DIVIDENDS:

JUST THE FACTS!

Dividends are s9cky.

Set Up and Objective

1: What is corporate finance
2: The Objective: Utopia and Let Down
3: The Objective: Reality and Reaction
The Investment Decision
Invest in assets that earn a return
greater than the minimum acceptable
hurdle rate
Hurdle Rate

4. Define & Measure Risk

5. The Risk free Rate
6. Equity Risk Premiums
7. Country Risk Premiums
8. Regression Betas
9. Beta Fundamentals
10. Bottom-up Betas
11. The "Right" Beta
12. Debt: Measure & Cost
13. Financing Weights

The Financing Decision

Find the right kind of debt for your
firm and the right mix of debt and
equity to fund your operations

Financing Mix
17. The Trade off
18. Cost of Capital Approach
19. Cost of Capital: Follow up
20. Cost of Capital: Wrap up
21. Alternative Approaches
22. Moving to the optimal
Financing Type
23. The Right Financing

Investment Return
14. Earnings and Cash flows
15. Time Weighting Cash flows
16. Loose Ends

36. Closing Thoughts

The Dividend Decision

If you cannot find investments that make
your minimum acceptable rate, return the
cash to owners of your business

Dividend Policy
24. Trends & Measures
25. The trade off
26. Assessment
27. Action & Follow up
28. The End Game

Valuation
29. First steps
30. Cash flows
31. Growth
32. Terminal Value
33. To value per share
34. The value of control
35. Relative Valuation

First Principles
Maximize the value of the business (firm)

The Investment Decision

Invest in assets that earn a
return greater than the
minimum acceptable hurdle
rate

The hurdle rate

should reflect the
riskiness of the
investment and
the mix of debt
and equity used
to fund it.

The return should

reflect the
magnitude and
the timing of the
cashflows as welll
as all side effects.

The Financing Decision

Find the right kind of debt
for your firm and the right
mix of debt and equity to
fund your operations

The optimal
mix of debt
and equity
maximizes firm
value

The right kind

of debt
matches the
tenor of your
assets

The Dividend Decision

If you cannot find investments
that make your minimum
acceptable rate, return the cash
to owners of your business

How much
cash you can
return
depends upon
current &
potential
investment
opportunities

How you choose

to return cash to
the owners will
depend on
whether they
prefer dividends
or buybacks

Steps to the Dividend Decision

How much did you borrow?
Cashflows to Debt
(Principal repaid,
Interest
Expenses)
Cashflow
from
Operations

How good are your investment choices?

Reinvestment back
into the business
What is a reasonable cash balance?

Cashflows from
Operations to
Equity Investors

Cash held back

by the company

Cash available
for return to
stockholders

What do your
stockholders prefer?
Stock Buybacks
Cash Paid out

Dividends

I. Dividends are s9cky

Dividend Changes at US companies
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%

Increase
Decrease
No change

20.00%
10.00%
0.00%

II. Dividends tend to follow earnings

S&P 500: Dividends and Earnings - 1960 to 2013

120.00

100.00

80.00

2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
1965
1964
1963
1962
1961
1960
Year
0.00

Earnings
60.00

Dividends
40.00

20.00

II. Are aected by tax laws

In 2003

In the last quarter of 2012

As the possibility of tax
rates rever9ng back to
pre-2003 levels rose, 233
companies paid out $31
billion in dividends.
Of these companies, 101
had insider holdings in
excess of 20% of the
outstanding stock.

IV. More and more rms are buying back stock,

rather than pay dividends...

V. And there are dierences across countries

Measures of Dividend Policy

Dividend Payout = Dividends/ Net Income

Measures the percentage of earnings that the company

pays in dividends
If the net income is nega9ve, the payout ra9o cannot be
computed.

Dividend Yield = Dividends per share/ Stock price

Measures the return that an investor can make from

dividends alone
Becomes part of the expected return on the investment.
B DES Page 3
PB Page 41-43
10

Dividend Payout Ra9os

Dividend Payout RaCos in 2014
18.00%
16.00%
14.00%
12.00%
10.00%

Global
US

8.00%
6.00%
4.00%
2.00%
0.00%
0-10%

10-20%

20-30%

30-40%

40-50%

50-60%

60-70%

70-80%

70-90%

90-100%

>100%

11

Dividend Yields
Dividend Yields in 2014
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%

Global
US

6.00%
4.00%
2.00%
0.00%

12

Dividend Yields and Payout Ra9os: Growth Classes

Dividend Yields and Payout Ra:os: By Growth Class
50.00%

4.00%

45.00%

3.50%

40.00%
3.00%
35.00%
2.50%

30.00%
25.00%

2.00%

Dividend Payout ra9o

Dividend Yield

20.00%

1.50%

15.00%
1.00%
10.00%
0.50%

5.00%
0.00%

0.00%
0-3%

3-5%

5-10%

10-15%

15-20%

20-25%

>25%

14

Dividend Policy: Disney et al.

Disney Vale
Dividend Yield - Last 12 months

1.09%

Tata Motors Baidu Deutsche Bank

6.56%

1.31% 0.00%

1.96%

Dividend Payout ratio - Last 12 months 21.58% 113.45%

Dividend Yield - 2008-2012
1.17%
4.01%

16.09% 0.00%
1.82% 0.00%

362.63%
3.14%

Dividend Payout - 2008-2012

15.53% 0.00%

37.39%

17.11%

37.69%

15

Task
Evaluate how
much your
company has
paid out in
dividends,
rela9ve to
earnings &
market cap

16

Read
Chapter 10