DIVIDEND POLICY

LEARNING OBJECTIVE
1. Practical and legal constraints 2. Dividend Policies Stable dividend policy Constant payout ratio Other dividend options Capital returns Dividend reinvestment plans Special dividends Bonus share issue Share splits

Cont
3. Steps in dividend payment 4. Imputation and capital gains tax 5. The effects of dividends on share price 6. The residual dividend policy theory Modiglini and miller dividend irrelevance theory Gordon and lintner dividend relevance theory 7. External finance decisions

1. Practical and legal constraints

Firms dividend policy a plan of action with the objectives of: a) Maximizing the wealth of the firms owners b) Providing for sufficient financing Factors need to be considered: accounting, liquidity, finance, growth and market performance

2. Dividend policies
Dividend is an amount/ distribution paid by a company to its SHs. This distribution is made out of earnings; the dividend may be paid out of current earnings or out of retained earnings Tend to use 1 or 2 diividend policy for financial needs of firm & shs

Stable dividend policy Share splits

Constant payout ratio

Bonus share issue

DIVIDEND POLICIES

Other dividend options

Special dividends Dividend reinvestm ent plans

Capital returns

Stable dividend policy

Large majority of Australian (and overseas) companies adopt a stable dividend policy. This conservative, traditional policy approach means that a regular amount will be paid to shs each year Such regular amounts are expressed as cents per share A stable dividend policy means that shs are aware of what they are likely to receive by way of dividend. Dividends are frequently satisfied by two payments per year, an interim payment in the early part of financial year, and a final dividend after the end of the financial year. Dividend stability is often perceived as very desirable

example

Constant dividend payout ratio

Some companies may offer shs a proportion of profits, for a period, as an incentive. This style of policy is more likely from a more risky enterprise, and very few companies follow this policy. As profits fluctuate the dividend payout would vary

example

Other dividend options

Capital return As the name suggests a capital return is where a company returns an amount of cash to its shs. Capital returns cans arise under a number of circumstances: 1. A co may have large amounts of excess cash and is unable to find an appropriate investment at the rigt price 2. A company has sold an asset or assets 3. A company receives a one-off windfall gain 4. Example next slide Low Regular Dividend Plus Extras A company may choose to pay low dividend in lean years and pay higher dividends in good years

example

Non cash dividends

Dividend reinvestment plans (DRP) Special dividend

Bonus share issue

Share splits

Equal access buybacks

Selective buybacks

Other types of buy backs

Forms & lodgement requirements

Summary of buy-back procedures

solvency

Dividend reinvestment plans (DRP)

These sheme allow shs to use their dividends to purchase new shares in the firm. As incentive, companies often allow a small discount on shares and may allow investors to acquire additional shares without transaction charges

example

Special dividend
Some companies with excess cash on their books may choose to pay proportion of this cash to shs in the form of a special dividend Special dividends may be paid under the same circumstances as a capital return. The difference to shs will be the way in which it is taxed

example

Bonus share issue

A bonus share issue is simply a dividend paid in the form of shares. Shares are issued on a pro-rata basis according to their existing holding for example, a bonus share issue of one share for very four held Example A co with 1,000,000 shares on issue completes a one for four bonus issue. This would result in 250,000 extra shares being issued

Share splits
A share split is a means of increasing the number of shares on issue. This may be achieved by issuing two new shares for each one previously held Example; Harvey Ltd. the board has received a number of requests from shs seeking a share split and i am pleased to report that we will be asking shs to consider a 5 for 1 split at our gemenral meeting on 23 may 2011

Share buy backs

Is where the company makes decision to buy back its own shares Can be done either on/off market and must be approved by shs On market buy backs are often given a maximum amount to be bought back and a timeframe to complete the buy back

Reasons buy back:

Will achieve a greater Earning per Share ratio (EPS) there will be less shares on issue Each of shares becomes more valuable & represents a greater percentage of equity in the company Buying back its shares is more beneficial than paying a dividend

Steps in dividend payment

Ex-div Dividend terms Cum-div

The declaration date

The closure of the register & date of record

Ex-dividend date

Date of payment

Dividend terms Cum-div

If a share is referred to as cumdiv it means that if you are holding that share you will be entitled to a dividend in the near future

Ex-div
If a share referred to as ex-div it means that if you are holding it the share has just paid a dividend and if you purchase the share you are not entitled to that dividend The market automatically adjusts for dividend paid. The share price reaction of share on the ex-date is dictated by the amount of the dividend and the tone of the market on the day Eg: a co pays a dividend of $0.30 per share on a day that the market has a large rise. The companys shares actually rise by $0.15 on the day reflecting an actual rise of $0.45 (0.30 + 0.15). The opposite could occur if the market falls on the day, the share could fall by more than the dividend amount The ususal dividend payment procedure is that dividends are paid as an interim dividend duirng the year, and a final dividend is paid when end-of year financial material is avaiable. The term dividend in financial management terms refers to distribution from porfits

The procedural steps are:

The declaration date

The board of directors (BOD) resolves to pay an interim dividend during the year. The date on which this is declared is the declaration date. At the AGM, the directors recommendation for the final dividend is considered. Acceptance by member is recorded as the declaration date

The closure of the register and date of record

It is obvious