Dividend Policy and Retained Earnings Chapter 18 Dividend Policy and Retained Earnings

PPT 18-1 FIGURE 18-1 Life cycle growth and dividend policy

TABLE 18-1 Corporate dividend policy PPT 18-2

FIGURE 18-2 Corporate profits and dividends for nonfinancial firms PPT 18-3

PPT 18-4 TABLE 18-3 XYZ Corporation’s financial position before stock dividend

PPT 18-4 TABLE 18-4 XYZ Corporation’s financial position after stock dividend

PPT 18-5 TABLE 18-5 XYZ Corporation’s before and after stock split

PPT 18-6 TABLE 18-6 Financial data of Morgan Corporation

Company Amount ($ millions) Date Announced American Express Company PPT 18-7 TABLE 18-7 Recent examples of share repurchase announcements Company Amount ($ millions) Date Announced American Express Company 3840.0 11/18/2002 Home Depot 2000.0 7/15/2002 Genentech 375.0 8/19/2002 First Health Group Corporation 212.0 12/3/2002 Burlington Northern Santa Fe 81.5 7/1/2002 Ethan Allen 29.4 11/21/2002 Nuevo Energy Company 10.0 1/14/2000 ScanSoft, Inc. 7.0 8/12/2002 ePlus, Inc. 3.7 10/4/2002

Chapter 18 - Outline LT 18-1 Dividends vs. Retained Earnings Life Cycle Growth and Dividends Other Factors Influencing Dividend Policy Cash and Stock Dividends Stock Splits Reverse Stock Splits Repurchase of Stock

Dividends vs. Retained Earnings LT 18-2 A company has to make a choice or decision regarding what to do with its earnings: Either pay them out to shareholders as dividends OR Retain them for reinvestment in the business (retained earnings) There is disagreement as to whether investors prefer dividends or retained earnings

Life Cycle Growth and Dividend Policy LT 18-3 Dividend policy is reflected in 4 stages: Stage I - Development no cash dividends Stage II - Growth stock dividends, low cash dividends Stage III - Expansion stock dividends, low to moderate cash dividends, stock splits Stage IV - Maturity moderate to high cash dividends

Other Factors Influencing Dividend Policy LT 18-4 Legal Rules Cash Position of the Firm Access to Capital Markets Desire for Control Tax Position of Shareholders

Cash and Stock Dividends LT 18-5 Cash dividends are usually paid quarterly Dividend Yield (%): –annual dividend per share / current stock price A stock dividend is a distribution of additional shares of stock There is no benefit from a stock dividend unless total cash dividends increase

Stock Splits LT 18-6 Similar to a stock dividend, by increasing the total shares of stock outstanding Market value of stock is unchanged initially –ex, a 2-for-1 split will double the number of shares outstanding (with each share worth half as much as before) Primary purpose of a stock split is to lower the price into a more popular trading range Stock splits are used if the stock price gets too high

Reverse Stock Splits LT 18-7 A firm exchanges fewer shares for the existing shares Purpose of a reverse stock split is to increase the stock price For example, a 1-for-4 reverse stock split will give the shareholder one new share in place of four old shares Reverse stock splits are used if the stock price gets too high

Repurchase of Stock LT 18-8 May be used as an alternative to paying a cash dividend Often utilized when a firm has excess cash Benefits to the stockholder are the same (in theory) Other reasons for repurchase: –belief that the stock is selling at a low price – may be used for employee stock options – reduces the possibility of being taken over by another firm