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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