stock begins trading ex-dividend and
the stock price falls approximately by the
amount of the dividend.
Jan.4
Declare
dividend
Jan.30 Feb.1
Ex-div. Record
date
date
Mar. 11
Payment
date
Dividend Payments
3) Date of Record:
Jan.4
Declare
dividend
Jan.30 Feb.1
Ex-div. Record
date
date
Mar. 11
Payment
date
Dividend Payments
3) Date of Record: 2 days after the exdividend date, the firm receives the list of
stockholders eligible for the dividend.
Often, a bank trust department acts as
registrar and maintains this list for the
firm.
Jan.4
Declare
dividend
Jan.30 Feb.1
Ex-div. Record
date
date
Mar. 11
Payment
date
Dividend Payments
4) Payment Date: date on which the
firm mails the dividend checks to the
shareholders of record.
Stock Dividends
In-class Problem
Hint:
P/E =
stock price
net income
# shares
Stock Repurchases
Stock Repurchases may be a good
substitute for cash dividends.
If the firm has excess cash, why not
buy back common stock?
Stock Repurchases
Stock Repurchases may be a good
substitute for cash dividends.
If the firm has excess cash, why not
buy back common stock?
Stock Repurchases
Repurchases drive up the stock
price, producing capital gains for
shareholders.
Repurchases increase leverage, and
can be used to move toward the
optimal capital structure.
Repurchases signal positive
information to the market - which
increases stock price.
Stock Repurchases
Repurchases may be used to avoid
a hostile takeover.
Example: T. Boone Pickens
attempted raids on Phillips
Petroleum and Unocal in 1985.
Both were unsuccessful because
the target firms undertook stock
repurchases.
Stock Repurchases
Methods:
Buy shares in the open market
through a broker.
Buy a large block by negotiating the
purchase with a large block holder,
usually an institution (targeted stock
repurchase).
Tender offer: offer to pay a specific
price to all current stockholders.