KEBIJAKAN DEVIDEN (english version)

  KEBIJAKAN KEBIJAKAN DIVIDEN DIVIDEN

mustikalukmanarief

mustikalukmanarief

Dilema: Untuk apa sebaiknya Dilema: Untuk apa sebaiknya perusahaan menggunakan laba? perusahaan menggunakan laba?

   Membiayai investasi baru yang Membiayai investasi baru yang menguntungkan? menguntungkan?

   atau atau

  

Membayar dividen untuk pemegang

  

Membayar dividen untuk pemegang

saham? saham?

Pembayaran Dividen

  

Pembayaran Dividen

  Announcement date Ex-dividend _day ^Record _day ^Payment _day 2-3 weeks _{2-3 days} ^{2-3 weeks}

  

Penurunan harga pada Ex-date

Penurunan harga pada Ex-date

_{-t . . . –2 –1 0 +1 +2 . . . t}

Ex date

  Price =$10 _{Price =$9}

• The share price will fall by the amount of the dividend on the ex date (Time 0).

• • If the dividend is $1 per share, the price will be

  equal to $10 – 1 = $9 on the ex date.

• • Before ex date (Time –1) Dividend = $0 Price =

   Bila perusahaan menahan semua laba untuk Bila perusahaan menahan semua laba untuk investasi yang mendatangkan laba, dividend investasi yang mendatangkan laba, dividend yield akan 0, yield akan 0, namun harga saham akan namun harga saham akan

meningkat, menghasilkan capital gain yang lebih

meningkat, menghasilkan capital gain yang lebih

tinggi. tinggi. P P

  1

  1 - Po D - Po D

  1

  1 Po Po Po Po + Return = Return =

  

Bila perusahaan membayarkan laba sebagai

  

Bila perusahaan membayarkan laba sebagai

dividen, pemegang saham akan menerima dividen, pemegang saham akan menerima kas atas investasi yang ditanamkan, kas atas investasi yang ditanamkan, namun namun

capital gain akan menurun, karena kas yang

capital gain akan menurun, karena kas yang

sama tidak diinvestasikan ke dalam sama tidak diinvestasikan ke dalam perusahaan. perusahaan. P P

  1

  1 - Po D - Po D

  1

  1 Po Po Po Po + Return = Return = Apakah investor lebih menyukai tingkat

  Apakah investor lebih menyukai tingkat

  pembayaran dividen tinggi atau rendah?

  pembayaran dividen tinggi atau rendah? 

  Dividends are irrelevant Dividends are irrelevant

  : : _ Investors don’t care about payout.

  Investors don’t care about payout. _ Bird-in-the-hand Bird-in-the-hand

  : : _ Investors prefer a high payout.

  Investors prefer a high payout. _ Tax preference Tax preference

  : : _ Investors prefer a low payout, hence growth.

  Investors prefer a low payout, hence growth.

  

Dividend Payout Ratios for

Value Line’s Selected Industries

Industry

  Payout ratio Banking

  38.29 Computer Software Services

  13.70 Drug

  38.06 Electric Utilities (Eastern U. S.)

  67.09 Internet n/a Semiconductors

  24.91 Steel

  51.96 Tobacco

  55.00 Water utilities

  67.35

  

Early evidence on dividend policy:

Early evidence on dividend policy:

  

Lintner’s (1956) stylized facts

Lintner’s (1956) stylized facts

_

  Lintner (1956) in a series of interviews with Lintner (1956) in a series of interviews with corporate managers observed the following facts corporate managers observed the following facts _

  

Firms have long-run target dividend payout ratios;

Firms have long-run target dividend payout ratios;

mature companies pay out a high proportion of their mature companies pay out a high proportion of their earnings, while young companies have low payouts

  _ earnings, while young companies have low payouts Managers focus more on dividend changes than on

  Managers focus more on dividend changes than on absolute levels

  _ absolute levels Dividend changes follow shifts in long-run, sustainable

  Dividend changes follow shifts in long-run, sustainable earnings; managers “smooth” dividends

  _ earnings; managers “smooth” dividends Managers are reluctant to make dividend changes that

  Managers are reluctant to make dividend changes that might have to be reversed might have to be reversed

The dividend debate: Does The dividend debate: Does dividend policy matter? dividend policy matter?

  _ The issue

  The issue : Should a firm be preoccupied with its dividend

  : Should a firm be preoccupied with its dividend policy? Does the choice of dividend policy affect firm policy? Does the choice of dividend policy affect firm value?

  _ value? Dividends are irrelevant

  Dividends are irrelevant : M & M (1961) showed that, under

  : M & M (1961) showed that, under certain assumptions, dividends do not really matter certain assumptions, dividends do not really matter because they do not affect firm value

  _ because they do not affect firm value Dividends are bad

  Dividends are bad : Dividends create a tax disadvantage

  : Dividends create a tax disadvantage for shareholders and destroy value

  _ for shareholders and destroy value Dividends are good

  Dividends are good : Dividends are good because

  : Dividends are good because shareholders (or some of them) prefer to receive them shareholders (or some of them) prefer to receive them rather than not rather than not

  

Dividend Irrelevance Theory

Dividend Irrelevance Theory

   Investors are

  Investors are indifferent indifferent between dividends and between dividends and retention-generated capital gains. If they want retention-generated capital gains. If they want cash, they can sell stock. If they don’t want cash, they can sell stock. If they don’t want cash, they can use dividends to buy stock. cash, they can use dividends to buy stock. _

  Modigliani-Miller (1961) Modigliani-Miller (1961) support irrelevance. support irrelevance. _

  Theory is based on unrealistic assumptions (no Theory is based on unrealistic assumptions (no

taxes or brokerage costs), hence may not be

taxes or brokerage costs), hence may not be true. Need empirical test. true. Need empirical test.

  

M & M: Dividends are irrelevant

M & M: Dividends are irrelevant

   Assume that

  Assume that _ There are no transaction costs from converting

  There are no transaction costs from converting price appreciation into cash

  _ price appreciation into cash Firms that pay too much in dividends can issue

  Firms that pay too much in dividends can issue stock that is fairly priced and do not face stock that is fairly priced and do not face transaction costs

  _ transaction costs The firm’s investment decision is not affected by

  The firm’s investment decision is not affected by its dividend decision and operating cash flows its dividend decision and operating cash flows are the same in each period

  _ are the same in each period Managers of firms that pay too little in dividends

  Managers of firms that pay too little in dividends do not waste excess cash

  

Two alternative views:

Two alternative views:

  

Dividends matter

_ Dividends are good

Dividends matter

  Dividends are good _ The clientele argument

  The clientele argument _ Dividends as signals

  Dividends as signals _ Dividends may discipline managers

  Dividends may discipline managers 

  Dividends are bad Dividends are bad _

  Taxes: whenever dividends are taxed more heavily Taxes: whenever dividends are taxed more heavily than capital gains, firms should pay the lowest cash than capital gains, firms should pay the lowest cash dividend they can get away with and earnings should dividend they can get away with and earnings should be retained or used to repurchase shares be retained or used to repurchase shares

  

Bird-in-the-Hand Theory

Bird-in-the-Hand Theory

  

  Investors think dividends are Investors think dividends are less risky

  less risky

  than potential future capital gains, hence than potential future capital gains, hence they like dividends. they like dividends. _

  If so, investors would value high payout If so, investors would value high payout firms more highly, i.e., a high payout firms more highly, i.e., a high payout would result in a would result in a high P

  high P .

  .

  

Dividends are “good”

Dividends are “good”

  The Clientele argument The Clientele argument 

  There are stockholders who like dividends, either because There are stockholders who like dividends, either because

they value the regular cash payments or because they do

they value the regular cash payments or because they do

not face the tax disadvantage

  _ not face the tax disadvantage Given the fact that there is a vast diversity among investors

  Given the fact that there is a vast diversity among investors in terms of preferences, it is no surprise that investors may in terms of preferences, it is no surprise that investors may form clienteles based upon their tax brackets

  _ form clienteles based upon their tax brackets

Thus, investors will cluster around firms whose dividend

  

Thus, investors will cluster around firms whose dividend

policies match their preference (called the policies match their preference (called the clientele effect clientele effect

  ) ) Dividends as signals Dividends as signals 

  By changing their dividend policy, firms send signals By changing their dividend policy, firms send signals about their future cash flows to market participants

  _ about their future cash flows to market participants When firms increase dividends, they somehow commit to

  When firms increase dividends, they somehow commit to those higher dividends, and, thus, send a signal that they those higher dividends, and, thus, send a signal that they expect to have higher future cash flows (share price expect to have higher future cash flows (share price increases)

  _ increases) Given that firms do not like to cut dividends, firms that are

  Given that firms do not like to cut dividends, firms that are forced to do so send a signal that their financial future is

forced to do so send a signal that their financial future is Dividends discipline managers Dividends discipline managers 

  In firms with principal-agent problems between In firms with principal-agent problems between

stockholders and managers and the potential of free

stockholders and managers and the potential of free

cash flows being wasted, making a commitment to pay cash flows being wasted, making a commitment to pay dividends imposes discipline on managers dividends imposes discipline on managers

  

Dividends are “bad”

Dividends are “bad”

   If dividends are taxed differently than capital gains

  If dividends are taxed differently than capital gains (dividends taxed as ordinary income) and the

  (dividends taxed as ordinary income) and the

marginal tax rate of dividends is higher than that

marginal tax rate of dividends is higher than that

of capital gains, there exists a tax disadvantage

of capital gains, there exists a tax disadvantage

for those stockholders who receive dividends

  _ for those stockholders who receive dividends Even if ordinary income and capital gains are

  Even if ordinary income and capital gains are taxed the same, dividends have a tax taxed the same, dividends have a tax

disadvantage because investors do not have the

disadvantage because investors do not have the

choice of when to report the dividend as it is the

choice of when to report the dividend as it is the

case with capital gains case with capital gains

  Tax Preference Theory Tax Preference Theory

  

Retained earnings lead to capital gains,

  

Retained earnings lead to capital gains,

which are taxed at which are taxed at lower rates lower rates than than dividends: 28% maximum vs. up to dividends: 28% maximum vs. up to

  38.6%. Capital gains taxes are also 38.6%. Capital gains taxes are also deferred deferred .

  . _ This could cause investors to prefer firms

  This could cause investors to prefer firms with low payouts, i.e., a high payout with low payouts, i.e., a high payout results in a results in a low P low P .

  .

   The tax disadvantage of dividends leads to the

  The tax disadvantage of dividends leads to the following conclusions following conclusions

  

Firms whose stockholders are primarily individuals

  

Firms whose stockholders are primarily individuals

should pay a lower dividend compared to firms that

should pay a lower dividend compared to firms that

are mainly owned by institutional investors (they are

are mainly owned by institutional investors (they are

under a tax-exempt status)

  _ under a tax-exempt status) The higher the income level of the firm’s investors, the

  The higher the income level of the firm’s investors, the lower the dividend paid by the firm should be

  _ lower the dividend paid by the firm should be

As the tax disadvantage of dividends increases, the

  

As the tax disadvantage of dividends increases, the

aggregate amount of dividends paid should decrease aggregate amount of dividends paid should decrease

  

Some “not so good” reasons for

paying dividends

paying dividends

Some “not so good” reasons for

  The Bird-in-the-hand fallacy The Bird-in-the-hand fallacy 

  

Risk-averse investors may prefer the certainty of dividend

Risk-averse investors may prefer the certainty of dividend

payments over the uncertainty of capital gains payments over the uncertainty of capital gains

   The proper comparison is between dividends today and an

  The proper comparison is between dividends today and an almost equivalent amount of price appreciation today almost equivalent amount of price appreciation today

   The evidence shows that share prices drop on the ex-

  The evidence shows that share prices drop on the ex- dividend day (firms that pay dividends experience a decline dividend day (firms that pay dividends experience a decline in their share price on that day) The excess cash hypothesis The excess cash hypothesis 

  A firm has excess cash in a year and decides to return it A firm has excess cash in a year and decides to return it to its stockholders through a dividend (assuming no to its stockholders through a dividend (assuming no investment projects in that year)

  _ investment projects in that year) If the lack of investment projects is temporary, then firm

  If the lack of investment projects is temporary, then firm

should consider future financing needs and the cost of

should consider future financing needs and the cost of

raising capital

  _ raising capital Why not return the excess cash through a share

  Why not return the excess cash through a share

repurchase, given the evidence on firms’ reluctance to

repurchase, given the evidence on firms’ reluctance to

change dividends? change dividends?

  

Double taxation of dividends

Double taxation of dividends

   The issue

  The issue : Corporate income was taxed twice, at the

  : Corporate income was taxed twice, at the corporate level and at the stockholder level corporate level and at the stockholder level

   Corporate earnings were taxed at 35% and shareholders

  Corporate earnings were taxed at 35% and shareholders receiving dividends were also faced with marginal tax rates as receiving dividends were also faced with marginal tax rates as

high as 38.6% (combined tax rate could be as high as 60%)

high as 38.6% (combined tax rate could be as high as 60%)

   In the US, The Bush administration passed legislation that

  In the US, The Bush administration passed legislation that

would limit the tax rates for dividends to a maximum of 15%

would limit the tax rates for dividends to a maximum of 15%

during the period 2003-2008 during the period 2003-2008

   The capital gains tax was also reduced from 20% to 15%

  The capital gains tax was also reduced from 20% to 15%

  “ “

  

Signaling,” hypothesis?

Signaling,” hypothesis?

  

  Managers hate to cut dividends, so won’t Managers hate to cut dividends, so won’t raise dividends unless they think raise is raise dividends unless they think raise is sustainable. So, investors view dividend sustainable. So, investors view dividend increases as increases as

  signals signals

  of management’s view of management’s view of the future. of the future. _

  Therefore, a stock price increase at time of Therefore, a stock price increase at time of a dividend increase could reflect higher a dividend increase could reflect higher expectations for future EPS, not a desire expectations for future EPS, not a desire

  The “clientele effect” The “clientele effect”

   Different groups of investors, or clienteles,

  Different groups of investors, or clienteles, prefer different dividend policies. prefer different dividend policies. _

  

Firm’s past dividend policy determines its

Firm’s past dividend policy determines its

current clientele of investors. current clientele of investors. _

  Clientele effects impede changing dividend Clientele effects impede changing dividend policy. Taxes & brokerage costs hurt policy. Taxes & brokerage costs hurt

investors who have to switch companies.

investors who have to switch companies.

  

The “residual dividend model”

The “residual dividend model”

  

  Find the retained earnings needed for Find the retained earnings needed for the capital budget. the capital budget. _

  Pay out any leftover earnings (the Pay out any leftover earnings (the residual) as dividends. residual) as dividends. _

  This policy minimizes flotation and equity This policy minimizes flotation and equity signaling costs, hence minimizes the signaling costs, hence minimizes the WACC.

  WACC.

  

Using the Residual Model to Calculate

Dividends Paid

Dividends = – .

  Net income Target equity ratio Total capital budget

[

  ]) )( ( Data for SSC Data for SSC

   Capital budget: $800,000. Given.

  Capital budget: $800,000. Given. _ Target capital structure: 40% debt,

  Target capital structure: 40% debt, 60% equity. Want to maintain. 60% equity. Want to maintain. _ Forecasted net income: $600,000.

  Forecasted net income: $600,000. _ How much of the $600,000 should we

  How much of the $600,000 should we pay out as dividends? pay out as dividends?

  

Of the $800,000 capital budget, 0.6($800,000) =

$480,000 must be equity to keep at target

capital structure. [0.4($800,000) = $320,000 will

be debt.] With $600,000 of net income, the residual is $600,000 - $480,000 = $120,000 = dividends paid. Payout ratio = $120,000 /$600,000 = 0.20 = 20% .

  How would a drop in NI to

How would a drop in NI to

  

$400,000 affect the dividend?

$400,000 affect the dividend?

  

A rise to $800,000?

A rise to $800,000?

  

  NI = $400,000

  NI = $400,000

  : Need $480,000 of : Need $480,000 of equity, so should retain the whole equity, so should retain the whole $400,000. Dividends = 0.

  $400,000. Dividends = 0. _ NI = $800,000

  NI = $800,000

  : Dividends = $800,000 : Dividends = $800,000

• $480,000 = $320,000. Payout =
• $480,000 = $320,000. Payout = $320,000/$800,000 = 40%.

  $320,000/$800,000 = 40%.

  

How would a change in

How would a change in

investment opportunities affect

investment opportunities affect

dividend under the residual policy dividend under the residual policy

  ? ? _

  Fewer good investments would lead to Fewer good investments would lead to smaller capital budget, hence to a higher smaller capital budget, hence to a higher dividend payout. dividend payout. _

  More good investments would lead to a More good investments would lead to a lower dividend payout. lower dividend payout. Advantages and Disadvantages Advantages and Disadvantages of the Residual Dividend Policy of the Residual Dividend Policy

  

  Advantages

  Advantages

  : Minimizes new stock issues : Minimizes new stock issues and flotation costs. and flotation costs. _

  Disadvantages

  Disadvantages

  : Results in variable : Results in variable dividends, sends conflicting signals, dividends, sends conflicting signals, increases risk, and doesn’t appeal to any increases risk, and doesn’t appeal to any specific clientele. specific clientele. _

  Conclusion

  Conclusion

  : Consider residual policy when : Consider residual policy when setting target payout, but don’t follow it setting target payout, but don’t follow it

  

Which theory is most correct?

Which theory is most correct?

  

  Empirical testing has not been able to Empirical testing has not been able to determine which theory, if any, is determine which theory, if any, is correct. correct. _

  Thus, managers use judgment when Thus, managers use judgment when setting policy. setting policy. _

  Analysis is used, but it must be applied Analysis is used, but it must be applied with judgment. with judgment.

  

Implications for Managers

Implications for Managers

  Theory Implication

Irrelevance Any payout OK

Bird-in-the-hand Set high payout

Tax preference Set low payout

  

But which, if any, is correct???

  Setting Dividend Policy Setting Dividend Policy

  equity needs .

  dividend growth rate

  Generally, some Generally, some dividend growth rate

  based on the residual based on the residual model. model. _

  target payout

  Set target payout

  . _ Set

  Estimate annual equity needs

  

  . _ Estimate annual

  target capital structure .

  Set a Set a target capital structure

  needs over a planning needs over a planning horizon, often 5 years. horizon, often 5 years. _

  Forecast capital

  Forecast capital

  emerges. Maintain target growth rate if emerges. Maintain target growth rate if possible, varying capital structure possible, varying capital structure

  

Appendix:

Appendix:

  Examples Examples

  

Example 1: Dividend irrelevance

Example 1: Dividend irrelevance

   Suppose that Illini Corp. has after-tax operating income

  Suppose that Illini Corp. has after-tax operating income of $100m growing at 5% per year and its cost of capital of $100m growing at 5% per year and its cost of capital is 10%

  _ is 10%

Assume that the firm has reinvestment needs of $50m

  

Assume that the firm has reinvestment needs of $50m

also growing at 5% per year and that it has 105m also growing at 5% per year and that it has 105m outstanding shares

  _ outstanding shares

The firm pays out any residual cash flows as dividends

  

The firm pays out any residual cash flows as dividends

each year

  _ each year The FCFF = EBIT(1 – t) – Reinvestment needs = $100m

  The FCFF = EBIT(1 – t) – Reinvestment needs = $100m

• $50m = $50m
• $50m = $50m

  

The firm’s value (using the Gordon growth model) is

  

The firm’s value (using the Gordon growth model) is

FCFF(1 + g)/(WACC – g) = $50(1.05)/(0.10 – 0.05) =

  FCFF(1 + g)/(WACC – g) = $50(1.05)/(0.10 – 0.05) = $1,050m

  $1,050m 

  The price per share is $1,050m/105m = $10 The price per share is $1,050m/105m = $10

   The dividend per share is $50m/105m = $0.476

  The dividend per share is $50m/105m = $0.476 

  The value per share is $10 + $0.48 = $10.48 The value per share is $10 + $0.48 = $10.48

   Case 1

  Case 1 : UIUC Corp. decides to double its dividends, but its

  : UIUC Corp. decides to double its dividends, but its investment needs remain the same, meaning that the firm has investment needs remain the same, meaning that the firm has to raise $50m to raise $50m

   Suppose the firm can issue stock worth $50m at no cost

  Suppose the firm can issue stock worth $50m at no cost 

  The existing shareholders receive dividends of $100m or The existing shareholders receive dividends of $100m or dividends per share equal to $100m/105m = $0.953 dividends per share equal to $100m/105m = $0.953

  

Given no change in the firm’s cash flows, the growth rate of

  

Given no change in the firm’s cash flows, the growth rate of

cash flows or the cost of capital, the firm’s value has not cash flows or the cost of capital, the firm’s value has not changed changed

  

However, existing shareholders now own $1,000m and new

  

However, existing shareholders now own $1,000m and new

shareholders $50m of the firm shareholders $50m of the firm

   Thus, the price per share for existing shareholders is $1,000m/

  Thus, the price per share for existing shareholders is $1,000m/ 105m = $9.523

  105m = $9.523 

  The value per share for existing shareholders is $9.523 + The value per share for existing shareholders is $9.523 +

  $0.953 = $10.476 $0.953 = $10.476

   The average shareholder is indifferent to this change in

  The average shareholder is indifferent to this change in

dividend policy (higher dividend per share is offset by lower

dividend policy (higher dividend per share is offset by lower

price per share) price per share)

   Case 2

  Case 2 : UIUC Corp. decides to eliminate dividends and

  : UIUC Corp. decides to eliminate dividends and retain the $50m retain the $50m

   Total value of the firm is

  Total value of the firm is

PV of after-tax operating cash flows + Cash balance

  

PV of after-tax operating cash flows + Cash balance

= $1,050m + $50m = $1,100m

  

= $1,050m + $50m = $1,100m



  The value per share is $1,100m/105m = $10.476, meaning The value per share is $1,100m/105m = $10.476, meaning that the increase in share price is offset by the loss of that the increase in share price is offset by the loss of dividends dividends