Copyright 2004 McGraw-Hill Australia 19.1 Cash Dividends and Dividend Payment 19.2 Does Dividend Policy Matter?. Copyright 2004 McGraw-Hill Australia • Dividends are usually paid in
Trang 1Copyright 2004 McGraw-Hill Australia
Trang 2Copyright 2004 McGraw-Hill Australia
19.1 Cash Dividends and Dividend Payment
19.2 Does Dividend Policy Matter?
19.3 Real-world Factors Favouring a Low Payout
19.4 Real-world Factors Favouring a High Payout
19.5 A Resolution of Real-world Factors?
19.6 Establishing a Dividend Policy
19.7 Share Repurchase: An Alternative to Cash
Dividends
19.8 Share Dividends and Share Splits
19.9 Employee Share Ownership Plans
19.10 Summary and Conclusions
Chapter Organisation
Trang 3Copyright 2004 McGraw-Hill Australia
• Discuss factors favouring a low or a high payout.
• Explain the residual dividend policy.
• Illustrate the situation of share repurchases vs paying a cash dividend.
• Understand both bonus issues and share splits.
• Outline the various employee share ownership plans.
Trang 4Copyright 2004 McGraw-Hill Australia
• Dividends are usually paid in the form of cash
• Types of cash dividends include:
– regular cash dividends
– extra dividends
– special dividends
– liquidating dividends.
• Share dividends are also paid, and share
repurchases are a dividend alternative
Trang 5Copyright 2004 McGraw-Hill Australia
January January January February
Trang 6Copyright 2004 McGraw-Hill Australia
Procedure for Dividend Payment
• Declaration date: the board of directors declares a payment
of dividends.
• Ex-dividend date: if you buy the share on or after this date
the seller is entitled to keep the dividend Under ASX rules, shares are traded ex-dividend on and after the seventh business day before the record date.
• Record date: declared dividends are distributable to
shareholders of record on a specific date.
• Payment date: the dividend cheques are mailed to
shareholders of record.
Trang 7Copyright 2004 McGraw-Hill Australia
The share price will fall by the amount of the dividend on the ex
date (Time 0) If the dividend is $1 per share, the price will be equal to $10 – 1 = $9 on the ex date.
Before ex date (Time –1) Dividend = $0 Price = $10
On ex date (Time 0) Dividend = $1 Price = $9
Trang 8Copyright 2004 McGraw-Hill Australia
Trang 9Copyright 2004 McGraw-Hill Australia
Does Dividend Policy Matter?
Dividend policy versus cash dividends
An illustration of dividend irrelevance
Original dividends
$1000 $1000
If R E = 20%: P0 = $1000/1.2 + $1000/1.2 2 = $1527.78
Trang 10Copyright 2004 McGraw-Hill Australia
$1200 $760
Assume an additional $200 of dividends is offered,
financed by an issue of debt or shares New dividend
plan:
P0 = $1200/1.2 + $760/1.2 2 = $1 527.78
Trang 11Copyright 2004 McGraw-Hill Australia
Dividend Policy Irrelevance
• Any increase in dividends at one point is offset exactly by a decrease somewhere else.
• An alternative explanation is home-made dividends
Individual investors can undo corporate dividend policy by reinvesting dividends or selling shares.
• Companies may help with creating home-made dividends by offering shareholders automatic dividend reinvestment plans (DRIPs).
Trang 12Copyright 2004 McGraw-Hill Australia
Dividends and the Real World
A low payout is better if one considers:
• Taxes: Optimal dividend policy is determined by various
shareholder situations Some shareholders prefer high franked dividends, others prefer the company to pay no dividend and retain the funds for reinvestment (tax on dividend income vs capital gains tax).
• Flotation costs: Higher dividend payouts may require a new
share issue, which could be expensive and decrease the
value of the firm.
• Dividend restrictions: Debt contracts might limit the
percentage of income that can be paid out as dividends.
Trang 13Copyright 2004 McGraw-Hill Australia
Dividends and the Real World
A high payout is better if one considers:
• Desire for current income instead of capital gain.
• Uncertainty resolution: ‘bird-in-hand’ story.
• Tax benefits: There are some investors who do receive favourable tax treatment from holding high dividends (e.g corporate investors).
• Legal benefits.
Trang 14Copyright 2004 McGraw-Hill Australia
Trang 15Copyright 2004 McGraw-Hill Australia
Trang 16Copyright 2004 McGraw-Hill Australia
Dividends and Signals
• Changes in dividends convey information
– Dividend increases:
Management believes it can be sustained.
Expectation of higher future dividends, increasing present value.
Signal of a healthy, growing firm.
Signal of a firm that is having financial difficulties.
– The information content makes it difficult to interpret the effect of the dividend policy of the firm.
Trang 17Copyright 2004 McGraw-Hill Australia
• Some investors prefer high dividend payouts and will buy shares in those companies that offer high dividend payouts
Trang 18Copyright 2004 McGraw-Hill Australia
Residual Dividend Policy
• Issue costs eliminate any indifference between financing by internal capital and new shares
• Dividends are paid only if profits are not completely used for investment purposes
• Desired debt-to-equity ratio is maintained
Trang 19Copyright 2004 McGraw-Hill Australia
Trang 20Copyright 2004 McGraw-Hill Australia
Trang 21Copyright 2004 McGraw-Hill Australia
Key Concepts in Dividend Policy
• Dividend stability—dividends are only increased if the
increase is sustainable.
• Dividend streaming—shareholders can choose different
dividend schemes to suit their tax position (franked vs unfranked dividends)
• Special dividends—‘one-off’’ extra dividends.
• Dividend reinvestment schemes—company reinvests
individuals’ dividends into fully paid shares of the company Avoids transactions costs and need for prospectus, and
shares are usually offered at a discount.
Trang 22Copyright 2004 McGraw-Hill Australia
Australian Equity Raisings 2001
Source: Australian Stock Exchange
Trang 23Copyright 2004 McGraw-Hill Australia
• Company buys back its own shares
• Similar to a cash dividend in that it returns cash
from the firm to the shareholders
• This is another argument for dividend policy
irrelevance in the absence of taxes or other
imperfections
Trang 24Copyright 2004 McGraw-Hill Australia
• Equal access purchase
Offer made by company to all shareholders to purchase shares in the same proportion as their holdings.
• On-market purchase
Purchase by a company of its own shares on the open market.
• Employee share purchase
Repurchase shares from employees that were issued under employee incentive scheme.
Trang 25Copyright 2004 McGraw-Hill Australia
Consider a firm with 50 000 shares outstanding, net
profit of $100 000 and the following balance sheet.
Trang 26Copyright 2004 McGraw-Hill Australia
• The firm is considering either:
– Paying a $1 per share cash dividend.
OR
– Repurchasing 2500 shares at $20 a share.
Trang 27Copyright 2004 McGraw-Hill Australia
Trang 28Copyright 2004 McGraw-Hill Australia
Trang 29Copyright 2004 McGraw-Hill Australia
Share Dividends and Share Splits
Bonus shares and share splits:
• involve issuing new shares on a pro-rata basis to the current shareholders
• do not change the firm’s assets, earnings, risk assumed and investors’ percentage of ownership in the company
• increase the number of shares outstanding
• reduce the value per share
A common explanation is to adjust the share price to a ‘more
desirable trading range’.
Trang 30Copyright 2004 McGraw-Hill Australia
– reduction in transaction costs
– increase in share marketability (trading range)
– regain respectability.
Trang 31Copyright 2004 McGraw-Hill Australia
Share Ownership Plans
• Encourage the financial participation of employees in the company, including:
– fully paid shares
– partly paid shares
– special classes of shares
– options
– phantom or shadow shares
– employee share trusts.