Chapter17-IFM10 - CHAPTER 17 Distributions to Shareholders:...

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1 CHAPTER 17 Distributions to Shareholders:  Dividends and Repurchases
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2 Topics in Chapter Theories of investor preferences Signaling effects Residual model Stock repurchases Stock dividends and stock splits Dividend reinvestment plans
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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
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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. 
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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
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6 Do investors prefer high or low  payouts?  There are three theories: Dividends are irrelevant: Investors don’t  care about payout. Dividend preference, or bird-in-the- hand: Investors prefer a high payout. Tax effect: Investors prefer a low  payout.
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7 Dividend Irrelevance Theory Investors are indifferent between dividends  and retention-generated capital gains.  If they  want cash, they can sell stock.  If they don’t  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).
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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. Therefore, investors would value high payout 
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Chapter17-IFM10 - CHAPTER 17 Distributions to Shareholders:...

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