Payout Policy

To make appropriate dividend decisions for the To make appropriate dividend decisions for the
firm, management need to understand types of
dividends, arguments about relevance of
dividends, the factors that affect dividend policy,
and types of dividend policies.
Dividen merupakan bagian dari laba
yang dibagikan kepada pemilik saham
Laba sebelum bunga dan pajak
Bunga
Laba sebelum pajak Laba sebelum pajak
Pajak
Laba setelah pajak
Dividen saham preferen
Laba yang tersedia untuk pemilik saham biasa
The term payout policy refers to the decisions
that firm make about whether to distribute
cash to shareholders, how much cash to
distribute, and by what means cash should be distribute, and by what means cash should be
distributed.
Dividend Fundamentals
A dividend is a redistribution from earnings.
Retained earnings is earnings not distributed to owners as
dividends, are a form of internal financing, the dividend
decision can significantly affect the firms external
financing requirements. financing requirements.
If the firm needs financing, the larger cash dividend paid,
the greater the amount of financing it must raise
externally through borrowing or through the sale of
common or preferred stock.
Cash Dividend Payment
Procedures:
At quarterly or semiannual meetings, a firms
board of directors decides whether and in what
amount to pay cash dividends.
If a firms directors declare a dividend, they issue
a statement indicating the dividend amount and
setting three important dates, the record date,
a statement indicating the dividend amount and
setting three important dates, the record date,
ex-dividend date and payment date.
Dividend policy is one of the factors that drives an
investors decision to purchase a stock, most
companies announce their dividend policy.
Date of Record Date of Record Date of Record Date of Record: The date on which investors
must own shares in order to receive the dividend
payment.
Ex Dividend Date Ex Dividend Date Ex Dividend Date Ex Dividend Date: Four days prior to the date of
record. The day on which a stock trades ex record. The day on which a stock trades ex
dividend (exclusive of dividends).
Distribution Date Distribution Date Distribution Date Distribution Date: The day on which a dividend is
paid (payment date) to stockholders.
Cash Dividend Payment Procedures:
Example 14.1 Example 14.1
On June 24, 2010, the board of directors announced
that the firms next quarterly cash dividend would
be $0.15 per share, payable on October 26,2010 to
shareholders of record on Tuesday, October 5, 2010.
Firm shares would begin trading ex dividend on the
previous Friday, October 1.
The firm had 420,061,666 shares of common stock
outstanding, so the total dividend payment would be
$ 63,009,250.
Before the dividend was declared, the key
accounts of the firm were as follows:
Cash $ 1,826,000,000 Dividends Payable $ 0
Retained Earnings 5,797,000,000 Retained Earnings 5,797,000,000
When the dividend was announced by the directors,
$63,009,250 of the retained earnings ($0.15/share x
420,061,666 shares) was transferred to the dividends payable
account. As a result, the key accounts changed as follows: account. As a result, the key accounts changed as follows:
Cash $ 1,826,000,000 Dividends Payable $ 63,009,250
Retained Earnings 5,733,990,750
When firm actually paid the dividend on
October 26, this produced the following
balances in the key accounts of the firm:
Cash $1,763,000,750 Dividends Payable $ 0 Cash $1,763,000,750 Dividends Payable $ 0
Retained Earnings 5,733,990,750
The net effect of declaring and paying the
dividend was no reduce the firms total assets
(and stockholders equity) by $ 63,009,250.
Successful companies earn income. That income can
then be reinvested in operating assets, used to
retire debt, or distributed to stockholders.
If decision is made to distribute income to
stockholders, 3 key issues arise: stockholders, 3 key issues arise:
(1) how much should be distributed?
(2) should the distribution be in form of dividends or
should the cash be passed on to stockholders by
buying back stock?
(3) how stable should the distribution be;
that is, should the funds paid out from year
to year be stable and dependable, which
stockholders like, or be allowed to vary stockholders like, or be allowed to vary
with the firms cash flows and investment
requirements, which might be better from
the firms; standpoint?
What do investors prefer?
When deciding how much cash to distribute, financial
managers must keep in mind that the firms objective is
to maximize shareholders value.
Consequently, the target payout ratio should be based in
large part on investors preferences for dividends versus large part on investors preferences for dividends versus
capital gains: Do investors prefer to receive dividends or
to have the firm plow the cash back into business, which
presumably will produce capital gains?
Constant growth stock valuation model:
P0 = D1
rs - g rs - g
Target payout ratio defined as the percentage of net income
to be paid out as cash dividends.
Jika perusahaan menaikkan rasio pembagian
dividen, D1 akan naik, maka akan menaikkan
harga saham.
Jika dividen tunai terus dibagikan, maka makin Jika dividen tunai terus dibagikan, maka makin
sedikit dana yang tersedia untuk investasi,
sehingga growth rendah, dan dapat
menurunkan harga saham.
Optimal Dividend Policy
The dividend policy that strikes a balance
between current dividend and future growth
and maximizes that firms stock price.
Kebijakan dividen yang menciptakan Kebijakan dividen yang menciptakan
keseimbangan antara pembagian dividen saat
ini dan pertumbuhan di waktu yang akan
datang yang akan memaksimumkan harga
saham.
Dividend Reinvestment Plans
Dividend Reinvestment Plans (DRIPs) enable stockholders to use
dividends received on the firms stock to acquire additional
shareseven fractional sharesat little or no transaction cost.
With DRIPs, plan participants typically can acquire shares at about
5 percent below the prevailing market prices.
From its point of view, the firm can issue new shares to From its point of view, the firm can issue new shares to
participants more economically, avoiding the under pricing and
flotation costs that would accompany the public sale of new
shares.
The Relevance of Dividend Policy
The most important question about payout
policy:
Does payout/dividend policy have a significant
effect on the value of a firm? effect on the value of a firm?
Residual Theory of Dividends
The residual theory of dividends suggests that
dividend payments should be viewed as
residualthe amount left over after all
acceptable investment opportunities have acceptable investment opportunities have
been undertaken.
The firm would treat the dividend decision in
three steps :
Step 1: Determine the optimal level of capital
expenditures which is given by the point of
intersection of the investment opportunities intersection of the investment opportunities
schedule (IOS) and weighted marginal cost of
capital schedule (WMCC).
Step 2: Using the optimal capital structure
proportions, estimate the total amount of
equity financing needed to support the equity financing needed to support the
expenditures estimated in Step 1.
Step 3: Because the cost of retained earnings is less
than new equity, use retained earnings to meet the
equity requirement in Step 2. If inadequate, sell new
stock. If there is an excess of retained earnings,
distribute the surplus amountthe residualas
dividends.
According to this approach, as long as the firms equity
need exceeds the amount of retained earnings, no cash
dividend is paid.
The argument for this approach is that it is sound
management to be certain that the company has the management to be certain that the company has the
money it needs to compete effectively.
This view of dividends suggest thar the required return
of investors, is not influenced by the firms dividend
policya premise that in turn implies that dividend
policy is irrelevant in the sense that it does not affect
firm value.
EXAMPLE:
Overbrook Industries has available from the current periods operations
$1.8 million that can be retained or paid out in dividends.
The firms optimal capital structure is 30% debt and 70% equity.
Figure depicts the firms Weighted Marginal Cost of Capital (WMCC) Figure depicts the firms Weighted Marginal Cost of Capital (WMCC)
schedule along with three investment opportunity schedules (IOSs).
WMCC and IOSs
For each IOS, the level of total new financing or
investment determined by the point of
intersection of the IOS and the WMCC has intersection of the IOS and the WMCC has
been noted.
For IOS 1 , it is $ 1.5 million, for IOS 2 $ 2.4
million, and for IOS 3 $ 3.2 million.
Applying the Residual Theory of Dividends for
Each of Three IOSs
Table shows that if IOS1 exists, the firm will pay
out $750,000 in dividends because only
$1,050,000 of the $1,800,000 of available $1,050,000 of the $1,800,000 of available
earnings is needed. 41,7% payout ratio.
The table also shows the dividend payouts
associated with IOS2 and IOS3. Depending on
which IOS exists, the firms dividend would in which IOS exists, the firms dividend would in
effect be the residual, if any, remaining after
all acceptable investments have been
financed.
The Dividend Irrelevance Theory
Merton Miller and Franco Modigliani (MM) developed a
theory that shows that in perfect financial markets
(certainty, no taxes, no transactions costs or other
market imperfections), the value of a firm is unaffected
by the distribution of dividends.
They argue that value is driven only by the future
earnings and risk of its investments.
Retaining earnings or paying them in dividends does not
affect this value.
Some studies suggested that large dividend
changes affect stock price behavior.
MM argued, however, that these effects are the
result of the information conveyed by these result of the information conveyed by these
dividend changes, not to the dividend itself.
Furthermore, MM argue for the existence of a
clientele effect.
Investors preferring dividends will purchase
high dividend stocks, while those preferring high dividend stocks, while those preferring
capital gains will purchase low dividend paying
stocks.
clientele effect
The argument that different payout policies
attract different types of investors but still do
not change the value of the firm. not change the value of the firm.
In summary, MM and other dividend irrelevance proponents argue
thatall else being equalan investors required return, and
therefore the value of the firm, is unaffected by dividend policy
because:
1. The firms value is determined solely by the earning power and
risk of its asset investments. risk of its asset investments.
2. If dividends do affect value, they do so because of the
information content, which signals managements future
expectations.
3. A clientele effect exists that causes shareholders to receive the
level of dividends they expect.
Arguments for Dividend Relevance
Dividend relevance theory, advanced by Gordon and
Lintner, that there is a direct relationship between a
firms dividend policy and its and market value.
bird-in-the-hand argument. The belief, in support of
dividend relevance theory, that investors see current dividend relevance theory, that investors see current
dividends as less risky than future dividends or
capital gains.
information content. The information privided by the
dividends of a firm with respect to future earnings,
which causes owners to bid up or down the price of
the firms stock.
Kesimpulan:
1. Jika kesempatan investasi meningkat, maka rasio
pembayaran dividen turun.
2. Investor memperkirakan, bahwa pembagian dividen
saat ini sebagai petunjuk estimasi pendapatan
perusahaan di waktu yang akan datang perusahaan di waktu yang akan datang
3. Jika pembagian dividen akan mempengaruhi harga
saham, maka hal tersebut sebagai
keinginan pemegang saham untuk
meminimalkan/menunda pembayaran pajak,
dan peranan dividen sebagai alat untuk
meminimalkan biaya keagenan meminimalkan biaya keagenan
4. Jika teori harapan benar, maka manajemen
merencanakan mengenai pembagian dividen
dan rencana investasi dengan baik .
5. Karena investor juga membayar pajak
penghasilan, maka investor yang sudah berada
dalam tax bracket yang tinggi ( di Indonesia
35%), mungkin akan menyukai untuk tidak 35%), mungkin akan menyukai untuk tidak
menerima dividen dan memilih capital gains.
Factors Affecting Dividend Policy:
1. Legal Constraints
2. Contractual Constraints
3. Internal Constraints
4. Growth Prospects 4. Growth Prospects
5. Owner Considerations
6. Market Considerations
Types of Dividend Policies:
1. Constant-Payout-Ratio Policy
2. Regular Dividend Policy
3. Low-Regular-and-Extra Dividend Policy
Constant-Payout-Ratio Policy
With a constant-payout-ratio dividend policy, the firm
establishes that a specific percentage of earnings is paid
to shareholders each period.
A major shortcoming of this approach is that if the firms
earnings drop or are volatile, so too will be the dividend earnings drop or are volatile, so too will be the dividend
payments.
As mentioned earlier, investors view volatile dividends as
negative and riskywhich can lead to lower share prices.
Example:
Peachtree Industries has a policy of paying out
40% of earnings in cash dividends. In the
periods when a loss occurs, the firms policy is
to pay no cash dividends. to pay no cash dividends.
Data Peachtrees earnings, dividends, and
average stock prices for the past 6 years
follow:
Regular Dividend Policy
The regular dividend policy is based on the payment of a
fixed-dollar dividend each period.
It provides stockholders with positive information
indicating that the firm is doing well and it minimizes
uncertainty. uncertainty.
Generally, firms using this policy will increase the regular
dividend once earnings are proven to be reliable.
Example:
The dividend policy of Woodward Laboratories is to pay annual dividends
of $1.00 per share until per-share earnings exceeded $4.00 for three
consecutive years.
At that point, the annual dividend is raised to $1.50 per share, and a new
earnings plateau is established. earnings plateau is established.
The firm does not anticipate decreasing its dividend unless its liquidity is
in jeopardy.
Data for Woodwards earnings, dividends, and average stock prices for the
past 12 years follow.
Low-Regular-and-Extra Dividend Policy
Using this policy, firms pay a low regular dividend,
supplemented by additional dividends when earnings can
support it.
When earnings are higher than normal, the firm will pay
this additional dividend, often called an extra dividend,
without the obligation to maintain it during subsequent without the obligation to maintain it during subsequent
periods.
This type of policy is often used by firms whose sales and
earnings are susceptible to swings in the business cycle.
Other Forms of Dividends:
1. Stock Dividends
2. Stock Splits
3. Stock Repurchases
Stock Dividends
A stock dividend is paid in stock rather than in cash.
Many investors believe that stock dividends increase the
value of their holdings.
In fact, from a market value standpoint, stock dividends
function much like stock splits. The investor ends up function much like stock splits. The investor ends up
owning more shares, but the value of their shares is less.
From a book value standpoint, funds are transferred from
retained earnings to common stock and additional paid-
in-capital.
Accounting Aspects
The current stockholders equity on the
balance sheet of Garrison Corporation is as
shown in the following accounts.
If Garrison declares a 10% stock dividend and the current market
price of the stock is $15 per share, $150,000 of retained earnings
(10% x 100,000 shares x $15 per share) will be capitalized.
The $150,000 will be distributed between the common stock (par) The $150,000 will be distributed between the common stock (par)
account ($ 40,000) and paid-in-capital in excess of par account
based on the par value of the common stock ($ 110,000).
The resulting balances are as follows:
Because 10,000 new shares (10% x 100,000)
have been issued at the current price of $15
per share, $150,000 ($15 per share x 10,000
shares) is shifted from retained earnings to shares) is shifted from retained earnings to
the common stock and paid-in-capital
accounts.
The Shareholders Viewpoint
From a shareholders perspective, stock dividends
result in a dilution of shares owned.
For example, assume a stockholder owned 100
shares at $20/share ($2,000 total) before a stock shares at $20/share ($2,000 total) before a stock
dividend.
If the firm declares a 10% stock dividend, the
shareholder will have 110 shares of stock.
However, the total value of her shares will still be
$2,000.
Therefore, the value of her share must have fallen
to $18.18/share ($2,000/110).
The Companys Viewpoint
Disadvantages of stock dividends include:
The cost of issuing the new shares
Taxes and listing fees on the new shares
Other recording costs
Advantages of stock dividends include:
The company conserves needed cash
Signaling effect to the shareholders that the firm is
retaining cash because of lucrative investment
opportunities opportunities
Stock Splits
A stock split is a recapitalization that affects
the number of shares outstanding, par value,
earnings per share, and market price.
The rationale for a stock split is that it lowers The rationale for a stock split is that it lowers
the price of the stock and makes it more
attractive to individual investors
Example:
Delphi Company had 200,000 shares of $2-par
value common stock outstanding and declares
a 2-for-1 split. The total before and after split
impact on stockholders equity is: impact on stockholders equity is:
A reverse stock split reduces the number of
shares outstanding and raises stock pricethe
opposite of a stock split.
The rationale for a reverse stock split is to add The rationale for a reverse stock split is to add
respectability to the stock and convey the
meaning that it isnt a junk stock.
Research on both stock splits and stock
dividends generally supports the theory that
they do not affect the value of shares. They
are often used, however, to send a signal to are often used, however, to send a signal to
investors that good things are going to
happen.
Stock Repurchases
A stock repurchase is the purchasing and
retiring of stock by the issuing corporation.
A repurchase is a partial liquidation since it
decreases the number of shares outstanding. decreases the number of shares outstanding.
It may also be thought of as an alternative to
cash dividends.
Alternative reasons for stock repurchases:
To use the shares for another purpose
To alter the firms capital structure
To increase EPS and ROE resulting in a higher
market price
To reduce the chance of a hostile takeover
Stock Repurchases Viewed as a Cash Dividend
The repurchase of stock results in a type of reverse
dilution.
The net effect of the repurchase is similar to the payment
of a cash dividend.
However, if the firm pays the dividend, the owner would However, if the firm pays the dividend, the owner would
have to pay tax on the income.
The gain on the increase in share price as a result of the
repurchase, however, would not be taxed until sold.