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FIN 614: Financial Management Larry Schrenk, Instructor
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1.Free Cash Flow Distributions 2.Types of Dividends 3.The Dividend Process 4.Distribution Policy
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Free cash flow (FCF) Interest payments (after tax) Stock repurchases Stock repurchases Principal repayments Dividends Sales revenues Operating costs and taxes Required investments in operating capital − − = Free Cash Flow: Distributions to Shareholders Purchase of short-term investments Sources Uses
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Many companies pay a cash dividend Public companies often pay quarterly Sometimes firms will pay an extra cash (ad hoc) dividend The extreme case would be a liquidating dividend Companies will often declare stock dividends No cash leaves the firm The firm increases the number of shares outstanding Similar to stock splits Some companies declare a dividend in kind Wrigley’s Gum sends a box of chewing gum Dundee Crematoria offers shareholders discounted cremation
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25 Oct. 1 Nov.2 Nov.5 Nov.7 Dec. Declaration Date Cum- Dividend Date Ex- Dividend Date Record Date Paymen t Date … Declaration Date : The Board of Directors declares a payment of dividends Cum-Dividend Date : Buyer of stock still receives the dividend Ex-Dividend Date : Seller of the stock retains the dividend Record Date : The corporation prepares a list of all individuals believed to be stockholders as of 5 November Payment Date : Dividend is paid to shareholders
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The level of cash distributions to shareholders The form of the distribution (dividend vs. stock repurchase) The stability of the distribution
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The percent of total payouts as a percentage of net income has been stable at around 26%-28%. Dividend payout rates have fallen, stock repurchases have increased. Repurchases now total more dollars in distributions than dividends. A smaller percentage of companies now pay dividends. When young companies first begin making distributions, it is usually in the form of repurchases. Dividend payouts have become more concentrated in a smaller number of large, mature firms.
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IndustryDiv. Yield % Recreational Products0.97 Forest Products1.88 Software2.42 Household Products1.73 Food2.39 Electric Utilities4.43 Banks2.56 Tobacco1.69 Source: Reuters.com, May 2012
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FIN 614: Financial Management Larry Schrenk, Instructor
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