Dividend Policy
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
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