Chapter 16 - Dividends

High dividends

Reduce cash flow and this reduces agency costs from firms with high free cash flow.

2 for 1 split

Stock split each owner receives 1 new share for each 1 share that they own. 1 share becomes 2 shares.

Declaration Date

The day that the board of directors declares that a dividend payment will be made

Under current tax law

shareholders generally prefer a repurchase to a dividend

Stock Repurchase

Firms can either buy their own stock on the open market or they can issue a tender offer.

Investment Policy

Firms should never give up positive NPV project to increase a dividend. "investment policy of a firm is set ahead of time and is not altered by changes in dividend policy"

Stocks Dividends

Often paid quarterly. Occasionally firm's will declare additional non-recurring dividends.

Dividend in Kind

Often the products of a company or discounts for a product. Theses dividends are uncommon.

Dividends - 1

Effective rate on dividends on dividends is higher. Dividends less attractive than capital gains and suggest that firms should avoid paying dividends.

Targeted Repurchase

Here the firm buys shares from a specific shareholder. Usually this is used to prevent a takeover

Cash Dividends

Dividends can come in different forms: are often paid quarterly. Occasionally firm's will declare additional non-recurring dividends

Dividends - 2

1) Dividends are large in aggregate and have increased over time. 2) The number of companies paying dividends has declined and are concentrated among large, mature firms. 3) Younger firms are less likely to pay dividends. 4) Corporations "smooth" dividends 5) While tax policy matters, it isn't a major deterrent. 6) Managers are reluctant to cut dividends 7) Stock prices react to unanticipated dividend changes

Common reasons that a company may choose a repurchase over a divided are

1) Flexibility - a repurchase doesn't commit the firm to future dividend increases 2) Executives with stock options prefer purchases because repurchases usually cause the share price to go up. 3) Offset to dilution - buying back shares reduced the number of shares and can prevent dilution with executives exercise stock options 4) Undervaluation - companies often buy back stock when they think it is undervalued 5) Taxes - repurchases provide a tax advantage over dividends.

Ex-Dividend Date

Anyone who buys the stock will NOT receive the upcoming dividend. The stock is trading without the dividend. Before this date the stock trades cum-dividend or with-dividend

Dividend Irrelevance

Assuming no taxes and transaction costs, if firms do not pay dividends, but investors want dividends, the investors can sell a small amount of their shares to create a cash flow equivalent to a dividend

Capital Gains

Can be deferred by not selling, however dividends cannot be deferred.

Dividend Types

Companies are not required to pay dividends, but may do so to distribute profits to the firm's owners.

3 for 2 stock split

Each owner receives 1/2 a share for each 1 share they own. Start with 2 shares and end up with 3.

3 for 1 split

Each owner receives 2 new shares for each 1 share that they own.

Stock Dividend

Happens when a company pays dividends in shares of a stock rather than in cash.

Dividends

Investors expect firms that increase their dividends in one period to continue paying the higher level of dividend in future periods. When firms cut their dividend, investors view this as a negative sign and the stock price usually falls.

Clientele Effect

Says that various groups or clienteles prefer different payout policies. If a firm changes its policy, the various clienteles will buy or sell the stock based on its preferences.

Signaling

Stock prices tend to increase after dividend increasing announcements are made.

Tender offer

The company announces that it will buy a specific number of shares of its own stock from shareholders for a pre-specified price.

100% stock dividend

The company gives 1 new share to shareholders for every 1 share that they own.

Stock Split

The company gives each owner shares of new stock for each share for each share that they own.

Stock dividend Paid

When a stock dividend is paid, no cash changes hands and the value of the firm does not change.

On the payment date

checks are sent to the shareholders as of the record date.

Ex-dividend date

the price of the stock will fall by the amount of the dividend

Behavioral Finance

suggests that dividends help investors be discipled. Investors don't need to sell stock to receive income, they are not tempted to sell too much.

On the record date

the company creates a list of everyone they believe to be stockholders