Foreign Profitability and Dividend Policy

1. Séminaires de Gestion Foreign Profitability and Dividend Policy Robert JOLIET FNRS Research Fellow Université de Liège

2. Multinational Firms & Segmental Financial Performance • Typically, the long-term growth rate of a project will be highly correlated with economic growth in the country, specially in the long-run and according to the firm’s business. • Percentage profitability and earnings vary from one country to another. A relatively “low” profitability in one country might be acceptable in a different one. • International diversification smoothing effect vs. specific regional effect.

3. The Value of Foreign Operations • Operations in different countries present the firm with different costs, barriers, political climates and legal restrictions  Operating regions/countries usually experience varied rates of profitability, risk and growth. • Valuation likely varies depending upon the location of the operations  disaggregation needed •  A geographical breakdown of firms’ operations may provides investors with useful information. • Investors may not fully understand the benefits and risks involved in the heterogeneous foreign operations tend to underestimate the persistence of foreign earnings. •  IS THERE INTERACTION WITH DIVIDEND POLICY ?

4. The Effect of Segmental Profitability on Stock Returns • Corporate Profitability is an essential key component in the computation of the cost of equity. Expected Dividend Yield Future Growth Rate for a multinational firm i, operating in n foreign region j

5. The Effect of Segmental Profitability on Stock Returns (2) • Assuming a changing profitability associated with associated with forthcoming projects existing projects

6. Dividend Yield & Segmental Profitability • Depends on the investment growth opportunities available (investors’ expectations & agency costs problems) • Signalling effects

7. Empirical Analysis • 388 firms from North America, Europe, and Australasia • Study on a 10 year period (1993-2003) • Based on incremental regional accounting profitability (ROIC) with respect to the domestic one (levels and changes). • Regional and Country-specific analysis • Simultaneous and lagged stock returns, following the firm’s fiscal year • Dividend-paying stocks vs. Non-dividend-paying stocks • Dividend per share adjusted for stock splits • Year, industry and firm’s nationality (fixed) effects.

8. A. Dividend-Paying Stocks

9. Empirical Analysis (1) : Dividend-Paying stocks –Simultaneous Stock Returns & Segmental Profitability

10. Empirical Analysis (2) : Dividend-Paying stocks – Lagged Stock Returns & Segmental Profitability

11. Empirical Analysis (3) : Dividend-paying stocks – Lagged Stock Returns & Segmental Profitability Variation, Dividend Yield

12. Empirical Analysis (4) : Dividend-paying stocks – Expected Dividend Yield & Segmental Profitability

13. Empirical Analysis (5) : Dividend-paying stocks – Past Dividend Yield & Segmental Profitability

14. B. Non-Dividend-Paying Stocks

15. Empirical Analysis (6) : Non-Dividend-paying stocks – Simultaneous Stock Returns & Segmental Profitability

16. Empirical Analysis (7) : Non-Dividend-paying stocks – Lagged Stock Returns & Segmental Profitability

17. Concluding Remarks • The relation between geographical profitability and common equity valuation depends on investors’ expectations and whether a firm pays dividends. • Dividend Policy seems to give a sign to investors about the profitability and the investment opportunities in the different area of operations.The dividend yield tends to be pushed down by operating regions/countries with sustainable growth opportunities.

18. Thank you for your attention