Dividend
CHAPTER 17
Payout Policy
Chapter Synopsis
17.1 Distributions to Shareholders A corporation’s payout policy determines if and when it will distribute cash to its shareholders by issuing a dividend or undertaking a stock repurchase. To issue a dividend, the firm’s board of directors must authorize the amount per share that will be paid on the declaration date. The firm pays the dividend to all shareholders of record on the record date. Because it takes three business days for shares to be registered, only shareholders who purchase the stock at least three days prior to the record date receive the dividend. As a result, the date two business days prior to the record date is known as the exdividend date; anyone who purchases the stock on or after the ex-dividend date will not receive the dividend. Finally, on the payable (or distribution) date, which is generally about a month after the record date, the firm pays the dividend. Just before the ex-dividend date, the stock is said to trade cum-dividend. After the stock goes ex-dividend, new buyers will not receive the current dividend, and the share price will reflect only the dividends in subsequent years. In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade exdividend. Most dividend-paying corporations pay them at quarterly intervals. Companies typically increase the amount of their dividends gradually, with little variation. Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend. An alternative way to pay cash to investors is through a share repurchase, in which a firm uses cash to buy shares of its own outstanding stock. These shares are generally held in the corporate treasury and can be resold in the future. An open market repurchase, in which a firm buys its own shares in the open market, is the most common way that firms repurchase shares.
©2011 Pearson Education
198
Payout Policy
Chapter Synopsis
17.1 Distributions to Shareholders A corporation’s payout policy determines if and when it will distribute cash to its shareholders by issuing a dividend or undertaking a stock repurchase. To issue a dividend, the firm’s board of directors must authorize the amount per share that will be paid on the declaration date. The firm pays the dividend to all shareholders of record on the record date. Because it takes three business days for shares to be registered, only shareholders who purchase the stock at least three days prior to the record date receive the dividend. As a result, the date two business days prior to the record date is known as the exdividend date; anyone who purchases the stock on or after the ex-dividend date will not receive the dividend. Finally, on the payable (or distribution) date, which is generally about a month after the record date, the firm pays the dividend. Just before the ex-dividend date, the stock is said to trade cum-dividend. After the stock goes ex-dividend, new buyers will not receive the current dividend, and the share price will reflect only the dividends in subsequent years. In a perfect capital market, when a dividend is paid, the share price drops by the amount of the dividend when the stock begins to trade exdividend. Most dividend-paying corporations pay them at quarterly intervals. Companies typically increase the amount of their dividends gradually, with little variation. Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend. An alternative way to pay cash to investors is through a share repurchase, in which a firm uses cash to buy shares of its own outstanding stock. These shares are generally held in the corporate treasury and can be resold in the future. An open market repurchase, in which a firm buys its own shares in the open market, is the most common way that firms repurchase shares.
©2011 Pearson Education
198