Dividend Policy

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Capital Markets and Corporate Finance (Stream 1): FINC5001
Dr. Reuben Segara Finance Discipline School of Business University of Sydney 1

Dividend Policy

2

This Lecture
PART I – Dividend Fundamentals
• • • • What is Dividend Policy? Institutional Features of Dividends Types of Dividend Policies Trends in Dividend Policies

PART 2 – Is There An Optimal Dividend Policy?
• Dividend Policy is Irrelevant • Dividend Policy is Relevant

PART 3 – Alternatives to Dividends
• Share Buy-Backs • Dividend Reinvestment Plans (DRPs)
3

What is Dividend Policy?
Definition
• Dividend policy refers to the decision corporations make to pay out profits as dividends or retain them within the firm • Corporations typically pay dividends twice a year:  An Interim dividend  A Final dividend  A “Special” dividend

• The dividend payout ratio quantifies the dividend policy decision 4

What is Dividend Policy?
The Dividend Payout Ratio – An Ilustration
EPS, DPS and Dividend Payout Ratio for CBA Ltd.
2001 Dividend per share (cents) Interim (cents) Final (cents) Total (cents) Earnings per share (cents) Dividend payout ratio 61 75 136 189.6 71.7% 68 82 150 209.3 71.7% 69 85 154 157.3 97.9% 79 104 183 196.8 93.0% 85 112 197 303 65.0% 94 130 224 297 75.7% 107 149 256 340 75.4% 113 153 266 344 77.2% 113 115 228 293 77.8% 2002 2003 2004 2005 2006 2007 2008 2009

Earnings and Dividend Forecasts (cents per share) 2010 Dividend per share (cents) Earnings per share (cents) Dividend payout ratio 260 385.6 67.4% 2011 293.9 441.5 66.6% 2012 338.6 494.1 68.5% 5

Institutional Features of Dividends
Legal Considerations
1. Can dividends be paid out of profits and/or paid out of capital? 2. Can dividends be paid out if it would make the company insolvent? 3. Can there be dividend restrictions in covenants in trust deeds and loan agreements? 4. Do investors prefer franked dividends? 5. Do companies have to pay out franked dividends? 6

Institutional Features of Dividends
Dividend Declaration Procedure
Where are the interim and final dividend amounts declared for any company?

CUM-DIVIDEND PERIOD

EX-DIVIDEND DATE

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Institutional Features of Dividends
Dividend Declaration Procedure
TAXATION CONSIDERATIONS

Franked dividend Imputation Tax Credit Withholding Tax
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Institutional Features of Dividends
Relevant Dates for Dividend Payments
Code CBA Div Amount 113c Ex Div Date 16/02/2009 Record Date 20/02/2009 Date Payable 23/03/2009 % Franked 100% Type Interim

11 Feb ‘09

15 Feb ‘09

16 Feb ‘09.

20 Feb.’09

23 Mar’09


Declaration Date Cumdividend Date Exdividend Date Record Date Payment Date

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Institutional Features of Dividends
Price Behaviour around the Ex-Dividend Date
Share price around the ex-dividend date of AMP Ltd on 10/03/00 Ex-dividend date 16.60 16.40 16.20 16.00 15.80 15.60 15.40 Open 8 March Close 8 March/ Open 9 March Close 9 March/ Open 10 March Close 10 March Grossed up dividend of 33 cents

AMP shares fell by 35 cents (approximately the value of the dividend to shareholders) when the shares opened on the ex-dividend date. Why? 10

Types of Dividend Policies
Constant Payout Policy
There are two common forms of dividend policies which firms use in practice 1. Constant (Smoothed) Payout Policy 2. Stable Dividend Policy

Constant Payout Policy

This is the policy of paying out a constant percentage of the firm’s earnings as dividends.

What are the implications of the constant payout policy?
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Types of Dividend Policies
Stable Dividend Policy
Stable Dividend Policy
This involves the firm paying a stable amount of dollar dividends each year, with adjustments only when the level of expected net income exhibits a permanent change

What are the implications of a stable dividend policy?

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Trends in Dividend Policies
Managers and Dividend Decisions
Dividends are an ‘active decision variable’ • Lintner (1956) found the following:  Companies...
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