Dividend Policy
january 2011
Dividends: The 2011 guide to dividend policy trends and best practices
Published by Corporate Finance Advisory For questions or further information, please contact: Marc Zenner marc.p.zenner@jpmorgan.com (212) 834-4330 Tomer Berkovitz tomer.x.berkovitz@jpmorgan.com (212) 834-2465 John Clark john.hs.clark@jpmorgan.com (212) 834-2156 Evan Junek evan.a.junek@jpmorgan.com (212) 834-5110
DiviDEnDs: ThE 2011 GuiDE To DiviDEnD poliCy TrEnDs anD BEsT praCTiCEs
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1
1. The return of the dividend
In many ways 2010 will be remembered as a year of recovery. Equity markets continued to rebound after 2009, appetite for fixed income securities continued to grow, and the cost of capital for large, well-capitalized firms dropped to historic lows. Remembering the financial panic of 2008, many firms adhered to a “fortress balance sheet” mentality, with cash balances remaining near all-time highs and balance sheets less burdened by debt than before the financial crisis.1 Despite the health of capital markets and corporate balance sheets, the forecast for the global economy remains bleak: unemployment in developed countries remains stubbornly elevated, OECD GDP growth estimates are muted, and local, state and sovereign governments struggle to balance fiscal solvency with social obligations. Simultaneously, non-financial S&P 500 firms hold approximately $1 trillion in cash and cash equivalents (about $3 trillion U.S.-wide), Bush-era dividend and capital gains taxes have now been extended for an additional two years, and at an estimated $200 billion in 2010, S&P 500 dividend payments are still just 80% of what they were pre-crisis.2 With this backdrop, board members have become increasingly focused on returning cash to shareholders, in particular through dividends, as a mechanism to implement capital discipline and provide a valuation floor. What are the benefits of a strong dividend policy? Does a strong dividend policy provide capital discipline, or
Dividends: The 2011 guide to dividend policy trends and best practices
Published by Corporate Finance Advisory For questions or further information, please contact: Marc Zenner marc.p.zenner@jpmorgan.com (212) 834-4330 Tomer Berkovitz tomer.x.berkovitz@jpmorgan.com (212) 834-2465 John Clark john.hs.clark@jpmorgan.com (212) 834-2156 Evan Junek evan.a.junek@jpmorgan.com (212) 834-5110
DiviDEnDs: ThE 2011 GuiDE To DiviDEnD poliCy TrEnDs anD BEsT praCTiCEs
|
1
1. The return of the dividend
In many ways 2010 will be remembered as a year of recovery. Equity markets continued to rebound after 2009, appetite for fixed income securities continued to grow, and the cost of capital for large, well-capitalized firms dropped to historic lows. Remembering the financial panic of 2008, many firms adhered to a “fortress balance sheet” mentality, with cash balances remaining near all-time highs and balance sheets less burdened by debt than before the financial crisis.1 Despite the health of capital markets and corporate balance sheets, the forecast for the global economy remains bleak: unemployment in developed countries remains stubbornly elevated, OECD GDP growth estimates are muted, and local, state and sovereign governments struggle to balance fiscal solvency with social obligations. Simultaneously, non-financial S&P 500 firms hold approximately $1 trillion in cash and cash equivalents (about $3 trillion U.S.-wide), Bush-era dividend and capital gains taxes have now been extended for an additional two years, and at an estimated $200 billion in 2010, S&P 500 dividend payments are still just 80% of what they were pre-crisis.2 With this backdrop, board members have become increasingly focused on returning cash to shareholders, in particular through dividends, as a mechanism to implement capital discipline and provide a valuation floor. What are the benefits of a strong dividend policy? Does a strong dividend policy provide capital discipline, or