12/04
MN10500 Lecture 9: Dividends & Payout Policy
Lecture Summary: Assessing Your Firm's Payout Policy
● Compare your firm’s dividends to its FCFE, looking at the last 5 years of
information.
● Based upon your earlier analysis of your firm’s project choices, would you
encourage the firm to return more cash or less cash to its owners?
● If you would encourage it to return more cash, what form should it take (dividends
versus stock buybacks)?
● Customize a solution for your firm’s dividend policy, but think about your earlier
analysis of its capital structure as well.
Steps to the Payout Decision
Dividend policy is affected by investment and financing decisions, and may affect investing
and financing decisions. In other words, analysing dividends has to be part and parcel of
analysing the whole company.
Pay-out Policy: The Big Picture
● Dividend
○ Dividends are rarely cut back, managers do not increase dividends unless
they are confident that dividend can be maintained.
● Stock Repurchase
○ Repurchases are more flexible and repurchases are tax-advantaged.
How Corporations Pay Cash to Shareholders
, 12/04
This trend accelerated through the 1990s. It can be partially explained by:
● An increase in the volatility of earnings at all companies, making dividends much
more difficult to maintain.
● An increasing proportion of investors who invested primarily for capital gains.
● Managers being compensated with options like stock buybacks more than dividends,
since the latter leads to lower stock prices.
European Evidence
Types of Dividend
● Cash Dividend: Payment of cash by the firm to its shareholders.
○ Regular Dividend: A dividend that is expected to be paid consistently into
the future.
○ Special Dividend: A dividend that is not likely to be repeated.
● DRIP (Dividend Reinvestment Plan): It is a plan offered by a corporation that allows
investors to reinvest their cash dividends by purchasing additional shares or
fractional shares on the dividend payment rate.
● Stock Dividend/Split: Distributions of additional shares to a firm's stockholders.
● Additional Terminology Associated with Dividend:
○ A 5% stock dividend means that the firm will send five extra shares to each
shareholder for every 100 shares currently owned.
○ Example: A 2-for-1 stock split means that shareholders will receive one new
share for every share currently owned.
MN10500 Lecture 9: Dividends & Payout Policy
Lecture Summary: Assessing Your Firm's Payout Policy
● Compare your firm’s dividends to its FCFE, looking at the last 5 years of
information.
● Based upon your earlier analysis of your firm’s project choices, would you
encourage the firm to return more cash or less cash to its owners?
● If you would encourage it to return more cash, what form should it take (dividends
versus stock buybacks)?
● Customize a solution for your firm’s dividend policy, but think about your earlier
analysis of its capital structure as well.
Steps to the Payout Decision
Dividend policy is affected by investment and financing decisions, and may affect investing
and financing decisions. In other words, analysing dividends has to be part and parcel of
analysing the whole company.
Pay-out Policy: The Big Picture
● Dividend
○ Dividends are rarely cut back, managers do not increase dividends unless
they are confident that dividend can be maintained.
● Stock Repurchase
○ Repurchases are more flexible and repurchases are tax-advantaged.
How Corporations Pay Cash to Shareholders
, 12/04
This trend accelerated through the 1990s. It can be partially explained by:
● An increase in the volatility of earnings at all companies, making dividends much
more difficult to maintain.
● An increasing proportion of investors who invested primarily for capital gains.
● Managers being compensated with options like stock buybacks more than dividends,
since the latter leads to lower stock prices.
European Evidence
Types of Dividend
● Cash Dividend: Payment of cash by the firm to its shareholders.
○ Regular Dividend: A dividend that is expected to be paid consistently into
the future.
○ Special Dividend: A dividend that is not likely to be repeated.
● DRIP (Dividend Reinvestment Plan): It is a plan offered by a corporation that allows
investors to reinvest their cash dividends by purchasing additional shares or
fractional shares on the dividend payment rate.
● Stock Dividend/Split: Distributions of additional shares to a firm's stockholders.
● Additional Terminology Associated with Dividend:
○ A 5% stock dividend means that the firm will send five extra shares to each
shareholder for every 100 shares currently owned.
○ Example: A 2-for-1 stock split means that shareholders will receive one new
share for every share currently owned.
