PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY
15 -1 PAYOUT POLICY FUNDAMENTALS
In Chapter 5, we argued that the value of a share equals the present value of the cash flows the
shareholder receives over time. Even though a company is not paying dividends or repurchasing shares
today, its market value reflects the likelihood that the company will either pay dividends or repurchase
shares in the future or be acquired by another company, at a price that reflects a higher stream of cash
payments. To provide an understanding of the fundamentals of payout policy, we begin with a discussion
of the procedures for paying cash dividends and the factors affecting dividend policy.
15 -1a CASH DIVIDEND PAYMENT PROCEDURES
In Australia, as in most countries, shareholders do not have a legal right to receive dividends for every
earning period. Instead, a company’s board of directors must decide whether to pay dividends. The
directors usually meet to evaluate the company’s recent financial performance and future outlook, and
to determine whether, and in what amount, dividends should be paid. The payment date of the cash
dividend, if one is declared, must also be established.
Payment Patterns and Measures
In Australia, most companies that pay dividends do so twice a year. These dividends are usually known
as the interim dividend and the final dividend. Companies can also pay special dividends related to a
particular event. In the US, companies that pay dividends usually do so once every quarter. Companies
adjust the size of their dividends periodically, but not necessarily every quarter. Figure 15.1 provides
LO 15.1
FIGURE 15.1 US PAYOUTS 1990–2009: DIVIDENDS, REPURCHASES AND EARNINGS
Aggregated earnings and payouts, non-financial firms
0
50
100
150
200
250
300
350
400
450
500
0
50
100
150
200
250
300
199
0
199
1
199
2
199
3
200
9
200
8
200
7
200
6
200
5
200
4
200
3
200
2
200
1
200
0
199
9
199
8
199
7
199
6
199
5
199
4
Earnings ($bn) Payout ($bn)
Earnings
Repurchases
Dividends
Note: Two scales. Dividends decreased a small amount for nonfinancial companies during the 2008–09 recession,
while repurchases decreased much more.