r e e n dividend policy and retained earnings · r e e ndividend policy and retained earnings...

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Dividend Policy andRetained Earnings

McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000

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©McGraw-Hill Ryerson Limited 2000

Foundations of FinancialManagement CANADIAN

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Figure 18-1Homemade dividends

PPT 18-1

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Table 18-1Earnings and dividends of selected Canadian corporations

PPT 18-2

Ten –Year

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 AverageBank of Montreal Earnings Dividends Payout ratioDofasco Earnings Dividends Payout ratioInco Earnings Dividends Payout ratioStelco Earnings Dividends Payout ratioMacmillan Bloedel Earnings Dividends Payout ratioBCE Inc Earnings Dividends Payout ratioCognos Earnings Dividends Payout ratio

($0.39)$1.05

n.a.

$2.95$1.2843%

$7.11$0.8512%

$2.25$1.0044%

$2.21$0.8036%

$1.22$1.25

102%

($0.55)$0.00

0%

$2.10$1.0650%

($10.64)$1.28

n.a.

$4.18$1.0024%

($5.96)$0.75

n.a.

$0.37$0.80216%

$1.75$1.2773%

$0.21$0.00

0%

$2.32$1.0646%

($0.73)$0.80

n.a.

$0.74$1.00135%

($3.05)$0.00

n.a.

($0.98)$0.60

n.a.

$2.00$1.2965%

$0.14$0.00

0%

$2.3841.0645%

($2.96)$0.15

n.a.

($0.21)$0.85

n.a.

($1.76)$0.00

n.a.

($0.52)$0.60

n.a.

$2.10$1.3062%

($0.21)$0.00

0%

$2.59$1.1243%

$1.41$0.00

n.a.

$0.22$0.40182%

($0.62)$0.00

n.a.

$0.42$0.60143%

$1.031.33

129%

$0.10$0.00

0%

$3.01$1.2040%

$2.33$0.3013%

$0.15$0.40267%

$1.01$0.00

n.a.

$1.34$0.6045%

41.43$1.3494%

$0.29$0.00

0%

$3.45$1.3238%

$1.98$0.8040%

$1.82$0.4022%

$1.35$0.00

n.a.

$2.14$0.6028%

$1.12$1.36

121%

$0.58$0.00

0%

$4.21$1.4835%

$2.12$1.4870%

$1.17$0.4034%

$0.63$0.00

n.a.

$0.36$0.60167%

$1.54$1.3688%

$1.09$0.00

0%

$4.6941.6435%

$2.12$1.6435%

$0.25$0.40160%

$1.17$0.00

n.a.

($2.99)$0.30

n.a.

$2,00$1.3668%

$1.00$0.00

0%

$4.72$1.7637%

$2.04$1.7686%

($0.63)$0.10

n.a.

$1.04$0.03

3%

$0.54$0.20

n.a.

$2.50$1.3654%

$1.96$0.00

0%

37%

33%

84%

5%

46%

86%

0%

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Figure 18-2Corporate earnings and dividends (all industries)

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10

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1991 1992 1993 1994 1995 1996 1997 1998

Source: Statistics Canada, Financial Statistics for Enterprises, Cataloque 61-008, Table 1.

$ bi

llion

s

Dividends Earnings

PPT 18-3

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Sample Calculation of Tax onIndividual Dividend Receipt

Dividend received . . . . . . . . . . . . . . . . . . . . . $1,000

Gross-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Taxable amount. . . . . . . . . . . . . . . . . . . . . . . 1,250

Federal tax (at 29%) . . . . . . . . . . . . . . . . . . . 363

Federal tax credit (13 1/3% of $1,250) . . . . 167

Federal tax payable . . . . . . . . . . . . . . . . . . . . 196

Provincial tax payable (52% of $196) .. . . . . 102

Total taxes payable . . . . . . . . . . . . . . . . . . . . 298

Net dividend ($1,000 - $298) . . . . . . . . . . . . . 702

PPT 18-4

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DevelopmentStage I

DevelopmentStage I

GrowthStage II

GrowthStage II

ExpansionStage III

ExpansionStage III

MaturityStage IV

MaturityStage IV

No cash dividends Stock dividendsLow cash dividends

Stock dividendsLow to moderatecash dividends

Stock splits

Moderate to highcash dividends

Sales ($)

Development

Expansion

Maturity

Decline

Time

Growth

PPT 18-5

Figure 18-3Life cycle growth and dividend policy

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Table 18-4XYZ Corporation’s financial position before stock dividend

Capital Common stock (1,000,000 shares issued) . . $15,000,000accounts Retained earnings . . . . . . . . . . . 15,000,000

Net worth. . . . . . . . . . . . . . . $30,000,000

{

PPT 18-6

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{

Table 18-5XYZ Corporation’s financial position after stock dividend

Capital Common stock (1,100,000 shares issued) . $16,500,000accounts Retained earnings . . . . . . . . . . . . 13,500,000

Net worth. . . . . . . . . . . . . . . . $30,000,000

PPT 18-6

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Common stock (1 million shares issued) $15,000,000Retained earnings 15,000,000

$30,000,000

Common stock (2 million shares issued) $15,000,000Retained earnings 15,000,000

$30,000,000

Before

After

PPT 18-7

Table 18-6XYZ Corporation before and after stock split

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Inco 11.5 million nil

Toronto Dominion Bank 24 million nil

Nova 25 million 22.5 million

Seagram 24 million 19.2 million

Shares SharesCompany Originally Bid Bought

PPT 18-8

Table 18-8Stock repurchases announced in 1997

Source: Merrill Lynch & Co.

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Chapter 18 - Outline LT 18-1

• Dividends vs. Retained Earnings

• Other Factors Influencing Dividend Policy

• Life Cycle Growth and Dividends

• Cash and Stock Dividends

• Stock Splits

• Repurchase of Stock

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Dividends vs. Retained Earnings LT 18-2

• A company has a choice or decision regarding what to dowith its profits:

Pay them out to shareholders as dividends OR

Retain the earnings in the business

• There is disagreement as to whether investors preferdividends or retained earnings

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Factors Influencing Dividend Policy LT 18-3

• Investment opportunities and growth prospects withincompany

• Company’s stage in corporate life cycle

• Cash position of the Firm

• Access to capital markets

• Desire for control

• Legal and lender restrictions

• Tax position of shareholders

• Pressure to maintain stability in dividend

• Improve company’s image by increasing dividend

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Life Cycle Growth and Dividend Policy LT 18-4

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, moderate cash dividends, stock splits

Stage IV - Maturity

moderate to high cash dividends

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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 ofstock

• There is no benefit from a stock dividend unless total cashdividends increase

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Stock Splits LT 18-6

• Similar to a stock dividend by increasing the total shares ofstock outstanding

• Market value of stock is unchanged initially

– ex, a 2-for-1 split will double the number of sharesoutstanding (with each share worth half as much asbefore)

• Primary purpose of a stock split is to lower the price into amore popular trading range

• Stock splits are used if the stock price gets too high

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Repurchase of Stock LT 18-7

• May be used as an alternative to paying a cash dividend

• Often utilized when a firm has excess cash

• Benefits to the shareholder 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 anotherfirm

r e e n dividend policy and retained earnings · r e e ndividend policy and retained earnings...

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