While welook atdividenddiscount modelsinthe coming
chaptersinmoredepth,therearethreepatternsin dividend
policy that are important and need emphasis:
- Dividends are sticky. In most time periods, U.S. and
European firms leave their dividends per share unchanged
from prioryears. Dividendchangesareunusual, and when
theydooccurdividendincreasesarefarmorecommonthat
dividendcuts.InpartsofLatinAmericaandAsia,dividend
payout ratios are sticky but absolute dividends are volatile.
2.Dividendsfollowearnings.Changesindividendstendto
neither lead changes in earningsnor be contemporaneous.
Firmstendtowaittomakesurethatincreasesinearningsare
sustainable beforeinitiating an increasein dividends.As a
result,dividendspershare tendtobe smootherand donot
manifest the volatility that earnings per share do.
3.Stockbuybacksareincreasinglyviewedasanalternativeto
dividends.Inthepast twodecades,firmshaveincreasingly
turned to stock buybacks as an alternative to paying
dividends.Thebiggestbenefitofstockbuybacksisthatfirms
donotfeelobligatedtocontinuebuyingbackstock,whereas
marketspunishfirmsthatdiscontinuepayingdividends.Until
2003, stock buybacks also offered tax benefits relative to
dividends for most investors.
Many analysts continue to favor using dividends as the
measureofcashflowtoequityfortworeasons.First,itisone
ofthefewcashflowmeasuresthatisobservableanddoesnot
requireestimation.Second,itisacashflowthatconservative
investorscancountonasabasecashflow,sincemostfirms
tendtoset dividendsatlevelstheycansustainforthelong