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GM Raises Dividend 33% To 40 Cents

  To pay or not to pay! 

Net Income = Retained Earnings + Dividends

 Thus, the decision is a tradeoff between retained earnings and the distribution of value to shareholders. Note that the accounting "Dividends" above is the total payment to shareholders, while in finance Dividend is traditionally measured as divided per share, i.e., 

Dividend = Dividends/(number of shares outstanding)

 Moreover, the announcement represents an increase in regular dividends as opposed to a one-time distribution. The distinction is that the shareholders expect to receive the higher dividend on a regular basis in the future.

Market Reaction:

Q. Since the announcement was made after the close of the market, you need to look at the following day’s prices. The closing price on Tuesday was down 3/8. What does this suggest to you?

A. There are two plausible explanations:

(1) The average investor expected a higher dividend announcement. In this case, the announced cash flows were lower than expected. Thus, the price, the sum of discounted expected cash flows, declines.

(2) The average investor believed that an increase in dividends was not a good decision. Investors react negatively to bad news by selling the stock. Other things remaining equal, this would lower the market price.

Q. But why would shareholders perceive receiving value as negative?

 A. Since it is an increase in a regular dividend, this commitment becomes a "burden" on the firm, especially in bad times. A regular dividend becomes part of investors’ expected future cash flows, in contrast to a one-time dividend distribution. You might want to consult your favorite textbook for additional arguments and models of dividend policy.

Story Source: WSJ, 2/6/96, p. A3.