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Chapter 17) Payout Policy (Dividend Distribution Procedure (A date, two…
Chapter 17) Payout Policy
Free Cash Flow
The cash flow available for distribution among all the
securities
holders of an organization.
Firms often need to decide on the use of FCF generated by its investments.
Firms of
different ages/stages
may have different preferences over the use of the FCF. Example.
FCF is important: allows a company to pursue
opportunities
that enhance
shareholder
value. Eg: develop new products, make acquisitions, pay dividends and reduce debt.
Some think that FCF provides a clearer view on the firms’ ability in generating profit.
Is negative FCF bad for firms?
Payout policy: the way a firm chooses between the alternatives
The overall policy concerning the distribution of value from a firm to its stockhloders
Dividend
Something of value distributed to a firm;s stockholders on a pro-rata basis (in proportion to the percentage of the firm shares that they own)
Dividend Distribution Procedure
Declaration Date
The date on which the board of directors authorizes (declares) the payment of a dividend
Record Date
When a firm pays a dividend, only shareholders on record on this date receive the dividend.
Ex-dividend Date
A date, two days prior to a dividend’s record
date, on or after which anyone buying the stock
will
_
be eligible for the dividend
Payable Date (Distribution Date)
A date, generally within a month after the record date, on which a firm mails dividend checks to its registered stockholders
Methods of Dividend Payout
Regular cash dividend
Cash
dividend that is paid a
regular
basis. Typically quarterly
Extra Dividend
A dividend paid at the same time as a regular cash dividend to distribute
additional value
Special Dividend
One-time
dividend payment a firm makes, which is usually much larger than a regular dividend
Stock Split (Stock Dividend)
When a company issues a dividend in shares of
stock
rather than cash to its shareholders
Share Repurchases
An alternative way to pay cash to investors is through a
share repurchase
/
buyback
The firm uses
cash
to
buy shares
of its own outstanding stock
Three possible ways for share repurchase
1) Tender Offer
A public announcement of an offer to all existing security holders to buy back a
specified amount
of outstanding securities at a
pre-specified price
(typically set a 10% - 20% premium to the current market price) over a prespecified period of time(usually about 20 days)
If shareholders don't tender enough shares, the firm may
cancel
the offer & no buyback occurs
1.2）Dutch Auction
A share repurchase method in which the firm
lists different prices
at which it is prepared to buy shares, and shareholders in turn indicate how many shares they are willing to sell at each price. The firm then pays the lowest price at which it can buy back its
desired number of shares
2) Targeted Repurchases
When a firm purchases shares directly from a
specific(major) shareholder
Purchase price (at premium/discount)
is negotiated directly with the
seller
3) Open Market Repurchase
When a firm repurchases shares by buying shares in the open market
Represent about 95% of all repurchase transactions
Need to oblige the SEC guidelines, & not to appear to manipulate the price.