As a result, the optimal dividend policy must strike the balance between current dividends and future growth that maximizes the stock price. Because investment opportunities and income vary from year to year, strict adherence to the residual dividend policy would be.
15-3B EARNINGS, CASH FLOWS, AND DIVIDENDS
I know the Board does not want to push the dividend to a level where we would have to cut it in bad economic conditions. Only if we raised the dividend to more than $3.00 would we be seriously exposed to the risk of cutting it. Here we would reduce the dividend payout ratio and use the funds generated to buy back our shares in the open market.
Alternatively, companies can temporarily suspend dividend payments due to a short-term need for cash, but the hope is that they can restore dividends once the situation returns to normal. BP resumed paying dividends in the fourth quarter of 2010 (albeit at a smaller amount than before the oil spill). However, CFPS was always higher than earnings per share, and always exceeded the dividend by a significant margin.
Here we see that the earnings payout is extremely volatile, but the cash flow payout (defined as DPS/CFPS) is relatively stable and always below 100%. These stable (and high) cash flows indicate that Exxon Mobil's dividend is relatively safe and investors can count on receiving it going forward. Considering the very high cash flows per stock, continued significant dividend increases (or large share buybacks) are likely - assuming nothing bad happens in the oil market.
Earnings are relatively volatile, but cash flows are more stable, and those stable cash flows are responsible for stable dividends. Thus, the decline in Exxon Mobil's earnings in 2001 and 2002 turned out to be temporary, so the dividend increased slightly during those years. But Exxon Mobil deals in oil, and strange things can happen with that commodity.
15-3C PAYMENT PROCEDURES
15-4 Dividend Reinvestment Plans
SelfTest
A “new stock” DRIP invests the dividends in newly issued shares; hence, these plans attract new capital for the company. AT&T, Xerox and many other companies have used new stock plans to raise significant amounts of equity capital. The companies are offering discounts because they would have incurred IPO costs if the new shares had been raised through investment banks.
Companies switch from old stocks to new stock DRIPs depending on their equity needs. 14See Charles Carlson, “Best Dow Stocks for Dividend Reinvestment Plans,” Forbes (www.forbes .com), October 16, 2013. 15See Vita Nelson, “Ten Dividend Stocks to Own Forever and Get Rich Slowly,” Forbes (www.forbes .com), 18 January 2017.
15-5 Summary of Factors Influencing Dividend Policy
15-5A CONSTRAINTS
15-5B INVESTMENT OPPORTUNITIES
15-5C ALTERNATIVE SOURCES OF CAPITAL
15-5D EFFECTS OF DIVIDEND POLICY ON r S
15-6 Stock Dividends and Stock Splits
Since its inception, Porter's markets have expanded and the company has enjoyed growth in sales and profits. Some of its earnings are paid out in dividends, but some are also retained annually, causing EPS and share price growth. The company started life with only a few thousand shares outstanding and, after several years of growth, each of Porter's shares had a very high EPS and DPS.
This limited demand for shares and thus kept the total market value of the firm below what it would have been if more shares had been outstanding at a lower price.
15-6A STOCK SPLITS
15-6B STOCK DIVIDENDS
15-6C EFFECT ON STOCK PRICES
15-7 Stock Repurchases
15-7A THE EFFECTS OF STOCK REPURCHASES
Current EPS 5 Total earnings
EPS after repurchasing 110,000 shares 5 $4.4 million
The share price may change as a result of the repurchase transaction for several reasons: rising if investors view it favorably and falling if they view it unfavorably.
15-7B ADVANTAGES OF REPURCHASES
15-7C DISADVANTAGES OF REPURCHASES
The selling shareholders may not be fully aware of all the implications of a buyback, or they may not have all the relevant information about the corporation's current and future activities. This is especially true in situations where management has good reason to believe that the share price is well below its intrinsic value. If its shares are not actively traded and if the firm seeks to acquire a relatively large number of shares of its stock, the price may be bid above its intrinsic value and then decline after the firm ceases its buyback operations.
15-7D CONCLUSIONS ON STOCK REPURCHASES
Self-Test Questions and Problems
Questions
Discuss those statements, making sure to (1) discuss the interrelationship between cost of capital, investment opportunities and new investment and (2) explain the implied relationship between dividend policy and stock prices. If a firm buys back its shares in the open market, the shareholders who tender the shares are subject to capital gains tax. If you own 100 shares of a company's stock and the company's stock splits two-for-one, you will own 200 shares in the company after the split.
The Tax Code encourages companies to pay out a large percentage of their net income in the form of dividends. If your company has built a clientele of investors who prefer high dividends, it is unlikely that the company will adopt a residual dividend policy. If a company follows a residual dividend policy, holding everything else constant, the dividend payout will tend to increase as the company's investment opportunities improve.
Problems
The company has 320,000 shares of common stock outstanding, and its stock trades at $37 per share. If the company maintains this 25% payout ratio, what will be the current dividend yield on the company's stock. Assume that the company is interested in expanding its operations dramatically and that this expansion will require significant amounts of capital.
Given this scenario, it would make more sense for the company to maintain a constant dividend payout ratio or to maintain the same dividend per share. stock. Consistent with the company's target capital structure, the firm has $10 million in total invested capital, 40% of which is financed by debt. If the plan in part d is implemented, how many new shares will be issued and how much will the company's earnings per share be diluted.
Comprehensive/Spreadsheet Problem
Assume that the resulting change in capital structure has a minimal effect on the company's compound cost of capital so that the capital budget remains at $10 million. Additionally, the company wants to maintain its target capital structure (60% equity and 40% debt) and its capital budget of $10 million. What is the minimum dollar amount of new common stock the company will need to issue to meet each of its objectives.
Assuming that the company's projects are divisible, what will be the company's capital budget for the next year. But SSC has now reached the stage where external equity capital is needed if the company is to achieve its growth goals and still maintain its target capital structure of 60% equity and 40% debt. Until now, Brown and Valencia have paid themselves reasonable salaries but routinely reinvested all after-tax earnings in the firm, so the firm's dividend policy has not been an issue.
What actions can a company following the residual dividend model take when its expected retained earnings are less than the retained earnings required to finance its capital budget. Discuss (1) the information content or signaling hypothesis, (2) the clientele effect, (3) the catering theory, and (4) their impact on dividend policy. You have determined that its current capital structure (60% equity and 40% debt) is optimal, and its net income is forecast to be $600,000. Use the residual dividend model to determine SSC's total dollar dividend and payout ratio. Explain in the process how the residual yield model works. How would a change in investment opportunities generally affect the payout percentage under the residual dividend model. What are the advantages and disadvantages of the residual policy. Tip: Don't neglect signaling and client effects.).
Describe the series of steps that most firms take in determining dividend policy in practice. Let's find out what has happened to Apple's (AAPL) dividend policy since its original announcement. Finance, Morningstar.com, Google Finance, and MSN Money (www.msn .com/en-us/money/markets). You will need to use a combination of these pages to answer these questions. What has happened to Apple's dividend per share, dividend yield and dividend payout over the past 4 years. Give an explanation of what happened. Compare this information with other firms in the same industry. Has Apple behaved differently from its peers or have there been industry-wide changes? Google Finance provides data on related companies. Related Companies" on the left side of your screen and then click "Add or Remove Columns" to view additional data, including dividend per share and dividend yield. Manually submit earnings per share, dividends per share and cash flow cash per share over time, we point out that dividends are often more stable than earnings, that cash flow follows earnings very closely, and that cash flow per share exceeds dividends by a safe margin.Do you see a pattern (similar to Apple? Note that Morningstar.com provides cash flow information over a 10-year period.) 4. Identify the dividend declared date, ex-dividend date, record holder date, and dividend payment date. dividend. From the ex-dividend date and industry convention, you should be able to determine the record holder's date. Now, go to the interactive price chart on the website. Can you observe price changes around these dates? Explain what price changes you can expect to see. Investors are more concerned about future dividends than historical dividends. See analysts' revenue estimates for the next year and 5-year annual growth estimates. Based on this data, what would you expect Apple's payment policy to be over the next 5 years. Your answer will only be a guess based on actual data.).
