Ch 17 - FIN.pdf - LEARNING OBJECTIVES After studying this...

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After studying this chapter, you should understand: LO1 Dividend types and how dividends are paid. LO2 The issues surrounding dividend policy decisions. LO3 The difference between cash and stock dividends. LO4 Why share repurchases are an alternative to dividends. LEARNING OBJECTIVES 546 Cost of Capital and Long-Term Financial Policy PA R T 6 17 DIVIDENDS AND PAYOUT POLICY Dividend policy is an important subject in corporate finance, and dividends are a major cash outlay for many corporations. For example, S&P 500 companies were expected to pay about $270 billion in dividends in 2008, an increase from the record $247 billion in dividends in 2007. Citigroup and General Electric were the biggest payers. How much? Both companies pay out in excess of $10 bil- lion annually. In contrast, about 22 percent of the companies in the S&P 500 pay no divi- dends at all. At first glance, it may seem obvious that a firm would always want to give as much as possible back to its shareholders by paying dividends. It might seem equally obvious, how- ever, that a firm could always invest the money for its shareholders instead of paying it out. The heart of the dividend policy question is just this: Should the firm pay out money to its shareholders, or should the firm take that money and invest it for its shareholders? In this chapter, we will cover a variety of topics related to dividends and corporate pay- out policies. We first discuss the various types of cash dividends and how they are paid. We ask whether dividend policy matters, and we consider arguments in favor of both high and low dividend payouts. Next, we examine stock repurchases, which have become an impor- tant alternative to cash dividends. We then bring together several decades of research on dividends and corporate payouts to describe the key trade-offs involved in establishing a payout policy. We conclude the chapter by discussing stock splits and stock dividends. TRACTOR MANUFACTURER JOHN DEERE on May 28, 2008, announced a broad plan to reward stockholders for the recent success of the firm’s busi- ness. Under the plan, Deere would (1) boost its quar- terly dividend by 12 percent from 25 cents per share to 28 cents per share; and (2) increase its planned repurchase of Deere’s common stock from $1.9 billion to $6.9 billion, or about 1/7 of the company’s out- standing shares. Investors cheered, bidding up the stock price by 3.4 percent on the day of the announcement. Why were investors so pleased? To find out, this chapter explores these actions and their implications for shareholders. Master the ability to solve problems in this chapter by using a spreadsheet. Access Excel Master on the student Web site www.mhhe.com/rwj.
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C H A P T E R 1 7 Dividends and Payout Policy 547 Cash Dividends and Dividend Payment The term dividend usually refers to cash paid out of earnings. If a payment is made from sources other than current or accumulated retained earnings, the term distribution , rather than dividend, is used. However, it is acceptable to refer to a distribution from earnings as a dividend and a distribution from capital as a liquidating dividend. More generally, any direct payment by
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