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

3

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)

4

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?

5

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  

6

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.    

8

IV.  More  and  more  firms  are  buying  back  stock,  rather  than  pay  dividends...  

9

V.  And  there  are  differences  across  countries…  

10

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  

11

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  

12

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  

14

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  

15

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%

16

Read  Chapter  10  

Task  Evaluate  how  much  your  company  has  paid  out  in  dividends,  rela9ve  to  earnings  &  market  cap