Dividend Policy And Stylized Facts By Lintner

Stylized facts provided by Lintner model

The Dividend policy are the guidelines that a company follows in making a decision about how much earning will the company distribute as dividend. There are many studies conducted on Dividend policy and one of the significant studies conducted by Lintner. In 1956, Lintner conducted a study in which managers of 28 firms were surveyed regarding their existing dividend policy (Wood 2016). In this study based on the interviews, conducted Lintner has developed various stylized facts regarding dividend policy. The first fact that was observed is that dividend does not generally change with the change in earnings. Therefore, it can be said that dividends are sticky, as it does not change with change in one dollar of earning. The second fact that is observed is that the level of dividend is dependent on the long term sustainable earning of the company. The third fact that is observed from the study is that in order to move towards a long-term payout ratio the dividends were smoothed on a yearly basis (Moran et al. 2014). The fourth fact is that the managers were reluctant in making changes in dividend, as they might have to be reversed.  Based on the above observations Lintner has developed an adjustment model for dividend change and the model has successfully able to explain the year-to-year change in the dividend policy of the selected firms. Therefore, it can be said that the model developed by Lintner states that dividend policy has two parameters. The first parameter is the target payout ratio and the second parameter is the manner in which the current dividend is adjusted for the target. The formula that is developed using the model is given below:

D= C X R X EPSc + (1-C) X D(C-1)

D= Dividend per share for the current;

C= Adjustment rate;

R= target payout ratio;

EPSc= Earnings per share of the current year;

D(C-1) = Dividend per share of the last year;

The analysis of the dividend policy is useful because it helps to determine the manner in which the business is managed and the direction the business is moving. It helps the investor to make more decisions that are informed (Volkov et al. 2014). In this case, it is evaluated if the Ford and BMW has followed the stylized facts on dividend policy of Linter that has been discussed earlier.

Ford

The Ford is a multinational automaker company with headquarter in Michigan of United States of America. Henry Ford founded the company in the year 1903. The company is engaged in selling automobile and commercial vehicles. In 2016, the company has approximately sold 6651000 vehicles throughout the world. The company has another Financial Service agreement known as “Ford credit”. This segment is mainly engaged in financing and leasing vehicles.  Therefore, it can be said that the Ford Company has huge financial activity and in this section, it is analyzed whether the company has followed the stylized facts on the dividend policy as provided by the Linter. The Linter Model provides that the company follows a long-term dividend payout ratio and it is not effected by short-term changes.  That means the managers only change the dividend based on the change in the long-term earning of the company.  The model was provided that the company will follow a smooth increase in dividend and avoid certain cuts in dividend payments. On analyzing the dividend payment, it can be seen that the dividend payment of the company has grown between the years 2013 to 2016 by 29%. It can be seen that one of the stylized facts that the dividend will increase was followed but the increase was not smooth as provided in the model.  In 2013 to 2014, the increase in dividend was 25%, in 2014 to 2015, the dividend growth was of 20% and from 2015 to 2016, the growth in the rate of dividend was 42%. It is also one of the stylized facts of the model that the company should have a long-term payout ratio. On analyzing the dividend payout ratio of the company, it can be seen that the company does not follow a long-term constant payout ratio of the company. This calculation and the figure given below shows that this stylized facts of the Lintner model has not been followed by the Ford Motors. The calculations are given below:

Analysis of Dividend Policy of Ford

Table 1: Dividend payment of ford

(Source: created by Author)

Figure 1: Dividend payout

(Source: created by Author)

BMW

Bayerische Motoren Werke AG is engaged in manufacturing and sales of motorcycles in automobiles. The company has three segments of motorcycle, automotive and financial Services. The company has headquarter in Munich Germany and was founded in 6 March 1916. On analyzing the financial performance of the last 5 years, it can be seen that the revenue of the company has increased by 4.51%. In addition to this, the net income of the company has increased by 6.93% and earning per share of the company has increased by 6.88% for the same period. In this section, it is analyzed whether the company has followed the stylized facts on Dividend policy provided in the Lintner model (Mac 2013). The calculation and figure related to dividend payment is given below: 

Table 2: Dividend Payment

(Source: created by Author)

Figure 2: Dividend policy of BMW

(Source: Created by Author)

The calculation shows that dividend has constantly declined whereas the stylized fact of the model stated that the dividend would smoothly increase on a year-to-year basis. Therefore, the company has failed to fulfill this fact of the model (Capriglione 2014). However, the calculation of payout ratio shows that it has remained constant at around 0.30. It indicates that the company has followed one of the stylized facts of the model of maintaining constant long-term dividend payout ratio. Therefore based on the above discussion it can be said that BMW AG has partially followed the Lintner Model.

Answer to Question B

The investors and shareholders are the owners of the company. They have keen interest in determining the financial position of the company. The financial position of an organization is influenced by the key financial policies followed by the company. The declaration of dividend is considered to be one of the significant financial policy decision that a company is required to undertake. The majority of the companies considers that it is advantageous to declare dividend (Dash 2016). The main reason is that the declaration of dividend is expected to have positive influence on the share price and Goodwill of the company. It has been found that same information’s are conveyed by the earnings surprises and the dividend surprises. The increase in dividend is utilized by the managers to convey significant information and signals about the organization. That means the organizations that are announcing increase in dividend should see a positive abnormal return. On the other hand, the company that have decreased dividend should experience a negative abnormal return.  There are lots of research that has been conducted in order to analyze relationship between the Dividend policy and the movement in stock price. The study conducted by Petit in 1972 it was for the first time demonstrated that as there is a positive change in dividend payment as a result there is a positive change abnormal return (Malhotra 2017). In 1973 the findings of Petit was challenged by Watts. In a study conducted by him in 310 business firms it was observed that there is a positive relationship between unexpected change in dividend and the change in future earnings. Thereafter many studies have been conducted to analyze relationship between the change in stock price and dividend announcement. In 1981, Kwan conducted a study on announcements of ordinary and extraordinary dividend of 183 companies listed in New York stock exchange. The empirical evidence found in this study showed that there is a non-trivial relationship between dividend and earning of the future. In 1983, Woolridge conducted a study on the announcement of dividend on 225 listed companies in the New York stock exchange (Swift and Piff 2014). The result of the study was interesting it showed that if the dividend increases then share price provided a positive return. On the other hand, if there is a decrease in dividend then the return becomes negative. Therefore, the study have successfully established a strong relationship between the dividend announcements and future earnings. It can be seen that there are plenty of researches that have been conducted in this field. In the backdrop of this understanding, an attempt is made to analyses the influence of dividend decision on the share price of Ford and BMW AG.

Analysis of Dividend Policy of BMW

Ford

In order to conduct the study the share price of the selected stocks are collected on a weekly for the period of 1 year from 26-06-2016 to 26/06/2017. The table is constructed to show the effect on share price after dividend is declared. The analysis of Ford is given below:

Table 3: Share price Analysis of Ford

(Source: yahoo finance)

Figure 3: Share price history

(Source: Google finance)

The calculation and the chart above shows that after the announcement of dividends the share price of the company has declined. It can be seen that after the declaration of dividend on 26-07-2016 the share price of the company has fallen by 4%. The company declared the next dividend on 25-10-2016 and it can be seen that immediately after that the share price have fallen by 3%. On 18-01-2017 dividend was declared and it helped the company to reverse its declining share prices.  The company also declared dividend on 18-04-2017 and in that case, the share price have increased by 1%. Based on the above analysis it can be said that the movement in share price of the company does not indicate any particular relationship with the dividend announcement (Bodie 2013). However, the analysis have shown that the increase in the amount of dividend helps in increasing the share price of the company.  

BMW

Table 4: Share price analysis of BMW

(Source: yahoo finance) 

Figure 4: Share price of BMW

(Source: Google Finance)

The table and figure above clearly indicates that after the company has declared dividend the share price of the company has declined. 1%.  In addition to this, the share price have continued to decline for several weeks after the declaration of dividend. Therefore, it can be said that for this company dividend announcement has resulted in decline in share price of the company. One of the reason can be that the dividend amount can be below the expectation of the investors as a result they are selling their position resulting in decline in share price.

Based on the above discussion and analysis of the two company it is not possible to reach any definite conclusion. However, it can be said that the declaration of dividend have effect on share price but it is dependent many other factors like expectation of the inventors etc. The efficiency of the market can be concluded based on the efficient market hypothesis.

The Efficient market hypothesis is one of the popular investment theory that states that it is not possible to build the market because the stock market is efficient. That means the current share price of the company reflects and incorporates all the significant information relating to the company. The Efficient market hypothesis provides that the shares always traded at fair price as a result it is not possible for the investor to purchase undervalued or overvalued stock. There are three types of efficient market hypothesis weak, semi strong and strong. In the weak efficient market hypothesis, it is assume that the share price reflects all the information available in the market. The semi strong efficient market hypothesis assumed that share price make adjustments to all the information that are released to the public. In the strong efficient market hypothesis, the share price reflects information that are available privately and publicly. In this case, it can be seen that the share price of the companies have changed after dividend is declared but the change has not been constant. These indicates that as per the efficient market hypothesis the market cab be semi strong or strong as all the information including declaration of dividend is reflected in the share price. Based on the above discussion it can be concluded that the market is efficient.   

References

Bodie, Z., 2013. Investments. McGraw-Hill.

Capriglione, F., 2014. The Use of’Derivatives’ by Italian Local Authorities in Public Finance Management. Still an Issue. Browser Download This Paper.

Dash, J.W., 2016. Quantitative finance and risk management: a physicist’s approach. World Scientific Publishing Co Inc.

Mac Innis, J.P., 2013. Computer implemented finance management routing system. U.S. Patent 8,392,294.

Malhotra, Y., 2017. Toward’Cyber-Finance’Cyber Risk Management Frameworks of Practice: Bridging Networks, Systems, and, Controls Frameworks.

Moran, M., Porter, D. and Curth-Bibb, J., 2014. Funding Indigenous organisations: improving governance performance through innovations in public finance management in remote Australia. Australian Institute of Health and Welfare AIHW.

Swift, L. and Piff, S., 2014. Quantitative methods: for business, management and finance. Palgrave Macmillan.

Volkov, A., Klimov, A.A., Tugaev, M.J., Lysova, S.I. and Shoptenko, V.V., 2014. Teaching public finance management through simulation. Developments in Business Simulation and Experiential Learning, 31.

Wood, D.A., 2016. Comparing the publication process in accounting, economics, finance, management, marketing, psychology, and the natural sciences. Accounting Horizons, 30(3), pp.341-361.

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