06-09-2012, 05:11 PM
Dividends and Dividend Policy
Dividend Policy.ppt (Size: 542 KB / Downloads: 29)
Cash Dividends
Regular cash dividend – cash payments made directly to stockholders, usually each quarter
Extra cash dividend – indication that the “extra” amount may not be repeated in the future
Special cash dividend – similar to extra dividend, but definitely won’t be repeated
Liquidating dividend – some or all of the business has been sold
Dividend Payment
Declaration Date – Board declares the dividend and it becomes a liability of the firm
Ex-dividend Date
Occurs two business days before date of record
If you buy stock on or after this date, you will not receive the dividend
Stock price generally drops by about the amount of the dividend
Date of Record – Holders of record are determined and they will receive the dividend payment
Date of Payment – checks are mailed
Does Dividend Policy Matter?
Dividends matter – the value of the stock is based on the present value of expected future dividends
Dividend policy may not matter
Dividend policy is the decision to pay dividends versus retaining funds to reinvest in the firm
In theory, if the firm reinvests capital now, it will grow and can pay higher dividends in the future
Illustration of Irrelevance
Consider a firm that can either pay out dividends of Rs.10Cr. per year for each of the next two years or can pay Rs.9Cr. this year, reinvest the other Rs.1Cr. into the firm and then pay Rs.11.12Cr. next year. Investors require a 12% return.
Market Value with constant dividend = Rs. X Cr.
Market Value with reinvestment = Rs. X Cr.
If the company will earn the required return, then it doesn’t matter when it pays the dividends
Low Payout Please
Why might a low payout be desirable?
Individuals in upper income tax brackets might prefer lower dividend payouts, given the immediate tax liability, in favor of higher capital gains with the deferred tax liability
Flotation costs – low payouts can decrease the amount of capital that needs to be raised, thereby lowering flotation costs
Dividend restrictions – debt contracts might limit the percentage of income that can be paid out as dividends