Payout Policy

Question 1

When can a dividend be paid?

Answer 1

Question 2

Describe several important terms in regards to the dividend payment process.

Answer 2

a) “announcement date” is the date on which the company releases the forthcoming dividend amount, record date and payment date; also known as the “declaration date”.
b) “cum-dividend price” is a share price after the dividend announcement (declaration) but before the ex-dividend date. Anyone buying the share in this period will receive the forthcoming dividend.
c) “ex-dividend date”: from the start of trading on the ex-dividend date, anyone buying the share will not receive the forthcoming dividend; on the ASX, the stock will continue to be marked “ex-dividend” until the dividend payment date.
d) “record date”: occurs shortly after the ex-dividend date. It is the date on which the list of shareholders qualifying for the dividend is finalised. In effect, anyone who buys before the ex-dividend date is guaranteed that they will have their name on that list, and anyone who buys on or after the ex-dividend date is guaranteed that they will not have their name on that list.

Question 3

What is a home-made dividend? How is it different from a normal dividend?

Answer 3

A “home-made” dividend is when a shareholder sells some of their shares in order to receive some cash from their investment, even if the company has not paid a dividend.

The three main differences are as follows.

1. The shareholder loses proportionate voting power; this does not occur when the company pays a dividend.
2. The shareholder has to pay transaction costs (eg brokerage) when they sell their shares; this does not occur when the company pays a dividend. (But, there are transaction costs payable by the company when a dividend is paid, such as bank fees, clerical costs etc, and ultimately these are borne by shareholders).
3. There may be different tax consequences. Selling shares may incur capital gains tax; receiving a dividend may provide franking credits. For most shareholders, this difference is probably by far the most important.

Question 4

Recall the various dividend policy.

Answer 4

Question 5

Mention the reasons a company may undertake a share buyback.

Answer 5

1. Signalling and undervaluation
   
   • If it believes the market price undervalues the shares
2. Financial flexibility
   
   • Interpreted as a short-term policy, so when discontinued is not misinterpreted as a negative signal.

Question 6

Mention the types of share buy-back.

Answer 6

Question 7

Recall informations regarding CGT.

Answer 7

Question 8

Recall the relationship of the after-tax return to shareholders to both the dividend payout ration and the personal tax rate.

Answer 8