IFM10 Ch17 Lecture

IFM10 Ch17 Lecture - 1 CHAPTER 17 Distributions to...

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Unformatted text preview: 1 CHAPTER 17 Distributions to Shareholders: Dividends and Repurchases 2 Topics in Chapter Theories of investor preferences Signaling effects Residual model Stock repurchases Stock dividends and stock splits Dividend reinvestment plans 3 What is distribution policy? The distribution policy defines: The level of cash distributions to shareholders The form of the distribution (dividend vs. stock repurchase) The stability of the distribution 4 Distributions Patterns Over Time The percent of total payouts a a percentage of net income has been stable at around 26%-28%. Dividend payout rates have fallen, stock repurchases have increased. Repurchases are now greater than dividends. A smaller percentage of companies now pay dividends. When young companies first begin making distributions, it is usually in the form of repurchases. Dividend payouts have become more concentrated in a smaller number of large, mature firms. 5 Dividend Yields for Selected Industries Industry Div. Yield % Recreational Products 3.30 Forest Products 3.79 Software 1.48 Household Products 1.55 Food 1.16 Electric Utilities 3.48 Banks 4.46 Tobacco 9.88 Source: Yahoo Industry Data, April 2008 6 Do investors prefer high or low payouts? There are three theories: Dividends are irrelevant: Investors dont care about payout. Dividend preference, or bird-in-the-hand: Investors prefer a high payout. Tax effect: Investors prefer a low payout. 7 Dividend Irrelevance Theory Investors are indifferent between dividends and retention-generated capital gains. If they want cash, they can sell stock. If they dont want cash, they can use dividends to buy stock. Modigliani-Miller support irrelevance. Implies payout policy has no effect on stock value or the required return on stock. Theory is based on unrealistic assumptions (no taxes or brokerage costs). 8 Dividend Preference (Bird-in-the-Hand) Theory Investors might think dividends (i.e., the-bird-in-the-hand) are less risky than potential future capital gains. Also, high payouts help reduce agency costs by depriving managers of cash to waste and causing managers to have more scrutiny by going to the external capital markets more often....
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This note was uploaded on 04/08/2011 for the course FIN 360 taught by Professor Smith during the Spring '10 term at Park.

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IFM10 Ch17 Lecture - 1 CHAPTER 17 Distributions to...

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