Dividends

Summaries

Cash dividends:

1)      Regular

2)      Special (irregular, extra)

3)      Liquidating dividend – when company goes out of business. Taxed as capital gain

Stock Dividends vs Stock splits

Stock splits reduces liquidity (more fee per share)

Optimal price $20-$80, <$5 is less than investment grade

Ex-dividend date – on or after which no dividend will be received.

+2 days = Holders-of-record (settling is 3 days)

Stock repurchase:

1)      if BVPS> market price, BVPS will increase

2)      if after tax cost is higher than EPS, EPS will decrease

Stock repurchase methods:

1)      open market

2)      tender offer

3)      direct negotiation with large share holders

Clientele effect – different preferences from different groups of investors

The impairment of capital rule – dividend paid cannot exceed the retained earnings

Floatation cost – cost associated when issuing new stocks

Double taxation: corporate tax rate + (1 – corporate tax rate) x individual rate (max 15% in US)

Split tax rate (Germany) – dividend taxed less than retained earnings in corporate tax

Imputation tax – share holders effectively pay all the tax. If corporate tax > individual, get refund, otherwise make up – effective rate is just the individual rate

Dividend approaches:

1.      Residual Dividend Model

2.      Longer-term residual dividend: focus on longer term capital budget/ then pay out also relatively evenly every year/ what excess is used to do stock repurchase

3.      Dividend Stability  - stability in the rate of increase

4.      Target payout ratio – move gradual to that ratio/ avoid cutting or eliminating payout

Expected Dividends:

= Previous dividend + (expected increase in EPS x target payout ratio / number of year of smoothing)

*** The new target payout ratio may less than the previous year!!!

Dividend Irrelevance – (MM) efficient market, dividend policy is irrelevant to stock holders, they can buy extra stock if dividend is high or sell if low, => price of stock is not affected => required rate of returned is not affected

Dividend preference – Gordon and Linter, bird-in-the-hand theory

Tax Aversion – dividend is taxed heavier than capital gain. (But now the same in US: 20%)