Dividend Policy - Chapter 11 Dividend policy 1 Table of...

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Chapter 11 Dividend policy 1
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Table of Contents 1. What is dividend policy? 2. How companies pay dividends 3. Alternatives to dividends 3.1 Share buybacks 3.2 Dividend reinvestment plans 4. How companies decide the amount of dividends paid 5. The impact of dividend policy on shareholder wealth 5.1 The conditions under which dividend policy is irrelevant 5.2 Why dividend policy is relevant 5.2.1 Costs of issuing shares 5.2.2 Costs of trading shares 5.2.3 Information asymmetry 5.2.4 Personal and corporate taxes
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1. What is dividend policy? When a company generates free cash flow, it can retain all or part of this cash for future use, or it can pay a dividend to its shareholders Companies typically pay dividends twice a year They may also elect to pay “special” dividends Additional one off dividends to shareholders Dividend policy refers to the decision by companies to pay out net profits as dividends or to retain the profits The dividend payout ratio quantifies the dividend policy decision by measuring the proportion of profits after tax paid out as dividends 3
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4 Both payment amount and payout ratios have been declining in recent years. Dividend history of Macquarie Group (MQG): Source: Morningstar database 1. What is dividend policy? Year 2011 2010 2009 2008 2007 2006 EPS After Abnormals (c/share) 275.9 317.4 308.6 653.5 569.8 382.3 Dividend Type Final Interim Final Interim Final Interim Final Interim Final Interim Final Interim Cent Per Share 100.00 86.00 100.00 86.00 40.00 145.00 200.00 145.00 190.00 125.00 125.00 90.00 Franked % 0 0 0 0 60% 80% 100% 100% 100% 100% 100% 90% Grossed up Dividend* 100.00 86.00 100.00 86.00 48.78 190.79 285.71 207.14 271.43 178.57 178.57 123.29 Total 186.00 186.00 239.57 492.86 450.00 301.86 Dividend payout ratio (%) 67% 59% 78% 75% 79% 79% Dividend Ex Date 09/05/2011 08/11/2010 10/05/2010 09/11/2009 11/05/2009 24/11/2008 26/05/2008 03/01/2008 21/05/2007 20/11/2006 22/05/2006 21/11/2005 Pay Date 04/07/2011 15/12/2010 02/07/2010 16/12/2009 03/07/2009 19/12/2008 04/07/2008 30/01/2008 04/07/2007 15/12/2006 05/07/2006 16/12/2005 * GD = Net Dividend/(1-Fraking ratio*tax rate)
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Table of Contents 1. What is dividend policy? 2. How companies pay dividends 3. Alternatives to dividends 3.1 Share buybacks 3.2 Dividend reinvestment plans 4. How companies decide the amount of dividends paid 5. The impact of dividend policy on shareholder wealth 5.1 The conditions under which dividend policy is irrelevant 5.2 Why dividend policy is relevant 5.2.1 Costs of issuing shares 5.2.2 Costs of trading shares 5.2.3 Information asymmetry 5.2.4 Personal and corporate taxes
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2. How companies pay dividends Once a dividend is declared at the AGM, the company’s shares trade cum dividend This means that the shares trade with the promise of a dividend attached to them After the ex dividend date : New purchasers of the shares are no longer entitled to the dividend payment In effect, the promise of a payment detaches from the shares The last person to own the shares prior to the ex dividend date is entitled to the dividend 6
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Dividend Announcement date Ex-Dividend date Dividend Payment date Share price may change if there is an unexpected component In the announcement Price falls by the amount of the dividend No Change in share price expected 7 2. How companies pay dividends Shares are cum-dividend Shares are ex-dividend
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Dividend Policy - Chapter 11 Dividend policy 1 Table of...

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