Chapter 14: Dividends and Dividend Policy
On Tuesday Dec. 8, Hometown Power Co.'s board of directors declares a dividend of 75 cents per share payable on Wed Jan 17, to shareholders of record as of Wed Jan 3. If a shareholder buys stock before that date, who gets the dividends on those shares? the buyer or the seller?
Anyone who buys the stock before December 29th is entitled to the dividend, assuming they do not sell it again before Dec. 29th.
How is it possible that dividends are so important, but at the same time dividend policy is irrelevant?
Dividend policy deals with the timing of dividend payments, not the amounts ultimately paid. Dividend policy is irrelevant when the timing of dividend payments (now or later) doesn't affect the present value of all future dividends.
On Tuesday Dec. 8, Hometown Power Co.'s board of directors declares a dividend of 75 cents per share payable on Wed Jan 17, to shareholders of record as of Wed Jan 3. When is the Ex-Dividend date?
Friday December 29th (remember not to count Jan 1st because it is a holiday and the market is closed.)
During 2008, only 21 companies went public with common stock offerings, raising a combined total of 22.8 billion. Relatively few of those companies involved paid cash dividends. Why do you think most chose not to pay dividends?
If these firms just went public, they probably did so because they were growing and needed additional capital. Growth firms typically pay very small cash dividends, if they pay dividends at all. This is because they have numerous projects, and therefore reinvest the earnings in the firm instead of paying cash dividends.
Last month, Central Virginia Power Company, which has been having trouble with cost overruns on a nuclear power plant that it had been building, announced that it was "temporarily suspending payments due to the cash flow crunch associated with its investment program" The company's stock price dropped from 28.5 to 25 when this announcement was made. How would you interpret this change in the stock price? (What caused it)
The stock price dropped because of an expected drop in future dividends. Since the stock price is the present value of all future dividend payments. If the expected future dividend payments decrease, the the stock price will decline.
Explain the life-cycle theory of dividend payments
Young firms don't pay out dividends. They instead use it to fund investments. As a firm matures, it begins to generate free cash flow. Pressure develops to not horde the cash, and to pay out the dividends.