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Payout Policy preference of Listed Firms in the Philippines Stock Exchange Abstract Every firm’s goal is to maximize shareholders’ wealth. When a firm has ample cash and wants to distribute it to shareholders, it can do so by means of dividends or stock repurchase. In the U.S., dividend payout is the fundamental way of corporations to give back to shareholders. But after the introduction of SEC’s Rule 10b-18 “Safe Harbor”, share repurchase activity have been more frequent than dividend payouts. It is consistent with the idea that stock repurchase has been restricted in the past. Also corporation’s propensity to pay decline over time as the perceived benefits of dividends reduces. One of the rationales behind this could be due to the difference of tax rates of dividend payout and capital gains. This paper aims to analyze if corporations in the Philippines leans toward the stock repurchase from dividend payouts. Data from FactSet Fundamentals for the 255 listed companies in the Philippines Stock Exchange for the year 2007-2014 were used to sort the aggregate amount of share repurchase and dividends payout. After evaluating the trend, it shows that the Philippine firms were more inclined to dividend payout than share repurchase. Around 9% of the listed companies engaged in share repurchase and roughly 2% carry it out regularly. This finding denotes that listed companies in the Philippines still preferred dividend payout than shares repurchase. Payout Policy In circumstances that companies had a good year, and has plenty of cash more than it requires, it has the option to invest the cash if there is a good opportunity or to give back to its shareholder. If there are no good investment, it is a chance for the company to payout its shareholders. There are two different ways in which it could return wealth to its shareholders: dividends and share repurchase. Dividend is a firm’s way to spread a portion of its earnings to its shareholders. Dividend can be issues as cash payments, as shares of stock, or other property. As the purpose of this paper is to compare dividends and share repurchase activity levels in the Philippine stock market, we are limiting the dividends to cash payments for a better gauge of comparison. A share repurchase is a company buying back its shares from the stock market. It is one way of saying that the firm is investing in itself. Therefore, the company is shelling out cash to the public to buy its own shares. The decrease in the outstanding number of shares thereby increases the ownership stake of each investor. Given the two payout policies, the firm should then decide in what manner will their payout be and by how much. Sample Selection and Data Gathering Philippine companies were chosen as a sample to study whether the shift of firms from dividend payout to shares repurchase applies in the same manner in the country. We gathered the 255 listed companies in the Philippines Stock Exchange using FactSet Fundamentals. The time range from 2007-2014 is used as it deemed fit to be able to examine the trend. Data from FactSet Fundamentals were generated for the aggregate amount in billions of dividend payouts and shares repurchase from company’s cash flows. Trends in Corporate Policy Using the data from FactSet Fundamentals, the cash dividend expenditures and shares repurchase expenditures from company’s cash flows were aggregated for each calendar year. In the time range 2007 – 2014, companies mainly carry out cash dividends rather than shares repurchase as shown in Table I. Table I Aggregate Dividends and Share Repurchase Year 2014 2013 2012 2011 2010 2009 2008 2007 ∑i Dividends 207.2 253.9 235.0 182.6 168.4 130.6 113.0 120.4 ∑i Repurchase 7.2 9.3 5.1 12.2 21.9 8.4 12.4 17.8 Figure I Aggregate Dividends and Share Repurchase 300.0 250.0 In Billions 200.0 150.0 Shares Repurchase Dividends 100.0 50.0 0.0 2014 2013 2012 2011 2010 2009 2008 2007 Year Source: FactSet Fundamentals Figure I. Aggregate Dividends and Share Repurchase. This figure depicts the distribution of dividends and shares repurchase in the time series 2007 – 2014. Majority of the listed companies preferred cash dividends than shares repurchase. Around 9% of the listed companies engaged in share repurchase and roughly 2% carry it out regularly. Conclusions Listed companies in the Philippine Stock Exchange shows no evidence of shift from dividend payouts to shares repurchase. Empirically, we find that it still preferred cash dividends than shares repurchase. Only few companies engaged in shares repurchases as a means of return to shareholders. The lag between Philippine firms and U.S. firms may be traced from the tax differences. As in U.S., capital gains received lower tax implications than cash dividends payout which could be the driver of the upward shift from dividends to share repurchase as firms recognized the benefits from this. In the Philippines, capital gains tax is not present but instead a stock transaction tax is imposed. The tax is applied to the entire transaction rather than the capital gains alone. This could entail a higher tax than what dividends received. The difference of tax in U.S. and Philippines stock market leads to different preferences of firms to payout policies. The evidence presented here suggests that Philippines is far behind the U.S. and further research could be made to prove this. References Data on Cash Dividends and Stock Repurchase Source: FactSet Fundamentals Brealey, Myers and Allen: Chapter 16 Payout Policy, Principles of Corporate Finance Fama, Eugene and French, Kenneth: Disappearing Dividends: Changing firm characteristics or Lower propensity to pay? A Breakdown Of Stock Buybacks | Investopedia http://www.investopedia.com/articles/02/041702.asp#ixzz446iuHl6j Grullon, Gustavo and Michaely, Roni: Dividends, Share Repurchases, and the Substitution Hypothesis