Relationship Between Dividend Policy And Share Price Volatility

Absent information about investors’ earnings quality concerns, it is likely to be the case that most of the variation in P/E ratios is due to differences in growth opportunities and (to a lesser extent) risk.

George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229

If earnings' growth rates are often used as estimated of dividend growth rates. However, these forecasts

The capital structure of a company changes the risks exposure highlighting the need to determine the impact of debt levels on financial risk (Pearson Learning, 2014). The dividend payout is the ratio of dividends per share to the earnings per share, and both ratios increased for the three years. The increase in the DPS rose at a decreasing rate resulting in slower growth in the dividend payout. The dividend per share is dependent on the total number of dividends paid out in an interim year, and the increase in the DPS was in line with the management’s efforts to reward the investors as the earnings improved. The dividend yield representing the dividend paid out relative to the share price, and the lower divided yield in December 2014 can be attributed to the higher share price hovering over $40, which was more than double the share price in the previous

We obtain the growth rate g in the dividend growth model by calculating the geometric average for the last 10 years based on Common DIV/SH.

The main purpose of the report is to make a decision for Linear Technology on dividend policy. The report analyzed the impact of changing future dividend policy on the value of the company, based on its historical performance, financial history and market trends.

The valuation process, in this case, requires us to estimate the short-run non-constant growth rate and predict future dividends. Then, we must estimate a constant long-term growth rate at which the firm is expected to grow. Generally, we assume that after a certain point of time, all firms begin to grow at a rather constant rate. Of course, the difficulty in this framework is estimating the short-term growth rate, how long the short-term growth will hold, and the long-term growth rate.

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

This is true since companies would be more likely to cut dividends when the market is doing poorly and pay dividends when the market is doing well, and by failing to maintain dividends payout the firm would send a bad signal to investors (Titman and Keown et al., 2011). It must also be noted that by not maintaining a stable dividend a stock price can decline by a greater amount than the price gains from the increase in dividends (Jiang and Koller, 2014). In the case of LT, the firm increased its dividend approximately US$0.0025 per share each quarter after their first dividend payout from Fiscal 1992 to Fiscal 1999 (Baker and Wagonfeld, 2004). The dividend payout ratio continued to grow steadily and by the last quarter of Fiscal 2000 dividends per share were increasing by an additional US$0.01 per share, per quarter (Baker and Wagonfeld, 2004). The company’s dividend payout in the third quarter of Fiscal 2003 was US$0.05, which increased in quarter 4 of Fiscal 2002 (Baker and Wagonfeld, 2004). In fiscal 2002, however, LT experienced its first significant drop in sales since the 1986 IPO where sales fell 47% and profits fell by 54% but it still continued increasing the dividend in order to maintain its reputation of profitability and positive cash flows to its investors (Baker and Wagonfeld, 2014). At the end of the third quarter of Fiscal 2003 its payout ratio reached approximately 28%, meaning that the firm

Baker et al. (2012) investigate factors that lead to the decision not pay cash dividends from Canadian mangers' perspective. The evidence shows that growth expansion opportunity, low profitability and cash constraints as the major causes underlying firms' decision not pay dividends. Also the results suggest taxations is at best second order as determinants of dividends.

The dividend model gives us a better understanding of how to value Apple stock prices. The

As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)

The dividend policy such as the payment of dividend affects the market price of share. If there is a debate in this issue, this theory is commonly accepted. In this report the relationship between dividend and the market price of share is proved in the banking sector of Bangladesh. But it is also revealed that

For the firm specific return prediction, a firm level monthly share prices, turnover and paid-up value data on KSE over eleven year period – January 2002 through December 2012 is collected from the websites of “Business Recorder and Karachi Stock Exchange” that are authentic sources of information. The data consists of monthly share prices of a large sample of 300 firms of 132 months. For risk free rate of return interest rate on 6-month Treasury bond is used. Accounting data has been collected from various bulletins of “balance sheet analysis” published by State Bank of Pakistan (SBP) Data set on “close prices” does not contain information on dividends. Mills and Coutts (1995) find that the exclusion of dividend payments is not a significant problem. This idea is, again supported by both Lakonishok and Smidt (1988) and fishe et al. (1993), who concludes that any dividend bias is relatively small and will not impact on the statistical significance of any results evidence from Draper and Paudyal (1997) adds further to this statement. However, it is noteworthy that Philips- Patrick and Schneeweis (1988) found conflicting evidence.

They suggest that firms with more risky returns on assets pay lower dividends, all other things being equal.