Business
Dividend Payout
Dividend payout refers to the portion of a company's earnings that is distributed to its shareholders in the form of dividends. It is a way for companies to share their profits with investors. The dividend payout ratio is a key financial metric that indicates the percentage of earnings paid out as dividends.
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9 Key excerpts on "Dividend Payout"
eBook - PDF- Robert Parrino, David S. Kidwell, Thomas Bates, Stuart L. Gillan(Authors)
- 2021(Publication Date)
- Wiley(Publisher)
These discussions provide insights into the ways in which payout policies affect firm value. We end this part of the chapter by directly comparing the benefits and costs of dividends with those of stock repurchases. We then describe stock splits and stock dividends and discuss the reasons managers might want to split their company’s stock or pay a stock dividend. Finally, we conclude the chapter with a discussion of factors that managers and their boards of directors consider when they set payout policies. LEARNING OBJECTIVE 1. Explain what a dividend is, and describe the different types of dividends and the dividend payment process. Calculate the expected change in a stock’s price around an ex-dividend date. Decisions concerning whether to distribute value to stockholders, how much to distribute, and how best to distribute it are very important financing decisions that have implications for a firm’s future investment and capital structure policies. Any time value is distributed to a firm’s stockholders, the amount of equity capital invested in the firm is reduced. Unless the firm raises additional equity by selling new shares, distributions to stockholders reduce the availability of capital for new investments and increase the firm’s financial leverage. The term payout policy refers to a firm’s overall policy regarding distributions of value to stockholders. In this section, we discuss the use of dividends to distribute this value. A dividend is something of value that is distributed to a firm’s stockholders on a pro-rata basis—that is, in proportion to the percentage of the firm’s shares that they own. A dividend can involve the distribution of cash, assets, or something else, such as discounts on the firm’s products that are available only to stockholders.
eBook - PDFCorporate Finance
Theory and Practice in Emerging Economies
- Sunil Mahajan(Author)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
Managers’ holding of stock options Dividend Definitions There are different conceptual definitions of dividends. 1. Profits made by a company can be used for a. reinvestment in business to finance positive NPV projects, b. payment of dividends to shareholders. The proportion of net profits that is paid as dividends is called the payout ratio. Thus, Payout ratio = dividends/net profits The proportion of net profits that is retained by the company is termed the retention ratio. Thus, Retention ratio = (net profit − dividends)/ net profits By definition, the payout ratio plus the retention ratio equals 1. Let us assume that PQR Ltd makes a net profit of ₹100 million and pays ₹40 million as dividends. It has 10 million shares outstanding. Assume a face value of ₹1 and market price of ₹200. The payout ratio is 40/100 = 40%. The retention ratio is (100 − 40)/100 = 60%. Thus, the company pays 40 per cent of its profits to shareholders and retains the balance 60 per cent for investment in projects. 2. The total amount of dividends divided by the number of shares is the dividend per share. This is the dividend amount the shareholder gets on each share held by him. The absolute amount received by any shareholder is the dividend per share multiplied by the number of shares held by him. For PQR Ltd, the dividend per share = 40 million/10 million = ₹4. A shareholder holding 200 shares will get a dividend of ₹800. 3. Next is the concept of the dividend yield which refers to the return based on the market price that a shareholder gets. Thus, Dividend yield = absolute dividend per share/ market price. Dividend Payout | 227 Dividends in India are declared on the face value which usually ranges from ₹1 to ₹10. The dividend per share divided by the market price provides the dividend yield. The market price may be very different from the face value, so that the dividend percentage (calculated on the face value) may vary significantly from the dividend yield.
eBook - ePub- (Author)
- 2021(Publication Date)
- Wiley(Publisher)
ex-dividend date is the first date that a share trades without (i.e., “ex”) this right to receive the declared dividend for the period. All else holding constant, on the ex-dividend date the share price can be expected to drop by the amount of the dividend. In contrast to the payment of interest and principal on a bond by its issuer, the payment of dividends is discretionary rather than a legal obligation and may be limited in amount by legal statutes and debt contract provisions. Dividend payments and interest payments in many jurisdictions are subject to different tax treatment at both the corporate and personal levels.In this reading, we focus on dividends on common shares (as opposed to preferred shares) paid by publicly traded companies. A company’s payout policy is the set of principles guiding cash dividends and the value of shares repurchased in any given year. Payout policy (also called distribution policy) is more general than dividend policy because it reflects the fact that companies can return cash to shareholders by means of share repurchases and cash dividends. One of the longest running debates in corporate finance concerns the impact of a company’s payout policy on common shareholders’ wealth. Payout decisions, along with financing (capital structure) decisions, generally involve the board of directors and senior management and are closely watched by investors and analysts.Dividends and share repurchases concern analysts because, as distributions to shareholders, they affect investment returns and financial ratios. The contribution of dividends to total return for stocks is formidable. For example, the total compound annual return for the S&P 500 Index with dividends reinvested from the beginning of 1926 to the end of 2018 was 10.0%, as compared with 5.9% on the basis of price alone. Similarly, from 1950 to 2018 the total compound annual return for the Nikkei 225 Index with dividends reinvested was 11.1%, as compared with 8.0% on the basis of price alone. Dividends also may provide important information about future company performance and investment returns. Analysts should strive to become familiar with all investment-relevant aspects of dividends and share repurchases.
eBook - PDF- Aswath Damodaran(Author)
- 2014(Publication Date)
- Wiley(Publisher)
The second widely used measure of dividend policy is the Dividend Payout ratio, which relates dividends paid to the earnings of the firm. Dividend Payout ratio = Dividends ∕ Earnings The payout ratio is used in a number of different settings. It is used in valuation as a way of estimating dividends in future periods, because most analysts estimate growth in earnings rather than dividends. Second, the retention ratio—the proportion of the earnings reinvested in the firm (Retention ratio = 1 − Dividend Payout ratio)—is useful in estimating future growth in earnings; firms with high retention ratios (low payout ratios) generally have higher growth rates in earnings 440 Chapter 10 DIVIDEND POLICY Figure 10.2 Dividend Yields across Dividend Paying Firms, January 2013 <0.5% 0.5-1% 1-1.5% 1.5-2% 2-2.5% 2.5-3% 3-3.5% 3.5-4% 4-4.5% 4.5-5% 5-5.5% 5.5-6% 6-6.5% 6.5-7% 7-7.5% 7.5-8% >8% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% US Global % of Companies with yield Value Line and Capital IQ than firms with lower retention ratios (higher payout ratios). Third, the Dividend Payout ratio tends to follow the life cycle of the firm, usually starting at zero when the firm is in high growth and gradually increasing as the firm matures and its growth prospects decrease. Figure 10.3 graphs the Dividend Payout ratios of U.S. firms that paid dividends in January 2013 and contrasts them with global firms. The payout ratios greater than 100% represent firms that paid out more than their earnings as dividends and also include firms that paid out dividends, even though they reported losses for the year. The median Dividend Payout ratio in January 2013 among dividend-paying stocks in the United States was about 30%, whereas the median payout ratio among global companies is slightly higher (about 40%).
eBook - PDFFinance for Strategic Decision-Making
What Non-Financial Managers Need to Know
- M. P. Narayanan, Vikram K. Nanda(Authors)
- 2004(Publication Date)
- Jossey-Bass(Publisher)
113 5 Payout Policy T he flip side of equity financing—discussed in Chapter Four—is the distribution of cash by the firm to its share-holders. Such payouts are common and take the form of dividend payments and share repurchases. Firm payout and fi-nancing policies are inextricably linked since, for instance, larger payouts will tend to increase the external financing that a firm needs to raise. The framework developed in the context of financ-ing—that of corporate decision making in the context of imper-fect markets—also makes it easier to understand the role and impact of payout policy. Managers have considerable discretion in paying out cash to shareholders, since equity, unlike debt, comes with no explicit 114 Finance for Strategic Decision Making payment obligations. As a consequence, the factors that influence a firm’s payout policy can be quite subtle. In this chapter, our objective is to understand the nature and trade-offs involved in the choice of a cash payout policy. After discussing the two forms of payout and the general purposes that they serve, we provide a brief guide to creating and maintaining a payout policy. After that we present a case in which financing decisions and payout decisions are crucially connected, illustrating what happens when a firm in need of capital faces an unattractive choice between raising equity capital or cutting back on dividend payments. ■ Payouts and Their Rationale First, here is a closer look at the two forms of payout. Then we discuss why payouts in general matter. Dividends and Share Repurchases Firms distribute cash in two ways: by dividends and by share repurchases. Historically dividends have been the predominant form of corporate cash payout to shareholders. However, as part of a trend starting in the mid-1980s, share repurchases have be-come comparable to dividends in terms of total cash flow from firms to shareholders.
eBook - PDF- Robert Parrino, David S. Kidwell, Thomas Bates(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
With this in mind, managers should consider several practical questions when selecting a dividend policy, including the following: 1. Over the long term, how much does the company’s level of earnings (cash flows from operations) exceed its investment requirements? How certain is this level? 2. Does the firm have enough financial reserves to maintain Dividend Payouts in periods when earnings are down or investment requirements are up? LEARNING OBJECTIVE 5 591 Summary of Learning Objectives 3. Does the firm have sufficient financial flexibility to maintain dividends if unforeseen cir-cumstances wipe out its financial reserves when earnings are down? 4. Can the firm quickly raise equity capital if necessary? 5. If the company chooses to finance dividends by selling equity, will changes in the number of shareholders have implications for control of the company? Before You Go On 1. How are dividend policies affected by expected earnings? 2. What did the 2005 study conclude about how managers view share repurchases? 3. List three practical considerations managers should take into account when setting a dividend policy. 1. Explain what a dividend is, and describe the different types of dividends and the dividend payment process. A dividend is something of value that is distributed to a firm’s shareholders on a pro-rata basis – that is, in proportion to the percentage of the firm’s shares that they own. There are four types of dividends: (1) regular cash dividends, (2) extra dividends, (3) special dividends and (4) liquidating dividends. Regular cash dividends are the cash dividends that firms pay on a regular basis (typically semi-annually or quarterly). Extra dividends are paid, often at the same time as a regular cash dividend, when a firm wants to distribute additional cash to its shareholders. Special dividends are one-time payments that are used to distribute a large amount of cash.
eBook - PDF- James A. Brickley, Clifford W. Smith Jr, James A. Brickley, Clifford W. Smith Jr(Authors)
- 2022(Publication Date)
- Edward Elgar Publishing(Publisher)
111 8 Corporate payout policy Corporate payout policy addresses two basic questions: (1) how much cash to distribute to shareholders (if any) and (2) whether the cash should be distributed through dividends and/or share repurchases. 1 This chapter summarizes the theory and evidence related to these important questions. 8.1 A few basic facts Corporations distribute significant amounts of cash to shareholders. According to Barron’s, global dividends hit an all-time high of $1.4 tril- lion in 2019. 2 And S&P 500 companies were “on track” to buy back $940 billion of stock in 2019, according to Goldman Sachs. 3 The propensity to pay dividends is highest among larger, more profitable industrial companies and banks, which are noted for making particularly high and consistent Dividend Payouts (Denis and Osobov, 2008; Floyd, Li and Skinner, 2015). Many firms, however, neither pay cash dividends nor repurchase shares. In 2017, it is estimated that 58% of U.S. nonfinan- cial corporations did not pay dividends, while 52% did not repurchase stock; on average, in each year over the period 2011 to 2017, 42.1% of nonfinancial firms paid neither dividends nor repurchased shares, while 23.4% both paid dividends and repurchased stock (Brealey, Myers and Allen, 2020, pp. 426–427). Although some non-dividend paying firms are in financial distress, many are growth firms, which use retained earn- ings to finance investment. For instance, Amazon.com – a firm clearly not in financial distress – as of 2021, has never paid a dividend to its shareholders. Figure 8.1 from Zeng and Luk (2020) displays the trends in dividends and share repurchases by listed firms covered by COMPUSTAT over the period 1980 through 2018. Between 1980 to 2002, there is a relatively constant and steep decline in the percentage of firms that pay cash divi- dends. However, over this same time, total Dividend Payouts to investors increase (in both real and nominal terms). This difference in trends is
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. dividend payments are more certain than the future cap- ital gains that might result when a firm retains earnings to invest in growth opportunities. If this logic is correct, the required return on equity, r s , should decrease as the Dividend Payout is increased, causing the firm’s stock price to increase. 2 Another factor that might cause investors to prefer a particular dividend policy is the tax effect of dividend receipts. Investors must pay taxes at the time dividends and capital gains are received. Thus, depending on his or her tax situation, an investor might prefer either a payout of current earnings as dividends, which would be taxed in the current period, or the capital gains associated with growth in stock value, which would be taxed when the stock is sold, perhaps many years in the future. Investors who prefer to delay the impact of taxes would be willing to pay more for companies with low Dividend Payouts than for otherwise similar high dividend-payout compa- nies, and vice versa. Those who believe the firm’s dividend policy is relevant are proponents of the dividend relevance theory, which asserts that dividend policy can affect the value of a firm through investors’ preferences. Although academic researchers have studied the div- idend policy issue extensively, they cannot tell corporate decision makers exactly how dividend policy affects stock prices and capital costs.
No longer available |Learn more- (Author)
- 2019(Publication Date)
- Wiley(Publisher)
A target payout ratio is a goal that represents the proportion of earnings that the company intends to distribute (pay out) to shareholders as dividends over the long term. A model of gradual adjustment (which may be called a “target payout adjustment model”) was developed by John Lintner. 34 The model reflects three basic conclusions from his study of dividend policy: 1) Companies have a target payout ratio, based on long-term, sustainable earnings; 2) managers are more concerned with dividend changes than with the level of the dividend; and 3) companies will cut or eliminate a dividend only in extreme circumstances or as a last resort. A simplified version of Lintner’s model can be used to show how a company can adjust its dividend. 35 For example, suppose that the payout ratio is below the target payout ratio and earnings are expected to increase. The expected increase in the dividend can be estimated as a function of four variables: expected earnings next year, the target payout ratio, the previous dividend, and the adjustment factor (one divided by the number of years over which the adjustment in dividends should take place). Suppose that the current dividend is $0.40, the target payout ratio is 50%, the adjustment factor is 0.2 (i.e., the adjustment is to occur over five years), and expected earnings are $1.50 for the year ahead (an increase from the $1 value of last year)
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