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Chapter 13 - DividendsWhat to Do With The Money?Dividend/Retention Trade-offDividends & Stock PriceOther ApproachesDividends in PracticeOther Dividend MattersAlternative PoliciesStock Dividends and SplitsStock RepurchasesMicrosoft’s Biggie1Chapter 13 - Dividends•Returns from price change and dividends•Issues: payout ratio, dividend stability considering reinvestment opportunities and shareholder preferences•Payout ratio = Dividends per Share Earnings per Share•Currently 35%; historically about 50%2What to Do With The Money?•Corporate cash holdings growing rapidly•Choices: Reinvest in new products?•Pay dividends?•Make acquisitions?•Do stock buybacks?3Dividend/Retention Trade-off4Dividends & Stock Price•Major change in tax law: both dividends and long-term capital gains taxed @ 15%–Makes part of chapter irrelevant•Still an issue – should company reinvest profits in itself to take on new projects providing high returns and growing stock price or pay earnings to shareholders?–Reinvestment opportunity – residual theory5Other Approaches•Residual dividend theory – “leftovers”•Clientele effect•Information effect; communications tool•Expectations effect – revise perceptions?•Empirical evidence – very mixed but may slightly favor nonpayers but recently challenged6Dividends in Practice•Usually quarterly as approved by Board of Directors•Legal restrictions•Liquidity position•Other sources of financing•Earnings predictability7Other Dividend Matters•About 75% of S&P 500 pay dividends•Dividend Yield currently 1.95%• Dividend Reinvestment Programs Reinvest dividends by buying same stock•Dividends have been increasing but not as fast as profits and stock prices8Alternative Policies•Constant payout ratio•Small regular plus year-end extra•Stable amount per share – most common–Usually profits grow faster than dividends–“Wait until we’re certain” attitude•Yearly dividends since 1885 – Eli Lily–GE (1894), PPG (1899), Pfizer (1901)9Stock Dividends and Splits•New shares issued on pro rata basis to current shareholders•No economic consequences•Accounting differences only–Split: new shares 25% over existing–Stock dividends – increase under 25%•Reverse splits – reduce number of shares–Should increase price and avoid delisting10Stock Repurchases•Boosts EPS (price?); uses excess cash•Buy as an “undervalued investment” –Don’t have to complete; effect on price?–Can’t go on forever •Buybacks must be publicly announced–Analogy: buybacks = dating; div = marriage•Bottom line: it’s capital restructuring11Microsoft’s Biggie•First annual dividend in 2003 (8¢/share);–Double to 16¢ early 2004•July 2004 announced Regular dividend doubled to 32¢ ($3.5 bil)+ $3/share one-time special dividend ($32 bil)+ $30 billion share buybacks over four years•Driven by $56 bil cash, high profits, new tax


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