FNCE 301

• a firm's cash distribution policy determines the:

  • Level of cash distributions to shareholders
  • Form of the distribution (dividend vs stock repurchase)
  • Stability of the distribution
• the distribution ratio is the percentage of net income distributed to shareholders through cash dividends or stock repurchases
• the Payout ratio is the percentage of net income paid as a cash dividend. it must be less than the distribution ratio
• the distribution and payout ratios both determine the mix of yield return vs gain return
• A high distribution ratio and a high payout ratio means:

  • Large dividends and little to no stock repurchases
  • Dividend yield relatively high and expected capital gain low
• A large distribution ratio but a small payout ratio means:

  • Low dividends but more repurchases
  • Low dividend yield but high capital gain