Chapter16: Payout Policy
16-1 Facts about Payout
Corporations can pay out cash to their shareholders in two ways. They can pay a dividend or they can buy back some of the outstanding shares. In recent years dividend payments and stock repurchases have amounted to a high proportion of earnings.
Although dividends remain the principal channel for returning cash to shareholders, many corporations pay no dividends at all. In the U.S., the percentage of dividend-paying firms fell from 64% in 1980 to 52% in 2007.1 Some of the non–dividend payers did pay a dividend in the past but then fell on hard times and were forced to conserve cash. Further, a large number of new growth companies have gone public in recent years and do not pay a dividend. In the U.S. these include such household names as Sun Microsystems, Cisco, Amazon, and Google, as well as many small, rapidly growing firms that have not yet reached full profitability.
Figure 16.1 shows that before 1983 stock repurchases were fairly rare, but since then they have become increasingly common. In 2007, a record year for stock repurchases, 28 U.S. companies each bought back more than $5 billion of stock. Exxon Mobil bought back $31 billion, Microsoft bought back $28 billion, IBM $19 billion, and GE $14 billion.
1The proportion of dividend payers among U.S. industrial companies is even lower. See E. Fama and K. French, “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics 60 (2001), pp. 3–43. In Europe the decline in the proportion of dividend payers has been particularly marked in Germany. See D. J. Denis and I. Osobov, “Why Do Firms Pay Dividends? International Evidence on the Determinants of Dividend Policy,” Journal of Financial Economics 89 (July 2008), pp. 62–82.