Finance P3: RWJ Chp. 17

Dividend payout

Dividend as a percentage of net income or earnings per share

Dividend yield

Dividend as a percentage of the market price

Date of record

The date by which a holder must be on record to be designated to receive a dividend.

Declaration date

The date on which the board of directors passes a resolution to pay a dividend

Stock repurchase

The purchase, by a corporation, of its own shares of stock; also known as a buyback.

If the dividend per share at a given date is raised, while the dividend per share at every other date is held constant how will the stock price change and why?

The stick price will rise because the present value of the future dividend goes up as the result of management decisions that improve productivity, increase tax savings, strengthen product marketing, or otherwise improve cash flow.

Dividend policy

The time pattern of dividend payout.

Extra cash dividend

By calling part of the payment "extra," management is indicating that the "extra" part may or may not ve repeated in the future.

There are a number of other investors who do not receive unfavorable tax treatment from holding high-dividend yield securities.

1. Corporate investors receive a significant tax break on dividends for holding stock in another company. 2. Tax-exempt investors such as pension funds, endowments funds, and trust funds.

Real-world factors favoring a low dividend payout:

1. Taxes 2. Flotation costs 3. Dividend restrictions

Firms should generally have higher dividend payouts because:

1. The discounted value of near dividends, is higher than the present worth of distant dividends. 2. Between two companies with the same general earning power and same general position in an industry, the one paying the large dividend will almost always sell at a higher rice. 3. They desire current income 4. They receive tax and other benefits from high dividends.

Regular cash dividend

A cash payment made by a firm to its owners in the normal course of business, usually paid four times a year.

Open market purchase

A company will purchase their own stock on the open market. They do not reveal itself as the buyer.

Targeted repurchase

A firm may repurchase shares from specific individual stockholders.

Stock dividend

A payment made by a firm to its owners in the form of stock, diluting the value of each share outstanding. For example, a 20% stock dividend means that a shareholder receives one new share for evert five currently owned.

Distribution

A payment made by the firm to its owners from sources other than current or accumulated retained earnings.

Dividend

A payment made out of a firm's earnings 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. For example, a three-for-one stock split, each old share is split into three new shares.

Taxes

For individual shareholders, effective tax rates on dividend income are higher than the tax rates on capital gains. Also, a tax on capital gains is deferred until the stock is sold. Historically, dividends have been taxes as ordinary income, but President Bush's lowered tax rates on dividends and capitals gains from 35-39% to 15%; giving corporations a tax incentive to pay dividends.

Clientele effect

The observable fact that stocks attract particular groups based on dividend yield and the resulting tax effects. In order for a firm to boost its share price by paying high dividends an unsatisfied clientele must exist.

Liquidating dividend

The payment of this type of dividend usually means that some of all of the business has been liquidated or sold off. A cash dividend payment reduces corporate cash and retained earnings, except in the case of a liquidating dividend (which may reduce paid-in capital).

Current income argument

Individual investors may have a desire for current income and may thus be willing to pay the dividend tax.

Flotation costs

Selling new stock to pay a dividend can be very expensive. If we flotation costs, we find that the value of the stock decreases if we sell new stock.

Dividend restrictions

Some corporations face restrictions on its ability to pay dividends. For example, a common feature of a bond indenture is a convenant prohibiting dividen payments above some level. May also be prohibited by law if the dividen amount exceeds the firms earnings.

Small stock dividend

Stock dividends of less than 20 to 25 percent.

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. If you buy the stock before this date, you are entitled to the dividend. If the buy on this date or after, the previous owner will get the dividend. Before this date the stock is said to trade "with dividend or cum dividend." Afterward, the stock trades, "ex dividend."

Tender offer

The firm announces to all of its stockholders that it is willing to buy a fixed number of shares at a specific price.

Information content effect

The market's reaction to a change in corporate dividend payout.

Special dividend

The name usually indicates that this dividen is viewed as a truly unusual or one-time event and won't be repeated.

Trading range

The price range between the highest and lowest prices at which a stock is traded. When the security is priced above this level, many investors do not have the funds to buy the common trading unit of 100 shares, called a round lot.

Homemade dividend policy

The tailored dividend policy created by individual investors who undo corporate dividen policy by reinvesting dividends or selling shares of stock.

Real world consideration in a repurchase

Under current tax law, a repurchase has a significant tax advantage over a cash dividend. A dividend is taxed and a shareholder has no choice whether or not to receive the dividend; however, in a repurchase a shareholder pays taxes only if (1) the shareholder actually chooses to sell and (2) the shareholder has a capital gain on the sale.

Is dividend policy irrelevant?

Yes - (In our simple example) 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.