Dividend Policy Analysis: Historical, Project Assessment, and Forecasting, Lecture notes of Financial Economics

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Analysis of Dividend Policy

Objective

Inputs neede

Output

Analysis of Dividend Policy

1. To compare how much a firm has returned to its stockholder historically (up to 10 years) with

2. To provide an assessment of project quality (ROE compared to cost of equity) and stock price

3. To provide forecasts of how much cash the firm will have available for stock buybacks in the f

For historical analysis:

a. Net Income

b. Depreciation, amortization and other non-cash charges

c. Capital expenditures: Please include acquisitions as part of capital expenditures

d. Non-cash working capital changes

In entering these numbers, please make sure that you get the signs right (check the comment box

e. Dividends: Only cash dividends should be shown here (ignore stock dividends)

f. Stock Buybacks: Include the cash flow associated with stock buybacks.

For project assessment and stock price performance analysis

a. Beta: You should really use an average beta over the historical period, but go ahead and use yo

b. Book Value of Equity: To compute return on equity.

c. Return on the stock: This is the total return you would have made as an investor: It includes pr

d. Riskfree rate: The one-year government security rate at the start of each year (use the T.Bill ra

e. Return on Stock Market: This is the total return on the stock market each year

(You can get the last two from the worksheet that is part of this spreadsheet that reports historica

For forecasts

a. Expected growth rates in net income, dividends, depreciation, capital expenditures and revenu

b. Working capital as a percent of revenues

c. Debt as a percent of reinvestment, looking forward. As a default, you can use your historical a

Historical Analysis

1. FCFE and Cash Returned each year for the historical period

2. Returns on equity, the stock and your required return each year for the historical period

3. Averages of both over the entire period

Forecasts

1. Forecasted FCFE for next 5 years

2. Forecasted dividends for next 5 years

3. Cash available each year for stock buybacks for next 5 years.

Section 1: Inputs for estimating Dividends and FCFE How many years of historical data do you have available? Current debt to capital ratio = Do you want to want to change this ratio to a target debt ratio? If yes, enter the target debt ratio to use = Enter the following data for the years for which you have data (starting with the most recent year of data and work Year Net Income Depreciation & AmortizatioCapital Spending & operating investme 1 $6,136.00 $2,192.00 $2,796. 2 $5,682.00 $1,987.00 $3,784. 3 $4,807.00 $1,841.00 $3,559. 4 $3,963.00 $1,713.00 $2,110. 5 $3,307.00 $1,631.00 $1,753. 0 $4,427.00 $1,582.00 $1,586. 0 $4,687.00 $1,491.00 $1,566. 0 $3,374.00 $1,437.00 $1,319. 0 $2,533.00 $1,339.00 $1,823. 0 $2,345.00 $1,210.00 $1,427. Enter the dollar dividends paid and equity repurchases for each year of historical data (staring with most recent yea Year Dividends (aggregate)Equity Repurchases (in $) 1 $1,324.00 $4,087. 2 $1,076.00 $3,015. 3 $756.00 $4,993. 4 $653.00 $2,669. 5 $648.00 $648. 0 $664.00 $4,453. 0 $637.00 $6,923. 0 $519.00 $6,898. 0 $490.00 $2,420. 0 $430.00 $335.

Section 2: Assessing Investment Quality and Stock Performance The following section of the dividend policy analysis looks at the quality of your firm's investments and the risk-adju you have a measure of excess returns (ROIC- Cost of capital) or a Jensen's alpha computed for your stock, you can u The last set of inputs to this analysis relate to project choice and performance: Enter the beta for the equity of this firm: 0. Enter the following data relating to performance (starting with most recent year): (Make sure that you update the r Year BV: Equity Annual return on stock T.Bill rate 1 $380,078.00 35.33% 0.07% 2 $330,056.00 10.65% 0.05% 3 $194,181.00 -5.15% 0.03% 4 $84,200.00 16.22% 0.13% 5 $63,437.00 31.17% 0.14% 0 $91,658.00 38.30% 1.59% 0 $79,717.00 -3.45% 4.64% 0 $63,054.00 10.27% 4.68% 0 $44,602.00 -11.55% 3.01% 0 $37,019.00 7.60% 1.23% Section 3: Inputs for forecasting future dividends and FCFE Use these inputs if you want to make projection of FCFE for the future Expected growth in Revenues over next 5 years = Expected growth in Net Income over next 5 years = Expected growth in capital expenditures in next 5 years = Expected growth in depreciation in next 5 years = Enter non-cash working capital as a percent of revenues Enter revenues from most recent year = Enter net income from most recent year or normalized value = Enter capital expenditures from most recent year or normalized value = Enter depreciation in most recent year = Enter dividends paid in the most recent year =

5 (number of years) 11.58% No 40.00% Use less years, if you do not have the data. nt year of data and working backwards). Chg in Non-Cash W Net Debt Issued ($133.00) $1,881. $940.00 $4,246. $950.00 $2,743. $308.00 $1,190. ($109.00) ($235.00) $485.00 $1,005. $45.00 $4,990. ($136.00) $2,891. $270.00 $1,076. $51.00 $276. ng with most recent year): (Equity repurchases are in the statement of cash flows)

ments and the risk-adjusted, market-adjusted performance of your stock over the period. If for your stock, you can use those measures instead of the ones computed here. re that you update the riskfree rate and return on the market from the attached worksheet to reflect the time period for your da Return on market 32.15% Note: I have the numbers for the US in the Historical stock & t.bill worksheet. 15.83% Please match up the annual data for the years for your company. 2.07% If you are in foreign market and don't 14.82% have these numbers, leave them at the US levels. 25.94% -36.55% 5.48% 15.61% 4.83% 10.74% 5.00% 5.00% 5.00% 5.00% 6.00% $42, $6, $2, $2, $1,

Dividend Policy 26 Page 26

Analysis of Past Dividends

1 2 3 4 5 0 Net Income $6,136.00 $5,682.00 $4,807.00 $3,963.00 $3,307.

• (Cap. Exp - Depr) $604.00 $1,797.00 $1,718.00 $397.00 $122.
• ∂ Working Capital ($133.00) $940.00 $950.00 $308.00 ($109.00) Free CF to Equity (pre-debt) $5,665.00 $2,945.00 $2,139.00 $3,258.00 $3,294.00 $0.

• Net Debt Issued $1,881.00 $4,246.00 $2,743.00 $1,190.00 ($235.00) = Free CF to Equity (actual debt) $7,546.00 $7,191.00 $4,882.00 $4,448.00 $3,059. Free CF to Equity (target debt ratio $5,719.54 $3,261.93 $2,447.94 $3,339.63 $3,295.51 $0. Dividends $1,324.00 $1,076.00 $756.00 $653.00 $648.
• Equity Repurchases $4,087.00 $3,015.00 $4,993.00 $2,669.00 $648.00 $0. = Cash to Stockholders $5,411.00 $4,091.00 $5,749.00 $3,322.00 $1,296. Dividend Ratios Payout Ratio 21.58% 18.94% 15.73% 16.48% 19.59% Cash Paid as % of FCFE 71.71% 56.89% 117.76% 74.69% 42.37% _Performance Ratios

1. Accounting Measure_ ROE 1.61% 1.72% 2.48% 4.71% 5.21% Required rate of return 28.98% 14.27% 1.86% 13.37% 23.38% ROE - Cost of Equity -27.36% -12.54% 0.61% -8.66% -18.17%

Dividend Policy 27 Page 27

2. Stock Performance Measure Returns on stock 35.33% 10.65% -5.15% 16.22% 31.17% Required rate of return 28.98% 14.27% 1.86% 13.37% 23.38% Jensen's alpha 6.35% -3.62% -7.01% 2.85% 7.79% Index 1 1 1 1 1 0 Aggregate Average Net Income $23,895.00 $4,779. Dividends $4,457.00 $891. Dividend Payout Ratio 18.65% 18.46% Stock Buybacks $15,412.00 $3,082. Dividends + Buybacks $19,869.00 $3,973. Cash Payout Ratio 83.15% Free CF to Equity (pre-debt) $17,301.00 $3,460. Free CF to Equity (actual debt) $27,126.00 $5,425. Free CF to Equity (target debt ratio $18,064.54 $3,612. Cash payout as % of pre-debt FCFE 114.84% Cash payout as % of actual FCFE 73.25% Cash payout as % of target FCFE 109.99% ROE 3.02% Return on Stock 17.64% Required Return 16.37% ROE - Required return -13.36% Actual - Required Return 1.27%

Dividend Policy 29 Page 29 0 0 0 0

FORECASTED FCFE AND DIVIDENDS

Debt Ratio used in forecasting FCFE = 11.58% Forecasted FCFE 1 2 3 4 Net Income $6,443 $6,765 $7,103 $7,

• (Cap Ex - Deprec'n) (1 - DR) $561 $589 $618 $
• Change in Working Capital (1 - DR) $112 $118 $124 $ FCFE $5,770 $6,058 $6,361 $6, Expected Dividends $1,390 $1,460 $1,533 $1, Cash available for stock buybacks $4,380 $4,599 $4,829 $5, Revenues $44,392 $46,611 $48,942 $51, Non-cash WC $127 $133 $140 $

Year S&P 500 3-month T.Bill10-year T. Bond

43.81% 3.08% 0.84%

-8.30% 3.16% 4.20%

### 4.55% 4.54%

### 2.31% -2.56%

-8.64% 1.07% 8.79%

49.98% 0.96% 1.86%

-1.19% 0.32% 7.96%

46.74% 0.18% 4.47%

31.94% 0.17% 5.02%

### 0.30% 1.38%

29.28% 0.08% 4.21%

-1.10% 0.04% 4.41%

### 0.03% 5.40%

### 0.08% -2.02%

19.17% 0.34% 2.29%

25.06% 0.38% 2.49%

19.03% 0.38% 2.58%

35.82% 0.38% 3.80%

-8.43% 0.38% 3.13%

5.20% 0.57% 0.92%

5.70% 1.02% 1.95%

18.30% 1.10% 4.66%

30.81% 1.17% 0.43%

23.68% 1.48% -0.30%

18.15% 1.67% 2.27%

-1.21% 1.89% 4.14%

52.56% 0.96% 3.29%

32.60% 1.66% -1.34%

7.44% 2.56% -2.26%

### 3.23% 6.80%

43.72% 1.78% -2.10%

12.06% 3.26% -2.65%

0.34% 3.05% 11.64%

26.64% 2.27% 2.06%

-8.81% 2.78% 5.69%

22.61% 3.11% 1.68%

16.42% 3.51% 3.73%

12.40% 3.90% 0.72%

-9.97% 4.84% 2.91%

Yes No