KEBIJAKAN DEVIDEN (english version)

(1)

KEBIJAKAN

DIVIDEN

mustikalukmanarief

(2)

Dilema: Untuk apa sebaiknya

perusahaan menggunakan laba?

 Membiayai investasi baru yang Membiayai investasi baru yang menguntungkan?

menguntungkan?

 atauatau

 Membayar dividen untuk pemegang Membayar dividen untuk pemegang saham?

(3)

Pembayaran Dividen

Announcement date Ex-dividend day

Record day

Payment day

(4)

Penurunan harga pada Ex-date

Ex date

Price =$10

Price =$9 -t . . . –2 –1 0 +1 +2 . . . t

• The share price will fall by the amount of the dividend on the ex date (Time 0).

• If the dividend is $1 per share, the price will be equal to $10 – 1 = $9 on the ex date.

• Before ex date (Time –1) Dividend = $0 Price = $10

(5)

 Bila perusahaan menahan semua laba untuk Bila perusahaan menahan semua laba untuk investasi yang mendatangkan laba, dividend

investasi yang mendatangkan laba, dividend

yield akan 0,

yield akan 0, namun harga saham akan namun harga saham akan

meningkat, menghasilkan capital gain yang lebih

tinggi.

P

11

- Po D

11

Po Po

_{Po Po}

+

Return =

(6)

 Bila perusahaan membayarkan laba sebagai Bila perusahaan membayarkan laba sebagai dividen, pemegang saham akan menerima

dividen, pemegang saham akan menerima

kas atas investasi yang ditanamkan,

kas atas investasi yang ditanamkan, namun namun capital gain akan menurun, karena kas yang

capital gain akan menurun, karena kas yang

sama tidak diinvestasikan ke dalam

perusahaan.

P

11

- Po D

11

Po Po

_{Po Po}

+

Return =

(7)

Apakah investor lebih menyukai tingkat

pembayaran dividen tinggi atau rendah?

 Dividends are irrelevantDividends are irrelevant: :

 Investors don’t care about payout.Investors don’t care about payout.

 Bird-in-the-handBird-in-the-hand: :

 Investors prefer a high payout.Investors prefer a high payout.

 Tax preferenceTax preference: :

(8)

Dividend Payout Ratios for

Value Line’s Selected Industries

Industry Payout ratio

Banking 38.29

Computer Software Services 13.70

Drug 38.06

Electric Utilities (Eastern U. S.) 67.09

Internet n/a

Semiconductors 24.91

Steel 51.96

Tobacco 55.00

Water utilities 67.35

(9)

Early evidence on dividend policy:

Lintner’s (1956) stylized facts

 Lintner (1956) in a series of interviews with Lintner (1956) in a series of interviews with

corporate managers observed the following facts

 Firms have long-run target dividend payout ratios; Firms have long-run target dividend payout ratios;

mature companies pay out a high proportion of their

earnings, while young companies have low payouts

 Managers focus more on dividend changes than on Managers focus more on dividend changes than on

absolute levels

 Dividend changes follow shifts in long-run, sustainable Dividend changes follow shifts in long-run, sustainable

earnings; managers “smooth” dividends

 Managers are reluctant to make dividend changes that Managers are reluctant to make dividend changes that

might have to be reversed

(10)

The dividend debate: Does

dividend policy matter?

 The issueThe issue: Should a firm be preoccupied with its dividend : Should a firm be preoccupied with its dividend policy? Does the choice of dividend policy affect firm

policy? Does the choice of dividend policy affect firm

value?

 Dividends are irrelevantDividends are irrelevant: M & M (1961) showed that, under : M & M (1961) showed that, under certain assumptions, dividends do not really matter

certain assumptions, dividends do not really matter

because they do not affect firm value

 Dividends are badDividends are bad: Dividends create a tax disadvantage : Dividends create a tax disadvantage for shareholders and destroy value

for shareholders and destroy value

 Dividends are goodDividends are good: Dividends are good because : Dividends are good because

shareholders (or some of them) prefer to receive them

rather than not

(11)

Dividend Irrelevance Theory

 Investors are Investors are indifferentindifferent between dividends and between dividends and

retention-generated capital gains. If they want

cash, they can sell stock. If they don’t want

cash, they can use dividends to buy stock.

 Modigliani-Miller (1961)Modigliani-Miller (1961) support irrelevance. support irrelevance.

 Theory is based on unrealistic assumptions (no Theory is based on unrealistic assumptions (no

taxes or brokerage costs), hence may not be

true. Need empirical test.

(12)

M & M: Dividends are irrelevant

 Assume thatAssume that

 There are no transaction costs from converting There are no transaction costs from converting price appreciation into cash

price appreciation into cash

 Firms that pay too much in dividends can issue Firms that pay too much in dividends can issue stock that is fairly priced and do not face

stock that is fairly priced and do not face

transaction costs

 The firm’s investment decision is not affected by The firm’s investment decision is not affected by its dividend decision and operating cash flows

its dividend decision and operating cash flows

are the same in each period

 Managers of firms that pay too little in dividends Managers of firms that pay too little in dividends do not waste excess cash

(13)

Two alternative views:

Dividends matter

 Dividends are goodDividends are good

 The clientele argumentThe clientele argument  Dividends as signalsDividends as signals

 Dividends may discipline managersDividends may discipline managers

 Dividends are badDividends are bad

 Taxes: whenever dividends are taxed more heavily Taxes: whenever dividends are taxed more heavily

than capital gains, firms should pay the lowest cash

dividend they can get away with and earnings should

be retained or used to repurchase shares

(14)

Bird-in-the-Hand Theory

 Investors think dividends are Investors think dividends are less riskyless risky

than potential future capital gains, hence than potential future capital gains, hence

they like dividends. they like dividends.

 If so, investors would value high payout If so, investors would value high payout firms more highly, i.e., a high payout

firms more highly, i.e., a high payout would result in a

(15)

Dividends are “good”

The Clientele argument The Clientele argument

 There are stockholders who like dividends, either because There are stockholders who like dividends, either because

they value the regular cash payments or because they do they value the regular cash payments or because they do

not face the tax disadvantage not face the tax disadvantage

 Given the fact that there is a vast diversity among investors Given the fact that there is a vast diversity among investors

in terms of preferences, it is no surprise that investors may in terms of preferences, it is no surprise that investors may

form clienteles based upon their tax brackets form clienteles based upon their tax brackets

 Thus, investors will cluster around firms whose dividend Thus, investors will cluster around firms whose dividend

policies match their preference (called the

(16)

Dividends as signals

 By changing their dividend policy, firms send signals By changing their dividend policy, firms send signals

about their future cash flows to market participants

 When firms increase dividends, they somehow commit to When firms increase dividends, they somehow commit to

those higher dividends, and, thus, send a signal that they

expect to have higher future cash flows (share price

increases)

 Given that firms do not like to cut dividends, firms that are Given that firms do not like to cut dividends, firms that are

forced to do so send a signal that their financial future is

troubling (share price decreases)

(17)

Dividends discipline managers

 In firms with principal-agent problems between In firms with principal-agent problems between

stockholders and managers and the potential of free

cash flows being wasted, making a commitment to pay

dividends imposes discipline on managers

(18)

Dividends are “bad”

 If dividends are taxed differently than capital gains If dividends are taxed differently than capital gains

(dividends taxed as ordinary income) and the

marginal tax rate of dividends is higher than that

of capital gains, there exists a tax disadvantage

for those stockholders who receive dividends

 Even if ordinary income and capital gains are Even if ordinary income and capital gains are

taxed the same, dividends have a tax

disadvantage because investors do not have the

choice of when to report the dividend as it is the

case with capital gains

(19)

Tax Preference Theory

 Retained earnings lead to capital gains, Retained earnings lead to capital gains,

which are taxed at

which are taxed at lower rateslower rates than than dividends: 28% maximum vs. up to dividends: 28% maximum vs. up to 38.6%. Capital gains taxes are also 38.6%. Capital gains taxes are also

deferred

deferred..

 This could cause investors to prefer firms This could cause investors to prefer firms

with low payouts, i.e., a high payout with low payouts, i.e., a high payout

results in a

(20)

 The tax disadvantage of dividends leads to the The tax disadvantage of dividends leads to the

following conclusions

 Firms whose stockholders are primarily individuals Firms whose stockholders are primarily individuals

should pay a lower dividend compared to firms that

are mainly owned by institutional investors (they are

under a tax-exempt status)

 The higher the income level of the firm’s investors, the The higher the income level of the firm’s investors, the

lower the dividend paid by the firm should be

 As the tax disadvantage of dividends increases, the As the tax disadvantage of dividends increases, the

aggregate amount of dividends paid should decrease

(21)

Some “not so good” reasons for

paying dividends

The Bird-in-the-hand fallacy

 Risk-averse investors may prefer the certainty of dividend Risk-averse investors may prefer the certainty of dividend

payments over the uncertainty of capital gains payments over the uncertainty of capital gains

 The proper comparison is between dividends today and an The proper comparison is between dividends today and an

almost equivalent amount of price appreciation today almost equivalent amount of price appreciation today

 The evidence shows that share prices drop on the ex-The evidence shows that share prices drop on the

ex-dividend day (firms that pay ex-dividends experience a decline dividend day (firms that pay dividends experience a decline in their share price on that day)

(22)

The excess cash hypothesis

 A firm has excess cash in a year and decides to return it A firm has excess cash in a year and decides to return it

to its stockholders through a dividend (assuming no

investment projects in that year)

 If the lack of investment projects is temporary, then firm If the lack of investment projects is temporary, then firm

should consider future financing needs and the cost of

raising capital

 Why not return the excess cash through a share Why not return the excess cash through a share

repurchase, given the evidence on firms’ reluctance to

change dividends?

(23)

Double taxation of dividends

 The issueThe issue: Corporate income was taxed twice, at the : Corporate income was taxed twice, at the

corporate level and at the stockholder level corporate level and at the stockholder level

 Corporate earnings were taxed at 35% and shareholders Corporate earnings were taxed at 35% and shareholders

receiving dividends were also faced with marginal tax rates as receiving dividends were also faced with marginal tax rates as

high as 38.6% (combined tax rate could be as high as 60%) high as 38.6% (combined tax rate could be as high as 60%)

 In the US, The Bush administration passed legislation that In the US, The Bush administration passed legislation that

would limit the tax rates for dividends to a maximum of 15% would limit the tax rates for dividends to a maximum of 15%

during the period 2003-2008 during the period 2003-2008

(24)

“

Signaling,” hypothesis?

_{Signaling,” hypothesis?}

 Managers hate to cut dividends, so won’t Managers hate to cut dividends, so won’t raise dividends unless they think raise is raise dividends unless they think raise is sustainable. So, investors view dividend sustainable. So, investors view dividend

increases as

increases as signals_signals of management’s view of management’s view of the future.

of the future.

 Therefore, a stock price increase at time of Therefore, a stock price increase at time of a dividend increase could reflect higher

a dividend increase could reflect higher expectations for future EPS, not a desire expectations for future EPS, not a desire

(25)

The “clientele effect”

 Different groups of investors, or clienteles, Different groups of investors, or clienteles,

prefer different dividend policies. prefer different dividend policies.

 Firm’s past dividend policy determines its Firm’s past dividend policy determines its

current clientele of investors. current clientele of investors.

 Clientele effects impede changing dividend Clientele effects impede changing dividend

policy. Taxes & brokerage costs hurt policy. Taxes & brokerage costs hurt

(26)

The “residual dividend model”

 Find the retained earnings needed for Find the retained earnings needed for the capital budget.

the capital budget.

 Pay out any leftover earnings (the Pay out any leftover earnings (the residual) as dividends.

residual) as dividends.

 This policy minimizes flotation and equity This policy minimizes flotation and equity signaling costs, hence minimizes the

signaling costs, hence minimizes the WACC.

(27)

Using the Residual Model to Calculate Dividends Paid

Dividends = – ._incomeNet Target

equity ratio

Total capital budget

(28)

Data for SSC

 Capital budget: $800,000. Given.Capital budget: $800,000. Given.

 Target capital structure: 40% debt, Target capital structure: 40% debt, 60% equity. Want to maintain.

60% equity. Want to maintain.

 Forecasted net income: $600,000.Forecasted net income: $600,000.

 How much of the $600,000 should we How much of the $600,000 should we pay out as dividends?

(29)

Of the $800,000 capital budget, 0.6($800,000) =

$480,000 must be equity to keep at target

capital structure. [0.4($800,000) = $320,000 will be debt.]

With $600,000 of net income, the residual is $600,000 - $480,000 = $120,000 = dividends paid.

(30)

How would a drop in NI to

$400,000 affect the dividend?

A rise to $800,000?

 NI = $400,000NI = $400,000: Need $480,000 of : Need $480,000 of equity, so should retain the whole equity, so should retain the whole

$400,000. Dividends = 0. $400,000. Dividends = 0.

 NI = $800,000NI = $800,000: Dividends = $800,000 : Dividends = $800,000 - $480,000 = $320,000. Payout =

- $480,000 = $320,000. Payout = $320,000/$800,000 = 40%.

(31)

How would a change in

investment opportunities affect

dividend under the residual policy

?

 Fewer good investments would lead to Fewer good investments would lead to smaller capital budget, hence to a higher smaller capital budget, hence to a higher

dividend payout. dividend payout.

 More good investments would lead to a More good investments would lead to a lower dividend payout.

(32)

Advantages and Disadvantages

of the Residual Dividend Policy

 AdvantagesAdvantages: Minimizes new stock issues : Minimizes new stock issues and flotation costs.

and flotation costs.

 DisadvantagesDisadvantages: Results in variable : Results in variable dividends, sends conflicting signals, dividends, sends conflicting signals,

increases risk, and doesn’t appeal to any increases risk, and doesn’t appeal to any

specific clientele. specific clientele.

 ConclusionConclusion: Consider residual policy when : Consider residual policy when setting target payout, but don’t follow it

setting target payout, but don’t follow it rigidly.

(33)

Which theory is most correct?

 Empirical testing has not been able to Empirical testing has not been able to determine which theory, if any, is

determine which theory, if any, is correct.

correct.

 Thus, managers use judgment when Thus, managers use judgment when setting policy.

setting policy.

 Analysis is used, but it must be applied Analysis is used, but it must be applied with judgment.

(34)

Implications for Managers

Theory Implication

Irrelevance Any payout OK

Bird-in-the-hand Set high payout

Tax preference Set low payout

(35)

Setting Dividend Policy

 Forecast capitalForecast capital needs over a planning needs over a planning horizon, often 5 years.

horizon, often 5 years.

 Set a Set a target capital structuretarget capital structure..

 Estimate annual Estimate annual equity needsequity needs..

 Set Set target payouttarget payout based on the residual based on the residual model.

model.

 Generally, some Generally, some dividend growth ratedividend growth rate

emerges. Maintain target growth rate if emerges. Maintain target growth rate if

possible, varying capital structure possible, varying capital structure

(36)

Appendix:

(37)

Example 1: Dividend irrelevance

 Suppose that Illini Corp. has after-tax operating income Suppose that Illini Corp. has after-tax operating income

of $100m growing at 5% per year and its cost of capital

is 10%

 Assume that the firm has reinvestment needs of $50m Assume that the firm has reinvestment needs of $50m

also growing at 5% per year and that it has 105m

outstanding shares

 The firm pays out any residual cash flows as dividends The firm pays out any residual cash flows as dividends

each year

 The FCFF = EBIT(1 – t) – Reinvestment needs = $100m The FCFF = EBIT(1 – t) – Reinvestment needs = $100m

- $50m = $50m

(38)

 The firm’s value (using the Gordon growth model) isThe firm’s value (using the Gordon growth model) is

FCFF(1 + g)/(WACC – g) = $50(1.05)/(0.10 – 0.05) =

$1,050m

 The price per share is $1,050m/105m = $10The price per share is $1,050m/105m = $10

 The dividend per share is $50m/105m = $0.476The dividend per share is $50m/105m = $0.476

(39)

 Case 1Case 1: UIUC Corp. decides to double its dividends, but its : UIUC Corp. decides to double its dividends, but its

investment needs remain the same, meaning that the firm has investment needs remain the same, meaning that the firm has to raise $50m

to raise $50m

 Suppose the firm can issue stock worth $50m at no costSuppose the firm can issue stock worth $50m at no cost

 The existing shareholders receive dividends of $100m or The existing shareholders receive dividends of $100m or

dividends per share equal to $100m/105m = $0.953 dividends per share equal to $100m/105m = $0.953

 Given no change in the firm’s cash flows, the growth rate of Given no change in the firm’s cash flows, the growth rate of

cash flows or the cost of capital, the firm’s value has not cash flows or the cost of capital, the firm’s value has not changed

(40)

 However, existing shareholders now own $1,000m and new However, existing shareholders now own $1,000m and new

shareholders $50m of the firm shareholders $50m of the firm

 Thus, the price per share for existing shareholders is $1,000m/Thus, the price per share for existing shareholders is $1,000m/

105m = $9.523 105m = $9.523

 The value per share for existing shareholders is $9.523 + The value per share for existing shareholders is $9.523 +

$0.953 = $10.476 $0.953 = $10.476

 The average shareholder is indifferent to this change in The average shareholder is indifferent to this change in

dividend policy (higher dividend per share is offset by lower dividend policy (higher dividend per share is offset by lower price per share)

(41)

 Case 2: UIUC Corp. decides to eliminate dividends and Case 2: UIUC Corp. decides to eliminate dividends and

retain the $50m retain the $50m

 Total value of the firm is Total value of the firm is

PV of after-tax operating cash flows + Cash balance PV of after-tax operating cash flows + Cash balance

= $1,050m + $50m = $1,100m = $1,050m + $50m = $1,100m

 The value per share is $1,100m/105m = $10.476, meaning The value per share is $1,100m/105m = $10.476, meaning

that the increase in share price is offset by the loss of that the increase in share price is offset by the loss of