Qbank not correct?

Q# 138205:

Dan Bridges, head of equity strategies for Paca Inc. a consultant to institutional investors makes the following statement:

Globally, the developed markets have seen a decline in dividend payout ratios over time. Lately, we have also seen an increase in the proportion of companies engaging in share repurchases.

Bridges’ statement is most likely:

A) Correct

B) Incorrect as to dividend payout ratios.

C) Incorrect as to companies engaging in share repurchases.

The thing gives the correct answer as A. However, CFAI text states that “both aggregate dividend amounts as well as payout ratios have generally increased over time, although the fraction of dividend payers has decreased.”, which means B is the correct answer.

Could anyone clarify?

A is correct. Am not on that reading right now, but I do see it in my notes (notes based on the CFAI text). Cash dividends have decreased while share purchases have increased over time.

Thanks Aether. My quote is directly from the CFAI text, book 3 page 154. What I understand is that the number of dividend payers is diminishing, however among those who still pay, the dividend ratio is increasing (also as shown in Exhibit 12 page 154). And the question seems to refer the latter, not the former, which means the answer should be B. Or am I getting the question wrong?

The question’s talking about developed nations. Look at the last two bullets at the bottom of page 153.

“Both aggregate dividend amounts as well as payout ratios have generally increased over time, although the fraction of dividend payers has decreased.” As a hypothetical example, there were a 1000 companies paying cash dividends in 1970 in the US. In 2010, only 100 pay cash dividends and their payout ratios have increased; however the remaining 900 engage in share repurchases.

“Globally, the developed markets have seen a decline in dividend payout ratios over time.”

Just one last question: is the statement above talking about “1000 companies in 1970” down to “100 in 2010”, or is it talking about “their payout ratios have increased”?

DPR decreases imply less cash is being handed out. So 1000 were paying cash back in the day. But now, only 100 do. In cumulative terms, payout ratios (cash handed out by the 100 companies) may have increased, but their effect is subdued by the other 900 companies engaging in share repurchases.

So the statement, “the developed markets have seen a decline in dividend payout ratios over time,” is alluding to two events: (1) most companies now engage in share repurchases and (2) in cumulative terms, DPR has declined [because of (1)].

Ah, so by “developed markets”, they are referring to the companies cumulatively, not individually, correct?

And I thought my English was not that bad… I’m so dead…

Sure, that’s one way to look at it… developed markets incorporate millions of firms, not just one.