Week 11 - Payout Policy

Payout Policy

How much cash should a corporation distribute to its shareholders?
How should this cash be distributed: through cash dividends or by repurchasing shares?

Cash Dividend: Regular cash payments that tend to increase steadily with earnings. These are rarely cut back.
- Managers are hesitant to increase dividends unless confident they can be maintained.
Stock Repurchase (Share Buybacks): Provides shareholders with cash and offers more flexibility.
- Often tax-advantaged.
- Have grown significantly in the last 30 years and now rival dividends in importance in the U.S.

Dividends are generally more stable than repurchases.
Repurchases experienced sharp cuts during the banking crisis of 2007-2009 and the COVID-19 pandemic.
Dividends also decreased during these periods, but to a lesser extent than repurchases.
Cash-rich corporations may undertake substantial repurchase programs while increasing dividends.
A significant percentage of firms (40.1% from 2011-2020) do not pay dividends or repurchase shares.
- These are often growth companies like Berkshire Hathaway, Alphabet, and Amazon.

Cash Dividend: A payment/distribution of cash by a firm to its shareholders.
- Regular cash dividends are typically paid each quarter or semi-annually.
- May be supplemented by a one-off extra or special dividend.
Declaration Date: The date the company announces the dividend.
- In Australia, there are typically two announcements per year: Interim and Final.
Ex-Dividend Date: The date determining which stockholder is entitled to the dividend payment.
- Shares trade cum-dividend prior to this date.
- Generally, the stock price falls by the amount of the dividend on the ex-dividend date.
Record Date: The date on which the person who owns the stock (registered owner) receives the dividend.
Payment Date: The date when dividend checks are mailed to shareholders.
Dividend Reinvestment Plan (DRPs or DRIPs): Allows investors to reinvest their dividends in the company rather than receive cash.
- Often, new shares are issued at a small discount (e.g., 5%) from the market price.

Stock Dividend: Distribution of additional shares to a firm’s stockholders.
- Example: A 5% stock dividend means a shareholder receives five extra shares for every 100 shares owned.
Stock Splits: Issuance of additional shares to a firm’s stockholders, similar in effect to a stock dividend.
- Both stock splits and stock dividends increase the number of shares outstanding but do not affect the company's assets, profits, or total value.
- Consequently, both reduce the value per share.
Stock Repurchase or Share Buy-back: The firm uses cash to repurchase shares instead of paying dividends.

The firm’s board of directors declares the dividend.
The dividend announcement specifies payment to all stockholders registered on a particular record date.
Stocks are typically bought or sold with dividend (cum dividend) until two business days before the record date, after which they trade ex-dividend.
Generally, the stock price decreases by the amount of the dividend on the ex-dividend date.
Checks are mailed to shareholders on the payment date.

Includes declaration date, ex-dividend date, record date, and payment date.
The share price typically falls two trading days before the record date.
The time between the declaration date and the payment date is about one month on average.
Share trades cum-dividend until the ex-dividend date.

Includes the declaration date (December 11, 2020), ex-dividend date (January 28, 2021), record date (January 29, 2021), and payment date (March 5, 2021).
Pfizer declared a regular quarterly dividend of 0.39 per share.

Stock Repurchase: A firm buys back its own stock from shareholders.
Four methods of stock repurchase:
1. Buy shares on the market
2. Tender offer to shareholders
3. Dutch auction
4. Private negotiation (Green Mail)