To examine how much cash your firm has returned to its stockholders and in what form (dividends or stock buybacks) and to evaluate whether the trade-off favors returning more or less.

Key Questions

• Has this firm ever paid out dividends? If yes, is there a pattern to the dividends over time?

• Given this firm’s characteristics today, do you think that this firm should be paying more dividends, less dividends, or no dividends at all?

Framework for Analysis 1. Historical Dividend Policy

• How much has this company paid in dividends over the past few years?

• How have these dividends related to earnings in these years?

2. Firm Characteristics

• How easily can the firm convey information to financial markets? In other words, how necessary is it for them to use dividend policy as a signal?

• Who are the marginal stockholders in this firm? Do they like dividends or would they prefer stock buybacks?

• How well can this firm forecast its future financing needs? How valuable is preserving flexibility to this firm?

• Are there any significant bond covenants that you know of that restrict the firm’s dividend policy?

• How does this firm compare with other firms in the sector in terms of dividend policy?

Getting Information on Dividend Policy You can get information about dividends paid back over time from the financial statements of the firm. (The statement of changes in cash flows is usually the best source.) To find typical dividend payout ratios and yields for the sector in which this firm operates examine the data set on industry averages on my Web site.
Online Sources of Information www.stern.nyu.edu/~adamodar/cfin2E/roject/data.htm