lecture_payoutpolicy_521_2011

lecture_payoutpolicy_521_2011 - Payout Policy Dividends and...

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1 Payout Policy Dividends and Share Repurchases
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2 Goals: Explain past 2 decade trend in payout policy Describe stylized facts about dividend payouts Explain why dividends are irrelevant! Explain why dividends are not irrelevant! Describe how share repurchases work and why firms might engage in them Explain implications of alternative tax treatment of dividends and share repurchases
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3 Trends in Payout Policy Source: Compustat Note: In 1992 and 2002, total payouts were more than double net income (due to recession). 1980-84 1985-89 1990-94 1995-99 2000-04 Repurchases 9 33 28 34 63 Dividends 47 54 83 37 67 Total 56 87 111 71 129
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4 Dividends and Share Repurchases, S&P 500 Firms 1980-2004 0 50 100 150 200 250 1 9 8 0 2 4 6 $ billions Dividends Share Repurchases
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5 Payout Yields, S&P 500 Firms 1980-2004 0 1 2 3 4 5 6 7 8 1 9 8 0 2 3 4 5 6 7 Percent of Market Value Dividends Share Repurchases
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6 Trends in Payout Policy Share Repurchases grew from 1/10 of dividends in 1980 for S&P 500 to exceeding dividend payments in 1998 Dollar amount of dividends have gradually increased over time, but have not kept pace with prices – dividend yield fell from about 5% to around 2% over past 2 decades Level of repurchases is more volatile and pro-cyclical Most firms make some type of cash payout. About three- quarters of S&P 500 firms pay some dividends, and about two-thirds repurchase shares
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7 How Dividends are Paid Dividend is set by Board of Directors. Shares are transacted cum dividend (i.e., with the dividend), before the ex-dividend date, then they begin to trade ex dividend (i.e., without the dividend). Company may have restrictions on size of dividend imposed by lenders/creditors (through debt covenants). Most companies pay a regular cash dividend (typically quarterly). Sometimes pay extra or special dividend. Sometimes pay stock dividends (like a split).
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8 How Dividends are Measured Dividends are reported in three ways: Dividend per share (DPS): dollar amount per share Dividend yield: DPS divided by share price Payout ratio: DPS divided by EPS (Each measure can be calculated to include repurchases) Timing of dividends Declaration date: The firm announces its next dividend, as well as its payment date Cum-Dividend Date: Last day when shares are traded with the right to receive the dividend. Ex-Dividend Date:
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lecture_payoutpolicy_521_2011 - Payout Policy Dividends and...

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