Sunday, May 24, 2009

The Latest In Dividend Research

For investors interested in the latest research on the factors impacting dividend policy for corporations, Harry DeAngela (Marshall School of Business-USC), Linda DeAngela (Marshall School of Business-USC) and Doulas J. Skinner (University of Chicago Booth School of Business), recently published a paper titled, Corporate Payout Policy. In this recent research the authors' have incorporated recent corporate dividend activity and related it back to prior dividend research by Lintner, Miller and Modigliani, Fama and French, just to name a few.

The paper begins with a discussion on the distribution of free cash flow and just a few of the topics reviewed are:
  • Are Dividends Disappearing
  • Why Do Dividends Survive
  • Signaling and the Information Content of Dividends
  • Taxes and Payout Policy
  • The Advantages of Stock Repurchases
As the authors note, the paper is organized:
...around a simple asymmetric information-based theoretical framework that moves beyond MM (1961) to determine optimal payout policy as a time-varying trade-off of the security valuation problems in Myers and Majluf (1984), which encourage retention, versus the agency costs of free cash flow (FCF) in Jensen (1986), which encourage payouts. The latter two path-breaking studies trail only Jensen and Meckling (1976) in terms of their importance to the post-MM (1958, 1961) corporate finance literature; thus, they provide solid building blocks for a theory that can explain the main features of real-world payout policies including, e.g., why payouts become increasingly likely (and retention less so) over the corporate lifecycle. The foundation of this framework is the need to distribute FCF to make investors as well off as possible — a principle that drives optimal payout policies even in the absence of frictions, but whose fundamental importance only became clear with Jensen’s (1986) analysis of the stockholder welfare consequences of managerial failures to distribute full value.
An example of one portion of the research publication is the recent desire of corporations to institute stock buybacks in place of higher dividend payments. The paper notes, historically, companies would payout excess earnings in the form of specially designated dividends (SDDs). The current research suggests many companies now implement stock buyback programs instead of SDDs. In the past these so-called SDDs were counted as dividends.
Finally, Grullon et al. (2008) find that firms’ overall net propensity to distribute cash to stockholders—defined as the fraction of firms with positive net payouts measured as dividends plus stock repurchase payouts minus equity issues — has not in fact declined over the past three decades. Their analysis suggests that the simplest explanation for the secular decline in the incidence of firms that pay dividends is that most firms continue to distribute cash when their earnings and investment opportunities indicate that it is appropriate to do so, but that they now rely increasingly on stock repurchases to deliver those distributions to investors, consistent with the results in Grullon and Michaely (2002) and Skinner (2008). It is still early to accept this explanation as the definitive factor driving the decline in the propensity to pay dividends initially identified by Fama and French (2001), but the explanation does have a strong ring of plausibility to it, especially given the tectonic shift in the population of publicly traded firms toward firms that are currently unprofitable and/or as yet unable to generate positive earnings for stockholders on a consistent basis.
The research paper contains a great deal of useful dividend data that incorporates recent dividend and buyback activity. It is a worthwhile reading for the serious dividend investor.

(H/T: Douglas J. Skinner)


Corporate Payout Policy
DeAngelo, DeAngelo and Skinner
May 2009

1 comment :

Dividends4Life said...

David: Nice read. thanks for sharing it!

Best Wishes,