Chapter 12 • The dividend decision
to sell need not do so. Share repurchasesallow the business to make significant cash
distributions in a particular year without establishing any expectations of the future
level of dividends.
It is common for businesses to make share repurchases involving a limited number
of shareholders while paying ‘normal’ dividends.12.6 Dividends: the evidence x
The scale of dividends
Whatever the effect on overall shareholders’ wealth of particular dividend policies,
the evidence shows that historically in the USA dividends have contributed 52 per
cent of returns to shareholders during the period 1872 to 2000, the remaining 48 per
cent coming from increases in share values (Coggan 2001). These proportions have not
been consistent over the period. In recent years, for example, the contribution of divi-
dends has been rather less than the average for the period. Between 1995 and 2000,
dividends contributed only 20 per cent. There is no reason to believe that the relation-
ship between capital gains and dividends is significantly different in the UK.
Benito and Young (2003) examined dividends paid by UK businesses between 1974
and 1999. They found that, since 1995, there has been an increasing tendency for busi-
nesses to pay no dividend. In 1995, 14.3 per cent of businesses paid no dividend, but
this had increased to 25.2 per cent by 1999. Although the single most important factor
in failing to pay dividends was a lack of profitability, the recent increase in the pro-
portion of businesses failing to pay a dividend is associated with new, expanding busi-
nesses that have never paid a dividend. The latter point is entirely consistent with
MM: finance that is needed for profitable investment is not used to pay dividends.
Benito and Young also noted an increasing tendency to reduce dividends over recent
years. On the other hand, the higher dividend payers in 1999 were paying out about
twice as much by way of dividends, relative to sales revenue, as their high-paying
counterparts in 1977. These findings suggest much more flexible dividend policies
in recent years; more non-payers and smaller big payments. This would be consistent
with MM.
Fama and French (2001) found that, in the USA, the percentage of businesses
paying dividends fell from 66.5 per cent in 1978 to 20.8 per cent in 1999. Like Benito
and Young in the UK, they found that this decline partly related to the changing
profile of stock market listed businesses towards younger, smaller businesses with
low profitability and strong growth opportunities. They also found a general decline
in the dividends among all businesses.
DeAngelo, DeAngelo and Skinner (2004), again with US data, supported the Fama
and French finding that there is a decreasing number of businesses paying dividends.
They also found, however, that total dividends paid by all businesses had increased.
The larger dividends paid by the big payers have tended to outweigh the other end of
the range, where there are lower dividends or none at all. These two US studies are
consistent with Benito and Young’s UK finding that there seems to be more flexibility
in dividend policies than used to be the case.
The flexibility point is further supported by Julio and Ikenberry (2004). They found
that the propensity of US businesses to pay dividends in the late twentieth century was
reversed in the early 2000s. They attributed this reversal to several factors, including:‘