9 dividend policy

5/20/2018 9 Dividend Policy

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Wijantini Prasetiya Mulya Business School

Dividend Policy


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Pembayaran Dividen TELKOM

Sumber: www.telkom.co.id


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What is distribution/dividend

policy?

The distribution policy defines:

The level of cash distributions to

shareholders Dividend Payout

The form of the distribution(dividend vs. stock repurchase)

The stability of the distribution


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Dividend Irrelevance Theory

Investors are indifferent betweendividends and retention-generated

capital gains. If they want cash,they can sell stock. If they dontwant cash, they can use cashdividends to buy stock.

Value of the Firms BasicEarning Power, Business Risk.

Merton Miller & Franco Modigliani.


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Bird-in-the-Hand Theory

Investors think dividends are less risky thanpotential future capital gains, hence they

like dividends. Investors prefer a high payout. Less certain

of capital gain.

If so, investors would value high payoutfirms more highly ke ??

i.e., a high payout would result in a high P0

Myron Gordon & John Lintner


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Tax Preference Theory

Investors prefer a low payout, hencegrowth. Capital Gains Are Preferred.

Low payouts mean higher capitalgains. Capital gains taxes are

deferred. Dividend Double taxation.

This could cause investors to preferfirms with low payouts, i.e., a high

payout results in a low P0.

Litzenberger & Rawaswamy


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Which theory is most correct?

Empirical testing has not been ableto determine which theory, if any, iscorrect.

Thus, managers use judgmentwhen setting policy.

Analysis is used, but it must be

applied with judgment.


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ESTABLISHING THE DIVIDENDPOLICY in PRACTICE

RESIDUAL DIVIDEND MODEL:Setting the Target Payout Ratio

4 steps:1. Determine the Optimal Capital Budget.2. Determine the Target Capital Structure

3. Use Retained Earnings FIRST to Supply Equity Requirement4. Pay Dividends only if earning is available

OPTIMAL PAYOUT RATIO

f { Investors preference, the firms investment opportunities,firms target capital structure, the availability and cost of external

capital }

See: Dallas Oil Company


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DALLAS OIL COMPANY

(RESIDUAL DIVIDEND POLICY)

Dallas Oil Company (selanjutnya disebut DOC) adalahperusahaan yang mencapai tahap dimana perusahaanmulai membutuhkan dana ekuitas dari luar untuktumbuh. Perusahaan juga ingin tetapmempertahankan target struktur modal 60% Ekuitas

dan 40% Utang. Manajemen DOC memutuskan untukGo Publicdan persyaratan keterbukaan informasimenyebabkan perusahaan harus memutuskan dasarpembagian deviden yang baik untuk tahun-tahunmendatang. DOC telah menyusun InvestmentOpportunity Schedule (IOS) dan Marginal Cost ofCapital (MCC) untuk skenario baik, normal dan buruk.

Jika tahun ini DOC memperoleh earning sebesar 60 MilyarRupiah, berapa porsi dari earning yang akan dibagikandalam bentuk dividend?


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%MIRR

New Capital ( Milyar Rupiah)400

30

28A

CB26

24

A

BC

ED

A

BC

D

MCC

20 EE

D

F

F

F

IOSBa

IOSN

IOSBu

15090


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Using the Residual Model to Calculate

Distributions Paid

Distr. = .Firms

EarningTargetequityratio

Totalcapitalbudget[ ]))((


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Advantages and Disadvantages of the

Residual Dividend Policy

Advantages: Minimizes new stock issuesand flotation costs.

Disadvantages: Results in variabledividends, sends conflicting signals,increases risk, and doesnt appeal to

any specific clientele.Conclusion: Consider residual policy

when setting target payout, but dont

follow it rigidly.


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Stock Repurchases

Reasons for repurchases:

As an alternative to distributing cash asdividends.

To dispose of one-time cash from an asset

sale. To make a large capital structure change.

Share EPS Price Capital Gain

Repurchases: Buying own stock backfrom stockholders.


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Advantages of Repurchases

Option for stockholders

Avoid setting a high payout ratio

Capital gain is tax preferable

Positive signal for stockholders,management thinks the stock is

undervalues


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Disadvantages of Repurchases

In practice, stockholders may not bewell informed

May be viewed as a negative signalas firm does not have goodinvestment opportunities

Firm may have bid up therepurchased price tooexpensive


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Stock Dividends vs. Stock Splits

Stock dividend: Firm issues newshares instead of giving cash

dividend. If 10%, get 10 shares foreach 100 shares owned.

Stock split: Firm increases thenumber of shares outstanding, say

2:1. Sends shareholders moreshares.


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Both stock dividends and stock splitsincrease the number of shares outstanding,so the pie is divided into smaller pieces.

Unless the stock dividend or split conveys

information, or is accompanied by anotherevent like higher dividends, the stock pr icefalls so as to keep each investors wealthunchanged.

But splits/stock dividends may get us to anoptimal price range.


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When should a firm consider

splitting its stock?

Stock splits can be used to keep the price inthe optimal range. Optimal Trading Range

Large # investors will be able topurchase the stock The Price of the Stockwill be Maximized

Increase Liquidity

Stock splits generally occur whenmanagement is confident, so areinterpreted as posi t ive signals.


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Soldwithoutdividend

9 dividend policy

Documents

distribution policy

business risk

dividend double taxation

investors preference

hand theory investors

target capital structure3

capital gains taxes

low payouts