ch10 - Returning Cash to the Owners: Dividend Policy Aswath...

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Aswath Damodaran 1 Returning Cash to the Owners: Dividend Policy Aswath Damodaran
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Aswath Damodaran 2 First Principles n Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt) Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects. n Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. n If there are not enough investments that earn the hurdle rate, return the cash to stockholders. The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics.
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Aswath Damodaran 3 Dividends are sticky Dividend Changes: Publicly owned firm - 1981-90 0 1000 2000 3000 4000 5000 6000 7000 8000 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Increases Decreases No Change
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Aswath Damodaran 4 Dividends tend to follow earnings Figure 10.1: Aggregate Earnings and Dividends: S & P 500 - 1960-1996 0 5 10 15 20 25 30 35 40 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year $ Earnings Dividends
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Aswath Damodaran 5 Measures of Dividend Policy n Dividend Payout: measures the percentage of earnings that the company pays in dividends = Dividends / Earnings n Dividend Yield : measures the return that an investor can make from dividends alone = Dividends / Stock Price
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Aswath Damodaran 6 Dividend Payout Ratios in the US Figure 10.8: Dividend Payout Ratios for U.S. firms - September 1997 0 200 400 600 800 1000 1200 1400 1600 1800 0% 0-10% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% 90-100% >100% Dividend Payout Ratio Number of Firms
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Aswath Damodaran 7 Dividend Yields in the US Figure 10.6: Dividend Yields for U.S. Firms - September 1997 0 200 400 600 800 1000 1200 1400 1600 1800 2000 0% 0 -1% 1 - 2% 2- 3% 3 - 4% 4 - 5% 5 - 6% 6 - 7% >7% Dividend Yield Number of Firms
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Aswath Damodaran 8 Three Schools Of Thought On Dividends n 1. If (a) there are no tax disadvantages associated with dividends (b) companies can issue stock, at no cost, to raise equity, whenever needed Dividends do not matter, and dividend policy does not affect value. n 2. If dividends have a tax disadvantage, Dividends are bad, and increasing dividends will reduce value n 3. If stockholders like dividends, or dividends operate as a signal of future prospects, Dividends are good, and increasing dividends will increase value
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Aswath Damodaran 9 The balanced viewpoint n If a company has excess cash, and few good projects (NPV>0), returning money to stockholders (dividends or stock repurchases) is GOOD.
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This note was uploaded on 01/17/2012 for the course ECON 101 taught by Professor Econnorm during the Spring '11 term at Art Institutes Intl. Minnesota.

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ch10 - Returning Cash to the Owners: Dividend Policy Aswath...

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