Agenda

Dividend Policy
Dividend Types Common in the Philippines Dividend Declaration and Payment Dividend Policy Theories Types of Dividend Policy Accounting for Cash & Stock Dividends Important Dates to Remember about Dividends

What are Dividends?

Dividends are distributions to stockholders of corporate earnings in proportion to the number of shares held by their respective owners. Potential buyers and sellers of a corporations shares are keenly interested in a companys dividends policies and practices.

Dividends may be paid out of accumulated earning of the corporation or may be paid as a return of stockholders invested capital.

Types of Dividends
Cash Dividends
The most common type of dividend which is a distribution of the companys income in the form of cash. Dividends may be expressed as follows:
A certain amount of pesos per share A certain percent of the par or stated value

Stock Dividends
These are distributions of the earnings of the corporation in the form of its own stock as dividend. This type of dividend represents a mere transfer of capital from retained earnings to share capital. The assets of the corporation remain the same before and after the issuance of the stock dividends. They create only a change in the components of the shareholders equity decrease in retained earnings but increase in share capital.

Property Dividends
Rarely used form of dividends which are in the form of other assets, such as tangible products of the company or shares of stocks in a company affiliate or subsidiary.

Relevant Dates
Date of Declaration
Date when the board of directors (BOD) formally approves and announces the dividend. Reduction in RE is recognized in the accounts.

Date of Record
Set by the BOD, the date on which all persons whose names are recorded as stockholders will receive a declared dividend at a specified future time. No entry made on this date.

Date of Payment
Set by the BOD, the actual date on which the payment of dividend is made. Entry is made on this date to record the settlement of dividend.

Dividend Payment Timeline

Tuesday, June 10 Monday, June 30 Wednesday, July 2 Monday, August 4

BDO declares P10 per share dividend payable to holders of record on July 2, payable on August 2

Stocks begin to sell exdividend on June 30, which is 2 business days before July 2, the date of record

Checks of P10 per share are mailed on Aug 2 to holders of record on July 2

Entries made:
Assuming there are 50,000 outstanding shares as of date of record:
June 10 Retained Earnings 500,000 Cash Dividends Payable To record dividend payable to shareholders 50,000 shares x P10 = P500,000

500,000

August 2

Cash Dividends Payable 500,000 Cash To record payment of dividends to shareholders

500,000

Dividend Reinvestment Plans (DRIPs)

Enable stockholders to use dividends received on the firms stock to acquire additional shares, even fractional shares, at little or no transaction cost. With DRIPs, plan participants typically can acquire shares at about 5% below the prevailing market price. From its point of view, the firm can issue new shares to participants more economically.

Is it relevant to have a Dividend Policy?

Dividend Policy
Dividend Policy refers to the policy which is used as a guide when a firm makes dividend decisions. It should be established in such a way that it provides for adequate financing for the firm and must also be aligned with the main objective of the firm which is to maximize shareholders wealth.

Dividend Policy Theories

Residual Theory Dividend Irrelevance Theory

Dividend Relevance Theory

Residual Theory of Dividends

A school of thought that suggests that the dividend paid by a firm should be viewed as residual the amount left over after all acceptable investment opportunities have been undertaken.

Suggests that the required return of investors is not influenced by the firms dividend policy a premise that in turn implies that dividend policy is irrelevant.

Three Steps in Making a Dividend Decision:

STEP 1: Determine the optimal level of capital expenditures, which would be the level generated by the point of intersection of the investment opportunities schedule (IOS) and weighted marginal cost of capital (WMCC) (as discussed in The Cost of Capital

STEP 2: Estimate the total amount of equity financing needed to support the expenditures generated in Step 1 using the optimal capital structure proportions (as discussed in Leverage & Capital Structure)

STEP 3: Because the cost of retained earnings is less that the cost of new common stock, use retained earnings to meet the equity requirement determined in Step 2. If retained earnings are inadequate to meet this need, sell common stock. If the available retained earnings are in excess of this need, distribute the residual as dividends.

Dividend Irrelevance Theory

By Merton H. Miller and Franco Modigliani Suggests that in a perfect world, dividends are irrelevant when the value of the stock and, therefore, of the firm is determined. The firms value is determined solely by the earning power and risk of its assets (investments) and that the manner in which it splits its earnings stream between dividends and internally retained (and reinvested) funds does not affect this value.

Dividend Relevance Theory

By Myron J. Gordon and John Lintner This theory suggests that investors are generally risk averse and would rather have the dividends today (bird-in-the-hand) than possible share appreciation and dividends tomorrow. There is a direct relationship between a firms dividend policy and its market value. A bird in the hand is worth two in the bush