Download KOC UNIVERSITY MFIN902- MANAGERIAL FINANCE II Spring 2004

Principles of
Corporate
Finance
Chapter 16
The Dividend Controversy
Seventh Edition
Richard A. Brealey
Stewart C. Myers
Slides by
Matthew Will
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
Topics Covered
• How Dividends Are Paid
• Information in Dividends and Stock Repurchases
• How Do Companies Decide on Dividend
Payments?
• The Dividend Controversy
• The Rightists
• Taxes and the Radical Left
• The Middle of the Roaders
Types of Dividends
Cash Div
Regular Cash Div
Special Cash Div
Stock Div
Stock Repurchase (3 methods)
1. Buy shares on the market
2. Tender Offer to Shareholders
3. Private Negotiation
Initial Notes
• Fama and French (2001) found that only about a fifth of public
companies pay a dividend, down from 67% in 1978.
• Stock repurchases have boomed since 80s and was larger in value
than dividend payments in late 90s. (Figure 16.1)
• Only Eregli Demir Çelik and Yazıcılar own their own shares in
Turkey.
Some food for thought
• If investors prefer high dividend payout companies,
– > companies maybe reluctant to invest
• If a company is paying low dividend, it may be signalling
that:
– It is optimistic about future growth opportunities
– It is pessimistic about keeping up its profitability in the future
• Is a high dividend paying company giving a bad signal?
– Usas, no!
– Technology co., yes!
Ülkemizde temettü esasları
• Halka açık anonim ortaklıkların temettü dağıtım yükümlülüğü ve
temettü avansı dağıtımına ilişkin esaslar 13.11.2001 tarih ve 24582
sayılı Resmi Gazete’de yayınlanan Seri:IV, No:27 sayılı “Sermaye
Piyasası Kanununa Tabi Olan Halka Açık Anonim Ortaklıkların
Temettü ve Temettü Avansı Dağıtımında Uyacakları Esaslar
Hakkında Tebliğ” ile düzenlenmiştir.
• Hisse senetleri borsada işlem gören ortaklıklarda birinci
temettü oranı ve temettü dağıtımı
Ortaklıkların birinci temettü tutarı, hesap dönemi kârından kanunlara
göre ayrılması gereken yedek akçeler ile vergi, fon ve mali ödemeler
ve varsa geçmiş yıl zararları düşüldükten sonra kalan dağıtılabilir
kârın %20’sinden az olamaz.
• Temettü dağıtım zamanı
Temettü dağıtımı, ortaklıklarca hesap dönemini izleyen 5 inci ayın
sonuna kadar tamamlanmak zorundadır.
Temettü İlanı
ARCLK
Arçelik A.Ş.’nin 24.04.2003 tarihinde yapılan Olağan Genel
Kurul Toplantısı’nda, 2002 yılı karından 72.720 milyar TL
(%50) tutarında kar payının hisse senedi olarak, 72.720 milyar
TL (%50 oranında, 1.000 TL nominal değerli beher hisseye
500 TL ve brüt=net) tutarında kar payının ise nakit olarak
dağıtılmasına ve dağıtım tarihinin 28.05.2003 olarak
belirlenmesine karar verildiği,
bildirilmiştir.
               
ARCLK
Arçelik A.Ş.’nin çıkarılmış sermayesinin 181.800 milyar TL iç
kaynaklardan, 72.720 milyar TL 2002 yılı kar payından
karşılanmak suretiyle toplam 254.520 milyar TL (%175) bedelsiz
artırılarak 145.440 milyar TL’den 399.960 milyar TL’ye
yükseltilmesine ilişkin hisse senetlerinin ve %50 oranındaki nakit
kar paylarının 28.05.2003-29.08.2003 tarihleri arasında aşağıdaki
adreslerde, bu tarihten sonra ise sadece şirket merkezinde
dağıtılacağı, iç kaynaklardan karşılanan hisse senetlerinin
dağıtımının 11 nolu yeni pay alma kuponları, kar payından
karşılanan hisse senetleriyle nakit kar paylarının dağıtımının ise
2002 yılı kar payı kuponları karşılığında yapılacağı bildirilmiştir.
Ortaklara bedelsiz hisse senedi dağıtımı ve kar payı ödeme
duyurusu ekte yayınlanmaktadır.
Başvuru Yerleri:
Şirket Merkezi, Tuzla, İstanbul
Koç Yatırım Menkul Değerler A.Ş., Harbiye, İstanbul
Bütün Koçbank Şubeleri
               
Dividend Policy
• Define dividend policy as the choice
between:
– 1) Retained earnings
– 2) Dividends and issuing new equity to pay for
additional dividends.
• Notice that dividend policy holds firm's
investment decisions and borrowing
decisions as given.
The Dividend Decision
Lintner’s Model (1956)
1.
Firms have long term target dividend payout ratios.
DIV1  target dividend
 target ratio  EPS1
Mature = high, growth = low
2. Managers focus more on dividend changes than on
absolute levels.
$2 div. is an important financial decision if last year’s was $1, but
not so if it was $2.
3.
4.
Dividend changes follow shifts in sustainable levels of
earnings.
Managers are reluctant to make dividend changes that
might have to be reversed. (Managers smooth div.)
DIV1 - DIV0  adjustment rate  target change
 adjustment rate  target ratio  EPS1 - DIV0 
Higher the conservativeness
....lower the adjustment factor
Tested by Fama & Babiak (Dec 68): adj. factor= 0.33, target=0.5
• This model implies that firms only increase dividends if
earnings per share is expected to be higher.
Consequently, changes in dividends provide information
about next period's earnings per share.
– Div cuts => future earnings down => stock price goes down
– Div rise => future earnings up => stock price goes up
• However, accountants are creative! (Enron)
Dividends provide information. If div is continuous and
generous then earnings quality is good.
Are dividends good or bad?
More specifically, what should be the dividend policy of the
firm?
• Rightists claim dividends are good
- Bird-in-the-Hand Fallacy
Argue that dividends are worth more than capital
gains, since high and constant dividends will
reduce the risk to the shareholders.
-
Market discipline
Information effect
=> Higher dividends higher firm value.
• Leftists: Dividends are bad
-
Taxes
Since capital gains are taxed at a lower
rate than dividend income, companies
should pay the lowest dividend possible.
-
Transaction costs
=> Higher dividends lower firm value.
Middle of the roaders
• Modigliani & Miller
If companies should increase their share price by
distributing more or less cash dividends, why have they
not already done so?
Supply effect, there are enough firms meeting
demands of high and low dividend seeking clientele
Whatever effects there are these are small
Perfect cap. markets
• Black & Scholes
– Imperfections
DIVIDEND IRRELEVANCY
• Does the dividend policy affect shareholders' wealth?
• In (perfect) efficient capital markets share price falls dollar for dollar
with dividends, however the shareholders' wealth is unchanged.
The fall in the share price is exactly offset by the dividend check the
shareholder receives.
• Remember that dividends are financed by issue of new shares. In
an (perfect) efficient capital market, the new shareholders acquire
claims on the firm exactly equal to what they paid for. Consequently,
the old shareholders given up claims on the firm (to the new
shareholders) exactly equal to the value of the dividends they
receive.
• Thus, assuming no taxes or transaction costs (and no info. costs),
the only necessary condition for dividend irrelevancy proposition is
that capital markets must be efficient (i.e., information efficient).
• We will consider additional complications such as taxes and
transactions costs later on.
• On ex-dividend day, stock price must fall exactly by the dividend
paid.
•
P(ON) = P(EX) + DIV
• Q:
What if P(ON) < P(EX) + DIV
• A: Buy a share before the record day, get the dividend and sell the
share on the ex-dividend day
• Cost
= P(ON)
• Revenue = P(EX) + DIV
• Profit
= Revenue - Cost
•
= P(EX) + DIV – P(ON)
•
> 0 by assumption.
• Since everyone would do the same, P(ON) < P(EX) + DIV cannot be
true.
• Similarly P(ON) > P(EX) + DIV cannot be true!
• Example 1 ABC wants to pay $2 a share dividends.
Stock price of ABC is $10.00, and ABC has 1,000,000
shares outstanding.
- Find shareholders' wealth before and after dividends.
- Find share price after dividends
- How much new equity must be issued to finance the
dividends?
• Sol'n: At $2 a share for 1,000,000 shares, ABC needs
$2 million today for dividends.
• Notice that new shareholders are not entitled to
dividends thus they will pay the ex-dividend price for
each new share.
•
P(EX) = $10 - $2 = $8.
• To raise $2 million 2,000,000/8 = 250,000 new shares
must be sold.
• Old shareholders’ wealth before dividends:
= $10 x 1,000,000 = $10M.
• After dividends:
= ($8) (1,000,000) + $2,000,000 = $10M.
• Old shareholders’ wealth is unchanged.
• Firm value after dividends:
= ($8) (1,250,000) = $10M
• Firm value is unchanged.
• New shrholders’ wealth = ($8) (250,000) = $2M
• New shrholders’ wealth is unchanged.
• This is what is meant by dividend irrelevancy
proposition.
Example 2
• Now suppose that the firm has a positive
net present value project worth $2 million.
The project requires an investment of $2
million.
A) Assume that the firm takes the project
and then pays dividends.
B) Assume that the firm foregoes the
project to pay dividends. How does your
answer change?
•
•
•
•
•
(A)Stock price with investment will
increase by NPV per share! After the
investment, stock price will be $12.
To raise $2M, 2,000,000/12 = 166,666 new
shares have to be sold
Firm value = (12) (1,166,666) = $14M
Firm value increases by $4M
$2M due to positive NPV of project
$2M due to additional shares sold to
finance the investment
Old shareholders’ wealth = 12 (1M) = $12M
Old shareholders’ wealth goes up by $2M.
Old shareholders capture the entire NPV of
project.
(2) New shareholders’ wealth = 166,000 (12)
= $2M
Same as before.
Now pay dividends by selling new shares to 3rd
group of shareholders.
Dividends = $2 per share for 1,166,666 shares =
$2,333,332 needed.
(1)
The (3) group is not entitled to dividends. Thus they will
only pay ex-dividend price
 Ex-dividend price = 12 - 2 = $10
 233,333 new shares must be sold
Wealth of 2nd group SH:
= 166,666 (10 + 2) = $2M
Wealth of 1st group SH:
= 1,000,000 (10 + 2) = $12M
Paying dividends does not change the wealth of ‘old’
shareholders.
(B) If we forego the project, we go to Example (1). Old
shareholders will suffer a loss of wealth of $2M, equal to
the NPV of project.
Notice that as long as taxes and
transactions costs are ignored, dividend
policy doesn’t change [firm value] (or
shareholders’ wealth) this is called M&M
dividend irrelevancy proposition after
Modigliani and Miller.
• Transactions costs, taxes, and dividends:
• Investors who desire a steady income may prefer
dividends to capital gains, since dividends relieve them
from having to sell some shares.
• For individuals, dividends are taxed at ordinary tax rates
whereas capital gains are taxed at 40% of the ordinary
tax rate. (Long term (> 1 year) realized capital gains.
No taxes are paid on unrealized capital gains). Thus
taxable individuals would prefer capital gains income
over dividend income. Greater the tax rate, greater the
preference for capital gains.
• Miller & Scholes suggest a way individuals can avoid
paying taxes on dividends.
– Tax-laws allow interest expense as tax deductions.
– The idea is to borrow and establish interest deductions. Invest
your borrowed amount in stocks.
Example:
Value of portfolio
=
$10,000
5% dividend yield
=
$500 in dividends
5% capital gains
=
$500 in cap. gains
Borrow $20,000 and buy more stock
Interest rate is 7.5%
Dividend income =
30,000 (0.05)
= 1,500
Capital gains
=
30,000 (0.05)
= 1,500
Interest expense =
20,000 (0.075) = 1,500
Hence interest expense exactly offsets dividend
income  no tax liability on dividends.
• Corporations on the other hand would prefer dividend
income. For corporations 85% of dividends are excluded
from taxation (80% after 1986). Realized capital gains
are taxed at 30% (34% after 1986).
• However, tax-exempt institutions such as universities,
pension funds do not care about dividends versus cap.
gains.
• Black & Scholes argue that while there may be demand
for high and low dividend policies, it is possible that firms
will cater to these needs so that there is no unsatisfied
clientele.
• Any given firm would not find it beneficial to switch
dividend policy if there are no unsatisfied clienteles.
• Black and Scholes test this idea:
Dividend Yield
ER i  R F   i (ER M  R F )  
Market Dividend Yield
• What would you expect  to be if investors did not like
dividends. Why?
• Black & Scholes (1974) find that on average   0
• Consequently, the market capitalization rate is unrelated
to the dividend yield. Investors are indifferent to
dividends.
Firm A
Firm B
Next year' s price
(no dividend)
112.50
(high dividend)
102.50
Dividend
0
10
Total pretax payoff
112.50
112.50
Today' s stock price
100
97.78
Capital gain
12.50
4.72
Pretax rate of return (%)
12.5
100
Tax on div @ 40%
Tax on Cap Gain @ 20%
Total After Tax income
(div  cap gain - taxes)
After tax rate of return (%)
100  12.5
0
.20 12.50  2.50
(0  12.50)  2.50  10
10
100
100  10.0
14.72
97.78
100  15.05
.40 10  4.00
.20  4.72  0.94
(10  4.72)  (4  0.94)  9.78
9.78
97.78
100  10.0
When dividends are taxed more heavily than capital gains,
high dividend paying stock must sell at a lower price in
order to provide the same after-tax return.
TAM MÜKELLEF
KURUM
TAM MÜKELLEF GERÇEK KİŞİ
HİSSE SENEDİ
TEMETTÜ GELİRİ
-Tam mükellef
kurumlardan elde
edilenler kurumlar
vergisinden istisna.
- Kar payı stopajına tabi
değil .
-Tam mükellef kurumlardan elde edilenlerin 1/2 si
gelir vergisinden istisna. (GVK’nun Geçici 62
nci maddesinde belirtilenler hariç) (16)
-Stopaja tabi tutulmuş, beyana tabi diğer menkul
sermaye iratları, gayrimenkul sermaye iratları
ve birden fazla işverenden alınmış ücretlerle
birlikte (2003 yılı için) 12.000.000.000 TL’yi
aşarsa gelirin tamamı beyan edilir. (1)
HİSSE SENEDİ ALIM
SATIM KAZANCI
-Kurumlar Vergisi (fon
payı dahil, % 33) (2)
-İvazsız olarak iktisap edilenler ile İMKB’de işlem
gören ve 3 aydan fazla elde tutulanlar vergiye
tabi değil. (5)
- IMKB de işlem görmeyenlerden tam mükellef
kurumlara ait olup (1) yıldan fazla elde
tutulanlar vergiye tabi değil.
-İktisap bedeli, sadece, elden çıkarılan ay hariç
olmak
üzere
TEFE
artış
oranıyla
endekslenebilir.
-Enflasyon indirimi uygulanmaz.
- Alım satım zararları, alım satım karlarına mahsup
edilir. (17)
-Diğer menkul kıymet alım satım kazançlarıyla
birlikte 10 milyar TL’yi aşarsa, aşan kısım
beyan edilir. (1)
1)
2)
3)
4)
Policy implications
The evidence shows that investors do not like sudden changes in
dividends. Clientele effect implies that you attract investors who
most prefer your dividend policy. Thus, sudden changes in
dividends will disturb your shareholders who will have to readjust
their portfolio.
Reduce dividends to minimize reliance on external capital. This will
minimize situations where you pay dividends and at the same time
issue new equity. Remember that retained earnings do not involve
any issue costs.
Evidence also shows that the discount rate is independent of the
dividend yield. As a manager, you can ignore the effect of dividend
yield on your investment projects.
As a shareholder, you would be best off by ignoring dividend yield.
Concentrating on low dividend stocks also implies that you
concentrate your holdings on high risk stocks only. This prevents
you from holding a well-diversified portfolio, which may be more
costly. Use Miller-Scholes suggestion to offset any potential tax
liability on dividends.
ISE Listed Companies
Net
Gross
Net
1996
Profit / Loss
382,083
Dividend
31,561
Dividend
28,765
Ratio
8%
1997
857,055
35,599
29,894
4%
1998
1,338,027
611,327
431,955
46%
1999
1,625,761
610,599
590,221
38%
2000
2,033,555
669,256
650,013
33%
2001
-4,014,863
681,589
667,024
n.m.
2002
4,138,000
931,170
900,704
23%
TL Bn
Payout
Reading
• Why is dividend yield so low?