18-01-2013, 03:21 PM
Dividend Policy
Dividend Policy.ppt (Size: 236.5 KB / Downloads: 265)
Irrelevance of Dividends
A. Current dividends versus retention of earnings
M&M contend that the effect of dividend payments on shareholder wealth is exactly offset by other means of financing.
The dividend plus the “new” stock price after dilution exactly equals the stock price prior to the dividend distribution.
B. Conservation of value
M&M and the total-value principle ensures that the sum of market value plus current dividends of two firms identical in all respects other than dividend-payout ratios will be the same.
Investors can “create” any dividend policy they desire by selling shares when the dividend payout is too low or buying shares when the dividend payout is excessive.
Other Dividend Issues
Flotation costs
Transaction costs and divisibility of securities
Institutional restrictions
Financial signaling
Empirical Testing of Dividend Policy
Tax Effect
Dividends are taxed more heavily (in PV terms) than capital gains, so before-tax returns should be higher for high-dividend-paying firms.
Empirical results are mixed -- recently the evidence is largely consistent with dividend neutrality.
Financial Signaling
Expect that increases (decreases) in dividends lead to positive (negative) excess stock returns.
Empirical results are consistent with these expectations.
Implications for Corporate Policy
Establish a policy that will maximize shareholder wealth.
Distribute excess funds to shareholders and stabilize the absolute amount of dividends if necessary (passive).
Payouts greater than excess funds should occur only in an environment that has a net preference for dividends.
Methods of Repurchase
Fixed-price self-tender offer -- An offer by a firm to repurchase some of its own shares, typically at a set price.
Dutch auction self-tender offer -- A buyer (seller) seeks bids within a specified price range, usually for a large block of stock or bonds. After evaluating the range of bid prices received, the buyer (seller) accepts the lowest price that will allow it to acquire (dispose of) the entire block.
Open-market purchase -- A company repurchases its stock through a brokerage house on the secondary market.