Payout Policy Flashcards
(15 cards)
What is meant by a firm’s payout policy?
The strategy a firm uses to distribute cash to shareholders, via dividends or share repurchases.
How is a dividend different from a share repurchase?
A dividend pays out cash directly; a repurchase reduces share count, potentially increasing share value.
What do M&M say about dividend policy?
In perfect markets, dividend policy does not affect firm value.
What does an increase in dividends signal to investors?
Positive expectations about future earnings.
What does a company’s payout policy refer to?
It’s how a firm chooses to return cash to shareholders, typically through dividends or share repurchases.
What are the primary ways a company pays shareholders?
Dividends – Regular cash payments
Share Repurchases – Company buys back its own shares
What are the four important dates in the dividend timeline?
Declaration Date
Ex-Dividend Date
Record Date
Payment Date
What are the three perspectives on dividend policy?
Neutral: Dividends don’t affect firm value (Modigliani-Miller)
Conservative: Higher dividends increase value
Radical: Dividends reduce value (due to taxes)
What does Modigliani & Miller’s theory say about dividend policy?
In perfect markets, a firm’s value is not affected by its choice of paying dividends or not.
Why might taxes make dividends less attractive?
Dividends are taxed as income, often higher than capital gains, making share repurchases more tax-efficient.
How can dividends signal a company’s financial health?
Dividend Increase = Confidence in future earnings
Dividend Cut = Negative signal to market
What are clientele effects in dividend policy?
Different investor groups prefer different payout methods based on their tax status and income needs.
Why would a firm choose to retain earnings rather than pay dividends?
To invest in future projects
To build reserves
To avoid issuing new equity
How do dividends compare to share repurchases?
Dividends
- Regular, expected income
- Strong signal to market
- Less discretion for firm
Share Repurchases
- Flexible, tax-efficient
- Subtle signal of undervaluation
- Easier to adjust or stop
How has Microsoft managed its payout policy over time?
Initially focused on repurchases
Started paying dividends in 2003
Issued a massive one-time dividend in 2004
Continued increasing both dividends and buybacks
