assesing dividend policy

8/17/2019 Assesing Dividend Policy

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2012 2011 2010 2009 2008 Aggregate

Net Income $6,136 $5,682 $4,807 $3,963 $3,307 $23,895

- (Cap. Exp - Depr) $604 $1,797 $1,718 $397 $122 $4,638

- # Working Capital ($133) $940 $950 $308 ($109) $1,956

Free CF to Equity (pre-debt) $5,665 $2,945 $2,139 $3,258 $3,294 $17,301

+ Net Debt Issued $1,881 $4,246 $2,743 $1,190 ($235) $9,825

= Free CF to Equity (actual debt) $7,546 $7,191 $4,882 $4,448 $3,059 $27,126

Free CF to Equity (target debt ratio) $5,720 $3,262 $2,448 $3,340 $3,296 $18,065

Dividends $1,324 $1,076 $756 $653 $648 ]_Q_ba

Dividends + Buybacks $5,411 $4,091 $5,749 $3,322 $1,296 $19,869

Disney returned about $1.5 billion more than the $18.1billion it had available as FCFE with a normalized debtratio of 11.58% (its current debt ratio).



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Deutsche Bank: FCFE estimates (November 2013) Current 1 2 3 4 5

Risk Adjusted Assets (grows3% each year) 439,851 ! 453,047 ! 466,638 ! 480,637 ! 495,056 ! 509,908 ! Tier 1 as % of Risk Adj assets 15.13% 15.71% 16.28% 16.85% 17.43% 18.00%

Tier 1 Capital 66,561 ! 71,156 ! 75,967 ! 81,002 ! 86,271 ! 91,783 ! Change in regulatory capital 4,595 ! 4,811 ! 5,035 ! 5,269 ! 5,512 ! Book Equity 76,829 ! 81,424 ! 86,235 ! 91,270 ! 96,539 ! 102,051 ! ROE (increases to 8%) -1.08% 0.74% 2.55% 4.37% 6.18% 8.00%Net Income -716 ! 602 ! 2,203 ! 3,988 ! 5,971 ! 8,164 ! - Investment in Regulatory

Capital 4,595 ! 4,811 ! 5,035 ! 5,269 ! 5,512 ! FCFE -3,993 ! -2,608 ! -1,047 ! 702 ! 2,652 !



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Chrysler : FCFE Dividends and Cash Balance

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How much did the rm pay out? How much could it have afforded to pay out? What it could have paid out What it actually paid out Net Income Dividends - (Cap Ex - Depr

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n) (1-DR) + Equity Repurchase - Chg Working Capital (1-DR) = FCFE

Firm pays out too little FCFE > Dividends Firm pays out too much FCFE < Dividends

Do you trust managers in the company with your cash? Look at past project choice: Compare ROE to Cost of Equity

ROC to WACC

What investment opportunities does therm have? Look at past project choice: Compare ROE to Cost of Equity

ROC to WACC

Firm has history ofgood project choiceand good projects inthe future

Firm has history of poor projectchoice

Firm has goodprojects

Firm has poorprojects

Give managers theexibility to keepcash and setdividends

Force managers to justify holding cashor return cash tostockholders

Firm shouldcut dividendsand reinvestmore

Firm should dealwith its investmentproblem rst andthen cut dividends



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Quality of projects taken: Excess Returns Poor projects Good projects

Cash Surplus + GoodProjects

Maximum exibility insetting dividend policy

Cash Surplus + PoorProjects Signicant pressure topay out more tostockholders asdividends or stockbuybacks

Cash Decit + GoodProjects Reduce cash payout, ifany, to stockholders

Cash Decit + PoorProjects Reduce or eliminatecash return but realproblem is ininvestment policy.

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Aggregate Average

Net Income $57,404 $5,740Dividends $36,766 $3,677Dividend Payout Ratio $1 $1

Stock Buybacks $6,032 $603Dividends + Buybacks $42,798 $4,280Cash Payout Ratio $1Free CF to Equity (pre-debt) ($1,903) ($190)

Free CF to Equity (actual debt) $1,036 $104

Free CF to Equity (target debt ratio) $19,138 $1,914

Cash payout as % of pre-debt FCFE FCFE negative

Cash payout as % of actual FCFE 4131.08%

Cash payout as % of target FCFE 223.63%



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Aswath Damodaran



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Aswath Damodaran

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Summary of calculations

Average Standard Deviation Maximum Minimum

Free CF to Equity $571.10 $1,382.29 $3,764.00 ($612.50)

Dividends $1,496.30 $448.77 $2,112.00 $831.00

Dividends+Repurchases $1,496.30 $448.77 $2,112.00 $831.00

Dividend Payout Ratio 84.77%

Cash Paid as % of FCFE

262.00%

ROE - Required return -1.67% 11.49% 20.90% -21.59%



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Summary of calculations

Average Standard Deviation Maximum Minimum

Free CF to Equity ($34.20) $109.74 $96.89 ($242.17)

Dividends $40.87 $32.79 $101.36 $5.97

Dividends+Repurchases $40.87 $32.79 $101.36 $5.97

Dividend Payout Ratio 18.59%

Cash Paid as % of FCFE -119.52%

ROE - Required return 1.69% 19.07% 29.26% -19.84%



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Aswath Damodaran

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Aswath Damodaran

Aggregate Average

Net Income $421,338.00 $42,133.80Dividends $74,214.00 $7,421.40Dividend Payout Ratio 17.61% 15.09%

Stock Buybacks $970.00 $97.00

Dividends + Buybacks $75,184.00 $7,518.40

Cash Payout Ratio 17.84%

Free CF to Equity (pre-debt) ($106,871.00) ($10,687.10)

Free CF to Equity (actual debt) $825,262.00 $82,526.20

Free CF to Equity (target debt ratio) $47,796.36 $4,779.64

Cash payout as % of pre-debt FCFE

FCFE negative

Cash payout as % of actual FCFE 9.11%

Cash payout as % of target FCFE 157.30%



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Quality of projects taken: ROE versus Cost of Equity Poor projects Good projects

Cash Surplus + GoodProjects

Maximum exibility insetting dividend policy

Cash Surplus + PoorProjects

Signicant pressure topay out more tostockholders asdividends or stockbuybacks

Cash Decit + Good

Projects Reduce cash payout, ifany, to stockholders

Cash Decit + Poor

Projects Cut out dividends butreal problem is ininvestment policy.

Disney

Vale

Baidu

Deutsche Bank

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Aswath Damodaran

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Company Market

Cap Dividends Dividends +

Buybacks Net

Income FCFE Dividend

Yield Dividend

PayoutCash

Return/FCFE

The Walt Disney Company $134,256 $1,324 $5,411 $6,136 $1,503 0.99% 21.58% 360.01%Twenty-First Century Fox, Inc. $79,796 $415 $2,477 $7,097 $2,408 0.52% 6.78% 102.87%

Time Warner Inc $63,077 $1,060 $4,939 $3,019 -$4,729 1.68% 27.08% NAViacom, Inc. $38,974 $555 $5,219 $2,395 -$2,219 1.42% 23.17% NA

The Madison Square Garden Co. $4,426 $0 $0 $142 -$119 0.00% 0.00% NA

Lions Gate Entertainment Corp $4,367 $0 $0 $232 -$697 0.00% 0.00% NALive Nation Entertainment, Inc $3,894 $0 $0 -$163 $288 0.00% NA 0.00%Cinemark Holdings Inc $3,844 $101 $101 $169 -$180 2.64% 63.04% NA

MGM Holdings Inc $3,673 $0 $59 $129 $536 0.00% 0.00% 11.00%Regal Entertainment Group $3,013 $132 $132 $145 -$18 4.39% 77.31% NA

DreamWorks Animation SKG Inc. $2,975 $0 $34 -$36 -$572 0.00% NA NAAMC Entertainment Holdings $2,001 $0 $0 $63 -$52 0.00% 0.00% NA

World Wrestling Entertainment $1,245 $36 $36 $31 -$27 2.88% 317.70% NASFX Entertainment Inc. $1,047 $0 $0 -$16 -$137 0.00% NA NA

Carmike Cinemas Inc. $642 $0 $0 $96 $64 0.00% 0.00% 0.27%Rentrak Corporation $454 $0 $0 -$23 -$13 0.00% NA NA

Reading International, Inc. $177 $0 $0 -$1 $15 0.00% 0.00% 0.00%Average $20,462 $213 $1,083 $1,142 -$232 0.85% 41.28% 79.02%

Median $3,673 $0 $34 $129 -$27 0.00% 6.78% 5.63%



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Aswath Damodaran

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Aswath Damodaran

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The Investment DecisionInvest in assets that earn a

return greater than the

minimum acceptable hurdlerate

The Financing DecisionFind the right kind of debtfor your rm and the right

mix of debt and equity tofund your operations

The Dividend DecisionIf you cannot nd investments

that make your minimum

acceptable rate, return the cashto owners of your business

The hurdle rate should reect theriskiness of theinvestment andthe mix of debt

and equity usedto fund it.

The return should reect the

magnitude andthe timing of the

cashows as welll

as all side effects.

The optimalmix of debtand equity

maximizes rmvalue

The right kindof debt

matches thetenor of your

assets

How muchcash you can

returndepends upon

current &

potentialinvestmentopportunities

How you chooseto return cash tothe owners will

depend onwhether they

prefer dividendsor buybacks

Maximize the value of the business (rm)

assesing dividend policy

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