Dividend and Dividend Policies

What is
Dividend?
A dividend is the
cash, stock, or any
type of property a
corporation distributes
to its shareholders.
Dividend per share = Common Stock Dividends
÷ Number of common shares
outstanding

Dividend per share = PhP 3,600,000,000

÷ 133,619,207 common shares

Divident per share = PhP 26.94 / common

share
Common Stock Dividends = Dividend per share
X Number of common shares
outstanding

Common Stock Dividends = PhP 1.35

X 3,361,047,000 common shares

Common Stock Dividends = PhP 4,537,413,450

Common stock dividends given amounting to PhP 865,463,365.26
Number of common shares outstanding = Common Stock Dividends
÷ Dividend
per share

Number of common shares outstanding = PhP

865,463,365.26
÷ PhP
0.78

Number of common shares outstanding = 1,109,568,417

Earning Per Share = Net Income - Preferred
Dividends
÷ Number of common shares
outstanding
Dividend Payout Ratio = Dividend per
share
÷ Earnings per share

Dividend Payout Ratio = 27

÷ 41.26

Dividend Payout Ratio = 0.65

Dividend Payout Ratio = Dividend per
share
÷ Earnings per share

Dividend Payout Ratio = 0.78

÷ -10.43

Dividend Payout Ratio = -0.07

 Dividend
Reinvestment
Plan
Dividend Reinvestment Plan
(DRP) is a program that allows
shareholders to reinvest their
dividends, buying additional
shares of stock of the company
instead of receiving the cash
dividend.
Stock
Distributions

1. Stock dividend
2. Stock Split
Stock dividend is the
distribution of additional shares
of stock to shareholders. Stock
dividends are generally stated
as a percentage of existing
share holdings.
So why pay a stock
dividend?
1. Provide information
to the market
2. Reduce the price
of the stock
Suppose an investor owns
1,000 shares, each worth 50
per share, for a total
investment of 50,000. If the
corporation pays the investor
a 5% stock dividend.
Stock split is something like a
stock dividend. A stock split
splits the number of existing
shares into more shares.
So why split stock?
 1. Like a stock
dividend, the split
reduces the trading
price of shares
Dividend
Policy
 There are several basic ways of
describing a corporation’s dividend policy:

1. No dividends.
2. Constant growth in dividends per share.
3. Constant payout ratio.
4. Low regular dividends with periodic extra
dividends.
Many corporations are reluctant to
cut dividends because the
corporation’s share price usually
falls when a dividend reduction is
announced.
Dividend Views
1. The Dividend Irrelevance
Theory
2. The “Bird in the Hand” Theory
3. The Tax-Preference
Explanation
4. The Signaling Explanation
5. The Agency Explanation
The Dividend Irrelevance Theory

The payment of dividends does not

affect the value of the firm since the
investment decision is independent
of the financing decision.
The “Bird in the Hand” Theory

Investors prefer a certain dividend

stream to an uncertain price
appreciation.
The Tax-Preference Explanation

Due to the way in which dividends

are taxed, investors should prefer
the retention of funds to the payment
of dividends.
The Signaling Explanation

Dividends provide a way for the

management to inform investors
about the firm's future prospects.
The Agency Explanation

The payment of dividends

forces the firm to seek more
external financing, which
subjects the firm to the
scrutiny of investors.
 Stock
Repurchases
Methods of Stock
Repurchase
1. Tender Offer
2. Open market purchases
3. Targeted block
repurchase
Tender offer is an offer made
to all shareholders, with a
specified deadline and a
specified number of shares the
corporation is willing to buy
back.
Open Market Purchases

A corporation may also buy

back shares directly in the open
market. This involves buying
the shares through a broker.
Targeted block repurchase

The third method of

repurchasing stock is to buy it
from a specific shareholder.
This involves direct negotiation
between the corporation and
the shareholder.
Reasons for
Stock
Repurchase
1. Repurchase is a way to
distribute cash to shareholders
at a lower cost to both the firm
and the shareholders than
dividends.
2. Increase earnings per share.
A company that repurchases its
shares increases its earnings
per share simply because there
are fewer shares outstanding
after the repurchase.
3. Tilt the debt to equity ratio so
as to increase the value of the
company.
Example. Company A: Balance Sheet

Before SR % After SR %

Assets 100,000,000 100%

Liabilities 50,000,000 50%

Owners’ 50,000,000 50%

Equity
Benefits from tax deductible
interest on debt outweigh the
cost of increasing the risk of
bankruptcy — repurchasing
stock may increase the value of
the firm.
4. Reduces total dividend
payments. If the corporation cuts
down on the number of shares
outstanding, the corporation can
still pay the same amount of
dividends per share, but the total
dividend payments are reduced.
Repurchasing shares tends
to shrink the firm: Cash is
paid out and the value of the
firm is smaller.

Then, can we still say that

repurchasing shares is
consistent with wealth
maximization?
Financial Strategy
and Financial
Planning