Lintner's Stylized Facts on Dividend Payouts

companies on dividend payments

• John
• Lintner
• conducted a series of interviews with managers about their firm’s dividend
• policy.
• He
• developed four
• “stylized facts” which describe how dividends are determined.

Lintner’s Four Stylized Facts

• 1. Firms have a long run dividend
• payout ratio.This
• ratio is that fraction of earning which the company intends to pay out as
• dividends.
• 2.
• Managers focus on dividend changes
• rather than absolute levels of dividends.Paying
• a $2 dividend is important if last year’s dividend was $1. It is unimportant if last year’s dividend was
• $2.

Lintner’s Four Stylized Facts

• 3. Dividend changes respond to
• long-run sustainable changes in earnings, but not to short-run changes.Managers are unlikely to change
• dividends in response to temporary variations in earnings. Instead, they “smooth” dividends.
• 4. Managers are reluctant to make
• dividend changes which might have to be reversed.They are particularly worried about
• having to reverse a dividend increase.

The Lintner Model

• Mangers believed that shareholders prefer a steady progression
• Investors see dividend decrease an unfavorable from mgmt abt firms future earning ability
• In sum, they worry that, assets, won't generate enough CF to support the dividend.

The Lintner Model

• Thus, in case of a circumstance in which dividends increase by large margins. The managers will wait to see if the earnings increase is permanent, before adjusting the dividend.

Seeking optimal Dividend Policy

• Why Dividends May Increase the Value of
• the Firm
• The
• argument for paying higher dividends rests on their desirability to investors.
• For
• example:
• Some
• institutional investors are not
• allowed to hold stock if it lacks an established dividend record.
• Some
• investors (trusts, endowment funds, retirees) rely on the dividends from their
• portfolio to provide them with income.