KEBIJAKAN
DIVIDEN
Dilema: Untuk apa sebaiknya
perusahaan menggunakan laba?
Membiayai investasi baru yang
menguntungkan?
atau
Membayar dividen untuk pemegang
saham?
Pembayaran Dividen
Announcement date Ex-dividend Record Payment
day day day
2-3 weeks 2-3 days 2-3 weeks
Penurunan harga pada Ex-date
Ex date
-t . . . –2 –1 0 +1 +2 . . . t
Price =$10
Price =$9
• The share price will fall by the amount of the
dividend on the ex date (Time 0).
• If the dividend is $1 per share, the price will be
equal to $10 – 1 = $9 on the ex date.
• Before ex date (Time –1) Dividend = $0 Price =
$10
• On ex date (Time 0) Dividend = $1 Price = $9
P1 - Po D1
Return = +
Po Po
Bila perusahaan menahan semua laba untuk
investasi yang mendatangkan laba, dividend
yield akan 0, namun harga saham akan
meningkat, menghasilkan capital gain yang
lebih tinggi.
P1 - Po D1
Return = +
Po Po
Bila perusahaan membayarkan laba sebagai
dividen, pemegang saham akan menerima
kas atas investasi yang ditanamkan, namun
capital gain akan menurun, karena kas yang
sama tidak diinvestasikan ke dalam
perusahaan.
Apakah investor lebih menyukai tingkat
pembayaran dividen tinggi atau rendah?
Dividends are irrelevant:
Investors don’t care about payout.
Bird-in-the-hand:
Investors prefer a high payout.
Tax preference:
Investors prefer a low payout, hence growth.
Dividend Payout Ratios for
Value Line’s Selected Industries
Industry Payout ratio
Banking 38.29
Computer Software Services 13.70
Drug 38.06
Electric Utilities (Eastern U. S.) 67.09
Internet n/a
Semiconductors 24.91
Steel 51.96
Tobacco 55.00
Water utilities 67.35
*None of the internet companies included in the
Value Line Investment Survey paid a dividend.
Early evidence on dividend policy:
Lintner’s (1956) stylized facts
Lintner (1956) in a series of interviews with
corporate managers observed the following facts
Firms have long-run target dividend payout ratios;
mature companies pay out a high proportion of their
earnings, while young companies have low payouts
Managers focus more on dividend changes than on
absolute levels
Dividend changes follow shifts in long-run,
sustainable earnings; managers “smooth” dividends
Managers are reluctant to make dividend changes
that might have to be reversed
The dividend debate: Does
dividend policy matter?
The issue: Should a firm be preoccupied with its
dividend policy? Does the choice of dividend policy
affect firm value?
Dividends are irrelevant: M & M (1961) showed
that, under certain assumptions, dividends do not
really matter because they do not affect firm value
Dividends are bad: Dividends create a tax
disadvantage for shareholders and destroy value
Dividends are good: Dividends are good because
shareholders (or some of them) prefer to receive
them rather than not
Dividend Irrelevance Theory
Investors are indifferent between dividends and
retention-generated capital gains. If they want
cash, they can sell stock. If they don’t want
cash, they can use dividends to buy stock.
Modigliani-Miller (1961) support irrelevance.
Theory is based on unrealistic assumptions (no
taxes or brokerage costs), hence may not be
true. Need empirical test.
M & M: Dividends are irrelevant
Assume that
There are no transaction costs from
converting price appreciation into cash
Firms that pay too much in dividends can
issue stock that is fairly priced and do not face
transaction costs
The firm’s investment decision is not affected
by its dividend decision and operating cash
flows are the same in each period
Managers of firms that pay too little in
dividends do not waste excess cash
Two alternative views:
Dividends matter
Dividends are good
The clientele argument
Dividends as signals
Dividends may discipline managers
Dividends are bad
Taxes: whenever dividends are taxed more heavily
than capital gains, firms should pay the lowest cash
dividend they can get away with and earnings should
be retained or used to repurchase shares
Bird-in-the-Hand Theory
Investors think dividends are less risky
than potential future capital gains, hence
they like dividends.
If so, investors would value high payout
firms more highly, i.e., a high payout
would result in a high P0.
Dividends are “good”
The Clientele argument
There are stockholders who like dividends, either
because they value the regular cash payments or
because they do not face the tax disadvantage
Given the fact that there is a vast diversity among
investors in terms of preferences, it is no surprise that
investors may form clienteles based upon their tax
brackets
Thus, investors will cluster around firms whose dividend
policies match their preference (called the clientele
effect)
Dividends as signals
By changing their dividend policy, firms send signals
about their future cash flows to market participants
When firms increase dividends, they somehow commit to
those higher dividends, and, thus, send a signal that they
expect to have higher future cash flows (share price
increases)
Given that firms do not like to cut dividends, firms that
are forced to do so send a signal that their financial
future is troubling (share price decreases)
Dividends discipline managers
In firms with principal-agent problems between
stockholders and managers and the potential of free
cash flows being wasted, making a commitment to pay
dividends imposes discipline on managers
Dividends are “bad”
If dividends are taxed differently than capital
gains (dividends taxed as ordinary income) and
the marginal tax rate of dividends is higher than
that of capital gains, there exists a tax
disadvantage for those stockholders who
receive dividends
Even if ordinary income and capital gains are
taxed the same, dividends have a tax
disadvantage because investors do not have the
choice of when to report the dividend as it is the
case with capital gains
Tax Preference Theory
Retained earnings lead to capital
gains, which are taxed at lower rates
than dividends: 28% maximum vs.
up to 38.6%. Capital gains taxes are
also deferred.
This could cause investors to prefer
firms with low payouts, i.e., a high
payout results in a low P0.
The tax disadvantage of dividends leads to the
following conclusions
Firms whose stockholders are primarily individuals
should pay a lower dividend compared to firms that
are mainly owned by institutional investors (they are
under a tax-exempt status)
The higher the income level of the firm’s investors,
the lower the dividend paid by the firm should be
As the tax disadvantage of dividends increases, the
aggregate amount of dividends paid should decrease
Some “not so good” reasons for
paying dividends
The Bird-in-the-hand fallacy
Risk-averse investors may prefer the certainty of
dividend payments over the uncertainty of capital gains
The proper comparison is between dividends today and
an almost equivalent amount of price appreciation today
The evidence shows that share prices drop on the ex-
dividend day (firms that pay dividends experience a
decline in their share price on that day)
The excess cash hypothesis
A firm has excess cash in a year and decides to return it
to its stockholders through a dividend (assuming no
investment projects in that year)
If the lack of investment projects is temporary, then firm
should consider future financing needs and the cost of
raising capital
Why not return the excess cash through a share
repurchase, given the evidence on firms’ reluctance to
change dividends?
Double taxation of dividends
The issue: Corporate income was taxed twice, at the
corporate level and at the stockholder level
Corporate earnings were taxed at 35% and shareholders
receiving dividends were also faced with marginal tax
rates as high as 38.6% (combined tax rate could be as
high as 60%)
In the US, The Bush administration passed legislation
that would limit the tax rates for dividends to a maximum
of 15% during the period 2003-2008
The capital gains tax was also reduced from 20% to 15%
“Signaling,” hypothesis?
Managers hate to cut dividends, so won’t
raise dividends unless they think raise is
sustainable. So, investors view dividend
increases as signals of management’s view
of the future.
Therefore, a stock price increase at time of
a dividend increase could reflect higher
expectations for future EPS, not a desire
for dividends.
The “clientele effect”
Different groups of investors, or
clienteles, prefer different dividend
policies.
Firm’s past dividend policy determines its
current clientele of investors.
Clientele effects impede changing
dividend policy. Taxes & brokerage costs
hurt investors who have to switch
companies.
The “residual dividend model”
Find the retained earnings needed for
the capital budget.
Pay out any leftover earnings (the
residual) as dividends.
This policy minimizes flotation and equity
signaling costs, hence minimizes the
WACC.
Using the Residual Model to Calculate
Dividends Paid
Net
[( )( )]
Dividends = income –
Target
equity
ratio
Total
capital
budget
.
Data for SSC
Capital budget: $800,000. Given.
Target capital structure: 40% debt,
60% equity. Want to maintain.
Forecasted net income: $600,000.
How much of the $600,000 should we
pay out as dividends?
Of the $800,000 capital budget, 0.6($800,000) =
$480,000 must be equity to keep at target
capital structure. [0.4($800,000) = $320,000 will
be debt.]
With $600,000 of net income, the residual is
$600,000 - $480,000 = $120,000 = dividends
paid.
Payout ratio = $120,000/$600,000
= 0.20 = 20%.
How would a drop in NI to
$400,000 affect the dividend?
A rise to $800,000?
NI = $400,000: Need $480,000 of
equity, so should retain the whole
$400,000. Dividends = 0.
NI = $800,000: Dividends = $800,000
- $480,000 = $320,000. Payout =
$320,000/$800,000 = 40%.
How would a change in
investment opportunities affect
dividend under the residual policy?
Fewer good investments would lead to
smaller capital budget, hence to a higher
dividend payout.
More good investments would lead to a
lower dividend payout.
Advantages and Disadvantages
of the Residual Dividend Policy
Advantages: Minimizes new stock issues
and flotation costs.
Disadvantages: Results in variable
dividends, sends conflicting signals,
increases risk, and doesn’t appeal to any
specific clientele.
Conclusion: Consider residual policy when
setting target payout, but don’t follow it
rigidly.
Which theory is most correct?
Empirical testing has not been able to
determine which theory, if any, is
correct.
Thus, managers use judgment when
setting policy.
Analysis is used, but it must be applied
with judgment.
Implications for Managers
Theory Implication
Irrelevance Any payout OK
Bird-in-the-hand Set high payout
Tax preference Set low payout
But which, if any, is correct???
Setting Dividend Policy
Forecast capital needs over a planning
horizon, often 5 years.
Set a target capital structure.
Estimate annual equity needs.
Set target payout based on the residual
model.
Generally, some dividend growth rate
emerges. Maintain target growth rate if
possible, varying capital structure
somewhat if necessary.
Appendix:
Examples
Example 1: Dividend irrelevance
Suppose that Illini Corp. has after-tax operating income
of $100m growing at 5% per year and its cost of capital
is 10%
Assume that the firm has reinvestment needs of $50m
also growing at 5% per year and that it has 105m
outstanding shares
The firm pays out any residual cash flows as dividends
each year
The FCFF = EBIT(1 – t) – Reinvestment needs = $100m
- $50m = $50m
The firm’s value (using the Gordon growth model) is
FCFF(1 + g)/(WACC – g) = $50(1.05)/(0.10 – 0.05) =
$1,050m
The price per share is $1,050m/105m = $10
The dividend per share is $50m/105m = $0.476
The value per share is $10 + $0.48 = $10.48
Case 1: UIUC Corp. decides to double its dividends, but
its investment needs remain the same, meaning that the
firm has to raise $50m
Suppose the firm can issue stock worth $50m at no cost
The existing shareholders receive dividends of $100m or
dividends per share equal to $100m/105m = $0.953
Given no change in the firm’s cash flows, the growth rate
of cash flows or the cost of capital, the firm’s value has
not changed
However, existing shareholders now own $1,000m and
new shareholders $50m of the firm
Thus, the price per share for existing shareholders is
$1,000m/105m = $9.523
The value per share for existing shareholders is $9.523
+ $0.953 = $10.476
The average shareholder is indifferent to this change in
dividend policy (higher dividend per share is offset by
lower price per share)
Case 2: UIUC Corp. decides to eliminate dividends and
retain the $50m
Total value of the firm is
PV of after-tax operating cash flows + Cash balance
= $1,050m + $50m = $1,100m
The value per share is $1,100m/105m = $10.476,
meaning that the increase in share price is offset by the
loss of dividends
