company: american airlines group

A Framework for Analyzing Dividends

Objective: To determine whether your firm should change its dividend policy based on an analysis of
its investment opportunities, its financial leverage, and comparable firms.
Key Steps: 1. Evaluate how much your company has returned to stockholders in the last few years
and in what form (dividends/ buybacks).
2. Measure the cash returned as a proportion of a scaling variable (market capitalization
and earnings).
3. Determine how much cash the company had available to return to its investors before
cash flows from issuing/repaying debt and after.
4. Evaluate how much investors in the company are likely to trust the company’s
management with their cash, paying particular attention to the company’s investment
track record.
5. Make a judgment on whether your company should return more or less in cash than it
actually does, keeping in mind its financial leverage.
6. Compare the firm’s dividend policy to those of its peer group and to the rest of the
market.
Framework
For Analysis: 1. Cash return to stockholders
a. Look at how much the company has paid out in dividends each year in absolute
terms and as a percentage of net income each year.
b. Look at how much stock the company has bought back each year and compute
the proportion of cash that is returned in buybacks.
c. If you can, look at the timing of the stock buybacks and the stock prices at which
these buybacks were done. If possible, pass judgment on whether the company’s
timing of buybacks has been beneficial or not for the remaining stockholders.
2. Affordable dividends
a. Examine how much the company had left over as cash flows, after taxes and
reinvestment needs, but before debt repayments/issues.
b. Estimate how much the company had left over as cash flows, after-tax,
reinvestment needs, and debt repayments/issues.
c. Estimate how much the company would have had left over as cash flows, after
taxes and reinvestment needs, if it had used its current debt to capital ratio to
fund reinvestment.
d. Track the cash balance of the firm over time.
3. Management trust
a. Look at the accounting returns (return on capital and equity) generated by the
firm in the most recent year and compare to the cost of capital and equity for the
firm.

b.Estimate the accounting returns for each of the last few years (5–10) to see if

there are trends in the returns or if volatile earnings cause the returns to vary
over time.
c. Compare the accounting returns earned by your firm to other firms in its peer
group.
d. Evaluate how well stockholders in the firm would have done, on a risk- and
market-adjusted basis, over the last few years.
e. If the management of the firm has changed, make a judgment on whether you
think that the future will deliver significantly different results from the past.
4. Changing dividend policy
a. Given your assessment of cash flows and cash returns from earlier sections,
estimate whether the company is generating cash surpluses or is at a cash deficit.
b. Given your analysis of past returns (accounting and stock), make a judgment on
whether you feel comfortable with current dividend/cash return policy.
c. Bringing into account your earlier analysis of the debt capacity of the firm (that it
is under-, over-, or correctly levered), make a reassessment of whether the
dividend policy of the firm is furthering the objective of moving toward the
optimal or undercutting that objective.
5. Comparing to sector and market
a. Relative to the sector to which this firm belongs, examine whether your firm is
returning less than, about what it should, or more cash than the typical firm.
Given your analysis of past returns (accounting and stock), make a judgment on
whether you feel comfortable with current dividend/cash return policy.
b. Relative to the rest of the firms in the market, evaluate whether your firm is
returning less than, about what it should, or more cash than the typical firm