Introduction Dividend policy is not a numbercrunching topic Javier - - PDF document

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Introduction Dividend policy is not a numbercrunching topic Javier - - PDF document

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Corporate Finance Dividend Policy Javier Estrada Spring, 2014 1. Introduction Limitations of the analysis 2. ConEd & Telefnica Circumstances and decisions 3. Other Important Issues Clienteles Growth opportunities Signals

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Corporate Finance

Dividend Policy

Javier Estrada Spring, 2014

  • 1. Introduction
  • Limitations of the analysis
  • 2. ConEd & Telefónica
  • Circumstances and decisions
  • 3. Other Important Issues
  • Clienteles
  • Growth opportunities
  • Signals
  • Smoothing
  • Taxes
  • Share repurchases

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

  • Dividend policy is not a ‘number‐crunching’ topic
  • This implies that solutions/decisions are much

more open to interpretation than in previous cases

  • Dividend policy is the issue we know the least in

Corporate Finance

  • An optimal policy may be difficult to determine
  • There are good reasons to pay/avoid dividends
  • Some investors want/avoid dividends
  • Ideally, what is the optimal dividend policy?
  • DPR such that the share price is maximized

 DPR for which investors are willing to pay the most

  • But there is no model to determine such DPR
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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

  • What we do know
  • Basic trade‐off
  • Reinvesting v. Paying out
  • Empirical regularities
  • Dividend smoothing
  • Relationship between dividend yield and income
  • Relevant variables to consider
  • Environment (Macro/Industry/Company)
  • Clienteles (What do shareholders want/expect?)
  • Growth opportunities (The critical trade‐off)
  • Signals (The implicit message conveyed)
  • Dividend history (Smoothing)
  • Taxes

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Other Relevant Issues

  • Clienteles
  • Companies can use their dividend policy to …
  • please their clientele
  • target a clientele (Telefónica)
  • Critical (cash) trade‐off
  • Reinvesting (and growing)
  • Paying out

Go

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Other Relevant Issues

  • Signals
  • What information does management convey with

its dividend policy?

  • ConEd

 The company is in deep trouble (The stock price tanked)

  • Telefónica

 The company has great growth opportunities (The stock price soared)

  • More generally

Go Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Other Relevant Issues

  • Smoothing
  • Dividends are sticky (less volatile than earnings)

Go

  • Model (Lintner)
  • DPSt = α⋅(TDPR)(EPSt) + (1–α)⋅DPSt‐1

 TDPR: Target dividend payout ratio  α: Adjustment rate

  • Note that …

 if α=0 ⇒ DPSt = DPSt‐1 (Dividends are constant)  if α=1 ⇒ DPSt = (TDPR)(EPSt‐1) (Dividends are just as volatile as EPS)

  • Empirically, Lintner found TDPR = 50% and α=0.3

 DPSt = (0.15)⋅EPSt + (0.7)⋅DPSt  Hence smoothing is substantial

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Other Relevant Issues

  • Taxes
  • Dividends are usually taxed at the personal tax rate
  • For wealthy individuals the personal tax rate typically

is much higher than the capital gains tax rate

Go

  • Dividends versus share repurchases
  • As discussed, dividends tend to be smoothed
  • Buybacks are far more volatile/unpredictable

Go Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Appendix

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Critical Trade‐Off

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Critical Trade‐Off

Back

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Signals

Back Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Smoothing

Back

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Taxes

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Taxes

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Taxes

Back Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Share Repurchases

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Share Repurchases

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Share Repurchases

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Share Repurchases

Back