Stable dividend policy

CFA Level II Corporate Finance
#1

If a question asks you to identify or describe a stable dividend policy, what do you think it should be ? 1) A constant dollar amount of dividend 2) An amount that increases regularly at a normal (average inflation maybe) level Schewser seems to think that it is the second and I think thats correct. Just saw this on CFAI PM mock. So wanted to confirm

#2

2 sounds better.

#3

I was reviewing schweser notes- it said though earnings maybe volatile- div payments for consistently similar. So I would think it has to be 1.

option 2 would be a constant div payout ratio

#4

Option 2 is not a constant div payment, that would be if you say div is 5% of NI. Here it is rising with inflation which makes some sense.

#5

yeah…so option 2 would be like if earnings $100 and DPR 10%. div =$10 and earnings $350 then div =$35. So it fluctuates based on earnings.

#6

Thanks for the confo guys

#7

Hi there,

Definition states regular dividends generaly not related to earnings. The dividend is regular, not the increase in the dividend.

So only the first answer would comply.

Going further, if you look at exercice 10 p.170 Vol3 , stable dividend in this case is a 1$ payment for several years. Wich would go for the first one; a constant dollar amount.

Any though?

Thank you and good luck,

#8

thoughts here, s2000?

#9

Stable dividend means constant dividend amount, increasing only occasionally.

#10

it’s a case of semantics…

this is something that in the real world… asking different PMs/ analysts will get you different answers but you just have to go with what CFA says…

#11

It’s called a stable dividend policy, not amount.

#12

The policy is about a dividend amount though.

Thus the policy word would just encompass the amount intrinsic nature of the dividend to include other details such:

  • How the amount of dividend is calculated, GENERALY not related to earnings

  • How the dividend is stable

So on my first opinion I am now more balanced between a double answer, making the schweser question even more a mess, the kind of mess that gives a proper useless loss of time while doing the exam.

Because you would have to look at the correlation between inflation and earnings to deem if the dividents are related to earnings (Don’t forget the GENERALY, you might be on a case where it is in fact related to earnings…carefull) and then… then there is the STABILITY and in fact stability could also mean a stable growth even if not directly specified.

If anyone brought up a Logit model on whether the CFA definition coupled with excercice has a sens, please let me know.

A la tienne MrSmart,

#13

J***s…

I thought it was option two because of inflation.

#14

I read CFAI text and it seems #1 is the stable policy, but then

just missed a schwezer qbank question because it was defined as #2.