Question

2. ABC (Company) paid annual dividend of $2.04/share and generated EPS of $1.90 in 2019. ABC stock was trading at $39/share at year-end 2019. The book value per share was $25 at year-end.

• What was the dividend yield on the ABC's stock in 2019? What was the dividend payout by ABC?

• ABC paid an annual dividend of $1.88/share in 2016 and increased the amount paid each successive year. What is the average, annual percentage growth in dividends between 2016 and 2019 (three years of growth)?

• Does ABC follow the residual theory or the stable growth theory of dividend policy? Why?

Answer 1

Dividend yield = dividend per share / market price per share

Dividend yield = $2.04 / $39 = 5.23%

dividend payout ratio = dividend per share / EPS

dividend payout ratio = $2.04 / $1.90 = 107.37% (dividend per share is higher than EPS)

Ending dividend = beginning dividend * (1 + growth rate)^{number of years}

$2.04 = $1.88 * (1 + growth rate)³

growth rate = 2.76%

In a residual dividend policy, capital expenditures are funded with available earnings before paying dividends to shareholders. ABC has paid dividends higher than EPS. Therefore, it does not follow a residual dividend policy.

It follows a stable growth theory of dividend policy.