Download - Session 24
DIVIDENDS: JUST THE FACTS!
Dividends are s9cky.
The Investment DecisionInvest in assets that earn a return
greater than the minimum acceptable hurdle rate
The Financing DecisionFind the right kind of debt for your firm and the right mix of debt and
equity to fund your operations
The Dividend DecisionIf you cannot find investments that make your minimum acceptable rate, return the
cash to owners of your business
Hurdle Rate4. Define & Measure Risk5. The Risk free Rate6. Equity Risk Premiums7. Country Risk Premiums8. Regression Betas9. Beta Fundamentals10. Bottom-up Betas11. The "Right" Beta12. Debt: Measure & Cost13. Financing Weights
Investment Return14. Earnings and Cash flows15. Time Weighting Cash flows16. Loose Ends
Financing Mix17. The Trade off18. Cost of Capital Approach19. Cost of Capital: Follow up20. Cost of Capital: Wrap up21. Alternative Approaches22. Moving to the optimal
Financing Type23. The Right Financing
Dividend Policy24. Trends & Measures25. The trade off26. Assessment27. Action & Follow up28. The End Game
Valuation29. First steps30. Cash flows31. Growth32. Terminal Value33. To value per share34. The value of control35. Relative Valuation
Set Up and Objective1: What is corporate finance2: The Objective: Utopia and Let Down3: The Objective: Reality and Reaction
36. Closing Thoughts
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First Principles
The Investment DecisionInvest in assets that earn a
return greater than the minimum acceptable hurdle
rate
The Financing DecisionFind the right kind of debt for your firm and the right mix of debt and equity to
fund your operations
The Dividend DecisionIf you cannot find investments
that make your minimum acceptable rate, return the cash
to owners of your business
The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used
to fund it.
The return should reflect the
magnitude and the timing of the
cashflows as welll as all side effects.
The optimal mix of debt and equity
maximizes firm value
The right kind of debt
matches the tenor of your
assets
How much cash you can
return depends upon
current & potential
investment opportunities
How you choose to return cash to the owners will
depend on whether they
prefer dividends or buybacks
Maximize the value of the business (firm)
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Steps to the Dividend Decision…
Cashflow from Operations
Cashflows to Debt(Principal repaid, Interest Expenses)
Cashflows from Operations to Equity Investors
Reinvestment back into the business
Cash available for return to stockholders
Cash held back by the company
Cash Paid out
Stock Buybacks
Dividends
How much did you borrow?
How good are your investment choices?
What is a reasonable cash balance?
What do your stockholders prefer?
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I. Dividends are s9cky
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
Dividend Changes at US companies
Increase
Decrease
No change
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II. Dividends tend to follow earnings
0.00
20.00
40.00
60.00
80.00
100.00
120.00
Year 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
S&P 500: Dividends and Earnings -‐ 1960 to 2013
Earnings
Dividends
II. Are affected by tax laws…
In 2003 In the last quarter of 2012 ¨ As the possibility of tax
rates rever9ng back to pre-‐2003 levels rose, 233 companies paid out $31 billion in dividends.
¨ Of these companies, 101 had insider holdings in excess of 20% of the outstanding stock.
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IV. More and more firms are buying back stock, rather than pay dividends...
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V. And there are differences across countries…
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Measures of Dividend Policy
¨ Dividend Payout = Dividends/ Net Income ¤ Measures the percentage of earnings that the company pays in dividends
¤ If the net income is nega9ve, the payout ra9o cannot be computed.
¨ Dividend Yield = Dividends per share/ Stock price ¤ Measures the return that an investor can make from dividends alone
¤ Becomes part of the expected return on the investment.
B DES Page 3 PB Page 41-‐43
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Dividend Payout Ra9os
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
0-‐10% 10-‐20% 20-‐30% 30-‐40% 40-‐50% 50-‐60% 60-‐70% 70-‐80% 70-‐90% 90-‐100% >100%
Dividend Payout RaCos in 2014
Global
US
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Dividend Yields
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
Dividend Yields in 2014
Global
US
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Dividend Yields and Payout Ra9os: Growth Classes
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
0-‐3% 3-‐5% 5-‐10% 10-‐15% 15-‐20% 20-‐25% >25%
Dividend Yields and Payout Ra:os: By Growth Class
Dividend Payout ra9o
Dividend Yield
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Dividend Policy: Disney et al.
Disney Vale Tata Motors Baidu Deutsche Bank Dividend Yield - Last 12 months 1.09% 6.56% 1.31% 0.00% 1.96% Dividend Payout ratio - Last 12 months 21.58% 113.45% 16.09% 0.00% 362.63% Dividend Yield - 2008-2012 1.17% 4.01% 1.82% 0.00% 3.14% Dividend Payout - 2008-2012 17.11% 37.69% 15.53% 0.00% 37.39%
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Read Chapter 10
Task Evaluate how much your company has paid out in dividends, rela9ve to earnings & market cap