Chapter 17 (Dividends and Payout Policy)
There are 4 types of dividends
1. regular cash dividends 2. Extra dividends 3. Special dividends 4. Liquidating Dividends
True or False: Dividends are irrelevant
False Duh Clearly, investors prefer higher dividends to lower dividends at any single date if the dividend level is held constant at every other date
Dividend Payment: A chronology
1. Declaration Date 2. Ex-dividend date 3. date or record 4. date of payment
Regular cash dividend
a cash payment made by a firm to its owners in the normal course of business, usually paid four times per year.
Declaration Date
a date which the board of directors passes a resolution to pay a dividend
Dividend
a payment made out of a firm to its owners, in the form of either cash or stock
reverse split
a stock split in which a firm's number of shares outstanding is reduced
stock split
an increase in a firm's shares outstanding without any change in owner's equity
Date of payment
the date on which the dividend checks are mailed
Ex-dividend date
the date two business days before the date of record, establishing those individuals entitled to a dividend
Date of record
the date which a holder must be on record to be designated to receive a dividend `
Information content effect
the market's reaction to a change in corporate dividend payout
Cash Dividends
the most common type of dividend is a cash dividend. Commonly, public companies pay these 4 times per year.
clientele effect
the observable fact that stocks attract particular groups based on dividend yield and the resulting tax effects
trading range
the price range between the highest andlowest prices at which a stock is traded
stock repurchasing
the purchase, by a corporation, of its own shares of stock; also known as a buyback
homemade dividend policy
the tailored dividend policy created by individual investors who undo corporate dividend policy by reinvesting dividends or selling shares of stock
Putting it all together
1. Aggregate dividend and stock repurchases are massive, and they have increased steadily in nominal and real terms over the years. 2. Dividends are heavily concentrated among a relatively small number of large, mature firms 3. Managers are very reluctant to cut dividends, normally doing so only due to firm-specific problems 4. Managers smooth dividends, raising them slowly and incrementally as earnings grow 5. Stock prices react to unanticipated changes in dividends
3 different positions on dividends
1. based on homemade dividend argument, dividend policy is irrelevant 2. Because of tax effects for individual investors and new issue costs, a low-dividend policy is best 3. Because of the desire for current income and related factors, a high-dividend policy is best
Distribution
A payment made by a firm to its owners from sources other than current or accumulated retained earnings
Stock Dividend
A payment made by a firm to its owners in the form of stock, diluting the value of each share outstanding
Flotation Costs
In our example illustrating that dividend policy doesn't matter, we saw that the firm could sell some new stock if necessary to pay a dividend. As we mentioned in chapter 15, selling a stock can be quite expensive. If we include floatation costs in our argument, then we will find that the value of the stock decreases if we sell new stock.
Standard Method of Cash Dividend Payment
The decision to pay a dividend rests in the hands of the board of directors of the corporation. When a dividend is declared, it becomes a debt of the fir and cannot easily be rescinded.
True or False: Dividend policy is irrelevant
True At least only in the simple case we have been examining. Dividend policy itself cannot raise the dividend at one date while keeping it the same at all other dates. Rather, dividend policy merely establishes the trade-off between dividends at one date and dividends at another date
Taxes
U.S Tax laws are complex and they affect dividend policy in a number of ways. The key tax feature has to do with the taxation of dividend income and other capital gain. For individual shareholders, effective tax rates on dividend income are higher than the tax rates on capital gains
Dividend Restrictions
force firm to retain assets rather than paying them out to shareholders