Transcript Payout Policy in the 21st Century

Payout Policy in the
st
21
Century
Alon Brav
Duke University, Durham, NC USA
John R. Graham
Duke University, Durham, NC USA
Campbell R. Harvey
Duke University, Durham, NC USA
National Bureau of Economic Research, Cambridge, MA USA
Roni Michaely
Cornell University, Ithaca, NY USA
IDC, Israel
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Brav/Graham/Harvey/Michaely: Payout Policy
Introduction
• In 1956, John Lintner laid the foundation for the modern
understanding of dividend policy
• He conducted detailed interviews with 28 companies
• His research helped set the agenda for theoretical and empirical
research on dividend policy
• Much has changed in the last 50 years.
– Possibly different payout policy goals
– Repurchases
– More insights from theory that may help direct the spotlight in the right
direction
• We revisit this path-breaking study at the beginning of the 21st
century
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Brav/Graham/Harvey/Michaely: Payout Policy
Introduction
• We survey 384 financial executives with an
instrument that focuses on both dividends and
repurchases
– 256 public, 128 private
– Most presented results are based on the public firms
• We conduct one-on-one interviews with 23 CFOs or
Treasurers of prominent corporations
– Interviews last between 40 minutes and two hours
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Brav/Graham/Harvey/Michaely: Payout Policy
Methodology
Survey and Interview Design
• Draft survey instrument “refereed” by both finance
researchers and experts in survey design
• Interviewed structured to adhere to best scientific
practices of interviews, e.g. Sudman and Bradburn
(1983)
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Brav/Graham/Harvey/Michaely: Payout Policy
Methodology
Survey Delivery
• Survey CFOs, Treasurers, Finance VPs
• Primarily members of Financial Executives
International
• Two $500 random winners
• Three surveys
–
–
–
–
FEI CFO Forum (April 23, 2002, Co. Springs CO)
Dave Ikenberry NFCF (May 1, 2002, Houston TX)
Mass emailing to 2200 FEI members
Overall ~16% response rate
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Brav/Graham/Harvey/Michaely: Payout Policy
How are payout decisions made?
Goals of Treasury department:
• Fund investment
– M&M
• Liquidity and possible contingencies
• Payout decisions are second-order
Except...
• DO NOT CUT DIVIDENDS ranks equal to or
above all of these items
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Brav/Graham/Harvey/Michaely: Payout Policy
Payout vs. Investment Decisions
4e: Fund externally, rather than cut
3e: Fund externally, rather than cut
4a: Investment decision made 1st
3a: Investment decision made 1st
7h: Good alternative investments
6h: Good alternative investments
7j: M&A strategy
6j: M&A strategy
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
Dividends vs. Repurchases (Fig. 2)
Fig. 2A: Of funds that are used to pay dividends, what is their most likely alternative use? (Current dividend
payers only). For each response we report the percentage of respondents who answer 1 or 2 on a scale from -2 to
+2.
Pay down debt
Repurchase shares
Mergers/Acquisitions
Invest more
Retain as cash
Other
0%
10%
20%
30%
40%
50%
60%
70%
80%
Fig. 2B: Of funds that are used to repurchase shares, what is their most likely alternative use? (Current share
repurchasers only). For each response we report the percentage of respondents who answer 1 or 2 on a scale
from -2 to +2.
Pay down debt
Mergers/Acquisitions
Invest more
Retain as cash
Pay more dividends
Other
0%
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10%
20%
30%
40%
50%
60%
70%
80%
Brav/Graham/Harvey/Michaely: Payout Policy
Complements or Substitutes?
• Level of dividend fixed
• Substitute repurchases for change in dividends
– One way substitution
• Would use even more repurchases if they were
free of constraint of dividend history
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Brav/Graham/Harvey/Michaely: Payout Policy
Lintner (1956)
Three main points
• Target payout ratio (dividend/earnings)
• Dividend policy set conservatively
– “partial adjustment” to target payout
– smooth through time
– sticky (history important)
• Level given, focus on changes
– tied to long-run sustainable earnings
– do not increase now if you might have to cut later
• No repurchases
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Brav/Graham/Harvey/Michaely: Payout Policy
Compare to Lintner (1956)
Dividend policy still “conservative”?
• Yes
• Perceived big penalty for cut, small reward for
increase
– So, smooth, to avoid future cuts
• Path dependence of dividend policy
• BUT
– stealth dividend cut if possible
– holding dividend constant OK
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Brav/Graham/Harvey/Michaely: Payout Policy
Payout Decisions Still Made Conservatively? vs. Lintner (1956)
6d: Try to avoid cutting
5d: Try to avoid cutting
4d: Neg. consequence to cutting
3d: Neg. consequence to cutting
7L: Maintain historic policy
6L: Maintain historic policy
5b: change in div what matters
5j: not want to cut in future
5c: smooth from year to year
0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases: No, flexible
Dividends: Yes, still conservative
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Brav/Graham/Harvey/Michaely: Payout Policy
Conservatively increase payout? Similar to Lintner (1956)?
7c: Stability of future earnings
6c: Stability of future earnings
7b: Sustainable change in earnings
6b: Sustainable change in earnings
7d: Excess cash on balance sheet
6d: Excess cash on balance sheet
7a: Temporary increase in earnings
6a: Temporary increase in earnings
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
Payout ratio still target? vs. Lintner (1956)
Level of dividends per share
Dividend as a % of earnings
Growth in dividends per share
Dividend yield
Do not target at all
Other
0%
10%
20%
30%
40%
50%
60%
For those that paid dividends within the past 3 years, what do you
target when you make your dividend decisions?
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Brav/Graham/Harvey/Michaely: Payout Policy
Payout ratio still target? vs. Lintner (1956)
A flexible goal
A somewhat strict goal
Not really a goal
A strict goal
0%
10%
20%
30%
40%
50%
60%
For those that paid dividends within the past 3 years, is the target part of
a strict goal or a flexible goal?
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Brav/Graham/Harvey/Michaely: Payout Policy
Payout ratio still target? vs. Lintner (1956)
Extension of Fama-Babiak (1968), Choe (1990)
Di ,t   i  1i Di ,t 1   2i Eit  u .
• The SOA=  ˆ1 and TP=  ˆ 2 / ˆ1 .
• Both SOA and TP have declined through time using
both matching sample to our survey and broader
Compustat sample
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Brav/Graham/Harvey/Michaely: Payout Policy
Summary vs. Lintner (1956)
•
Dividend policy still very conservative
•
•
•
Payout ratio no longer target
•
•
Modern cash cows live in (close to) Lintner
world
Repurchase policy is not (i.e., it is more flexible)
Targets very flexible
Repurchases now very important
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Brav/Graham/Harvey/Michaely: Payout Policy
Miller and Modigliani (1961)
•
Payout Policy irrelevant if capital markets perfect
•
Imperfections that could explain payout policy
–
–
–
–
•
Taxes
Managerial agency conflict
Information/signaling
Other factors (EPS, float, credit ratings, etc)
Clienteles could result from imperfections
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Brav/Graham/Harvey/Michaely: Payout Policy
A. Taxes
• Theory: At least for individual investors,
dividends are taxed move heavily than capital
gains.
• Therefore:
– Firms should consider investors’ taxation when
deciding about payout policy
– Relative taxation should affect the amount of
dividends they pay
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Brav/Graham/Harvey/Michaely: Payout Policy
A. Taxes
•
Interviews: repurchases are “efficient way to return capital”
–
•
taxes (2nd order) important
Surveys: modest support
7g: Investor taxes
6g: Investor taxes
8a: Investor taxes lower vs. dividends
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
B. Clienteles
• Investors that pay (relatively) more taxes on
dividends should hold stocks that pay out through
repurchases.
– Translation: Individual investors should have an
aversion to dividend paying stocks. By
implications, institutions should be more
attracted to such stocks.
• Prudent man
• Institutions as monitors
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Brav/Graham/Harvey/Michaely: Payout Policy
B. Clienteles
•
Retail investors
–
–
•
Prefer dividends, in spite of tax disadvantage
Firms like because loyal
Institutions
–
–
If anything, prefer repurchases
Some can not invest in zero dividend stocks
• 42% say pay dividends because of prudent man rules
– Tax advantage not an issue to institutions
– Firms like because they “have the money”
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Brav/Graham/Harvey/Michaely: Payout Policy
B. Clienteles
•
•
•
Companies do not think that dividends attract institutions more so than do
repurchases
Companies do not use dividends or repurchases attract institutions to
monitor
Inconsistent with Allen, Bernardo, and Welch (2000) idea that firms use
dividends to attract institutional investors
7o: Attract institutions
6o: Attract institutions
7p: Attract inst. bc they monitor
6p: Attract inst. bc they monitor
7i: Influence of institutions
6i: Influence of institutions
7n: Attract retail investors
6n: Attract retail investors
0%
Repurchases
Dividends
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
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90%
Brav/Graham/Harvey/Michaely: Payout Policy
C. Agency Stories
• Firms pay dividends to impose discipline on
managers
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Brav/Graham/Harvey/Michaely: Payout Policy
C: Free Cash Flow
•
•
Interviews: some say: “money can burn hole in pocket”
–
But payout not the way to fix the problem
Surveys: (1) no support in general, (2) repurchases work as well as dividends but
(3) Cash cows are much more likely to pay; more reluctant to cut; more likely to
keep dividend growth as earnings growth
7f: Disciplinary role
6f: Disciplinary role
Repurchases
Dividends
0%
10%
20%
30%
40%
50%
60%
70%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
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80%
Brav/Graham/Harvey/Michaely: Payout Policy
D. Asymmetric Information
•
Conveying information
•
Costly self-imposed action—Signaling
•
Adverse selection
–
•
Do informed investors benefit from repurchase programs,
at expense of uninformed?
Stock undervaluation
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Brav/Graham/Harvey/Michaely: Payout Policy
D: Do payout decisions convey information?
•
Interviews: Yes, punctuation mark at end of sentence
–
–
•
Need to be consistent with other forms of communication
Repurchases convey as much as dividends
Surveys: Yes, convey info in general
4b: Convey information?
3b: Convey information?
7m: Running low on investments?
6m: Running low on investments?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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90%
Brav/Graham/Harvey/Michaely: Payout Policy
Information: Signaling
4h: Look better than competitors?
3h: Look better than competitors?
4i: Show we can bear costs
3i: Show we can bear costs
5i: pass up good investments
5h: investor bear dividend tax
5g: bear external financing cost
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
•
Surveys
–
–
–
•
D. Information: Signaling
No supporting evidence
Scores are even lower for growth/risky firms
39% (16%) say keep div (repurchase) policy of peers
Interviews
–
–
–
Spent hours on this issue
Generally try to group selves with peers (not separate)
No evidence of
•
•
–
increasing dividend to show market that firm is strong
viewing dividend as self-imposed cost
Avoiding dividend cut
•
•
•
Possibly a signal (costly for bad firms, separate from bad)
Cuts are rare – can’t explain dividend policy for most firms
Does not explain why firms pay dividends in the first place
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Brav/Graham/Harvey/Michaely: Payout Policy
D. Information: Stock Price
•
Interviews: Would like to buy when price low, but
–
–
–
•
often want to maintain liquidity at this time
do not want credit rating downgrade
So, it’s a conditional objective
Surveys: repurchases, stock good investment
7q: Stock price low
6q: Stock price low
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
E. Other factors: EPS
•
Interviews: managers are concerned about EPS
–
–
•
Some think it’s automatic that repurchases increase EPS
Other believe that it depends on alternative use of funds
Surveys: EPS important
8b: Increase EPS
8f: Offset stock option dilution
8g: Options not dividend protected
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchase questions
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90%
Brav/Graham/Harvey/Michaely: Payout Policy
E. Other factors: Float and credit ratings
•
Interviews: Float very important
–
•
Execs think they need to have a large number of shareholders
Interviews: credit rating important
–
–
Hoard cash to improve rating
Especially for financial firms or firms with financial divisions
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
Initiate with repurchases or dividends?
share repurchases only
dividends only
some combination of
dividends and
repurchases
0%
10%
20%
30%
40%
50%
60%
70%
Fig. 6D: What would your first payout be if you were
hypothetically deciding to pay out capital for the first time. (For
neither dividend payers nor share repurchasers only.)
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Brav/Graham/Harvey/Michaely: Payout Policy
Why initiate payout?
9i: stock undervalued
10i: stock undervalued
9m: convey info bc undervalued
10L: convey info bc undervalued
9c: Extra cash
10c: Extra cash
9n: Float/liquidity improves
9j: Increase EPS
9L: Offset stock option dilution
0%
10%
20%
30%
40%
50%
60%
70%
80%
Percent of CFO's who rate choice as +1 or +2 (on scale of -2 to +2)
Repurchases
Dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
Conclusions
• Payout policy is not first-order important*
(M&M)
• Repurchases: decided de novo
• Dividends: level very important
• Managers prefer repurchases over dividends
because they are more flexible.
– Not because of taxes.
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Brav/Graham/Harvey/Michaely: Payout Policy
Conclusions
• According to managers, payout
– convey information
– NOT being used as a costly signal
– NOT being used to attract institutions
• Managers do not use dividends over
repurchases to attract institutions
• Institutions do not push for more dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
Conclusions
• Managers of cash cows believe more
strongly that
– Dividends should be stable
– Keeping dividend growth rate with earnings
growth
• But all managers reject the notion that they
need dividends so that they will not spend
cash unwisely.
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Brav/Graham/Harvey/Michaely: Payout Policy
Rules of the Game:
How payout policies are determined
• Make investment plans first*
• Take care of cash/liquidity needs
• *BUT, remember, level of dividends fixed
• Only reduce dividends in extraordinary
circumstances
•
•
•
Severe penalty for cutting dividend because the market
believes that “cuts precede bad news”
So, don’t ever cut dividends
• unless you have an amazing investment opportunity
• smaller penalty if competitors cut
Think very carefully before initiating dividends
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Brav/Graham/Harvey/Michaely: Payout Policy
Rules of the Game
• Desire to maintain the level of dividend “at any
cost” consistent with findings in Graham,
Harvey and Rajgopal, 2004, “The Economic
Implications of Corporate Financial Reporting”
•
•
•
Here managers desire to hit consensus EPS “at any cost”
55% would knowingly sacrifice value (not pursue a very
positive NPV project) if it would cause the firm to miss next
quarter’s target!
78% would knowingly sacrifice value to smooth earnings
39