TheLintnerModelofPayout

ThelateJohnLintner,coinventorwithWilliamSharpeoftheCAPM,alsowrotedownthefirst
quantitativemodelofpayoutpolicy.Hebasedthemodeloninterviewswith16manufacturingfirmsin
the1950s:

DIVt=Constant+SOA(TargetDIVtDIVt1),

whereDIVtandDIVt1arethecashdividendspaidinperiodstandt1,DIVtistheexpectedchangein
thedividendfromdatet1andSOAisthespeedofadjustment.Thetargetdividendequalsatarget
payoutratiomultipliedbyearningspershareinperiodt.WecanrewriteLintnersformulaas:

DIVt=Constant+SOA(TPREPStDIVt1)

Thisformulashowshowfirmssmoothdividendpayout.WhenEPSincrease,thetargetpayout
increases,butthefirmdoesnotgoimmediatelytothetargetbutonlypartofthedistancebetweenlast
periodsdividendandthetarget.Lintnerpredictedapositiveconstant,reflectingfirmsbiastoincrease
dividendsratherthancutthem.

Lintnersformulaworkedwellinthe1960sand1970s.Researchersestimatedtheconstantassmallbut
positive,asLintnerhadpredicted.TheSOAwasroughly1/3,indicatingthatdividendsmoveabout1/3of
thewayfromlastyearsleveltothetargetineachyear.Thetargetpayoutratiovariedfromfirmtofirm,
withhigherTPRsformature,slowgrowingfirms.

Theninthe1990sand2000sthemodelsperformancedegraded.EstimatedSOAsweresmallerandthe
constantwasnegative.Itappearsthatdividendshavebecomemuchstickierandlessresponsiveto
changesinearnings.

Whatchanged?Itwastheshiftofpayoutfromcashdividendstosharerepurchases.Skinnerfoundthat
theLintnermodelstillworks,moreorlessasitusedto,iffittedtototalpayout,definedasdividends
plusrepurchases.(Thatis,itworksforasampleofmaturefirmsthatpaydividendsandrepurchase
sharesregularly.Thefitofthemodeltoyoungerfirmsthatsometimesrepurchasebutdonotpaycash

dividendsislessimpressive.)

InLintnersday,companiessometimespaidspecialdividends,whichinvestorsunderstoodmightnotbe
repeated.Thespecialdividendssoakedupmuchofthevariabilityinpayout.Nowrepurchasessoakup
thatvariability,andspecialdividendsarerare. LambrechtandMyerssuggestthatsharerepurchases
havegivenfinancialmanagersanextradegreeoffreedom,allowingthemtomakecashdividendsmore
stablewhilestillmaintainingpayoutaccordingtoLintnersmodel.

Somejournalistsandinvestmentanalystshavecomplainedthatfirmsrepurchasemoreshareswhen
earningsarerobustandstockpriceshigh.Apparentlytheywouldlikefirmstotimethemarket,buying
shareswhentheirstockisundervalued.Buthowdoesbuyinglowhelpshareholders?Itsarawdeal
forshareholderswhosellbacktotheirfirmwhentheirmanagershavereasontobelievethatthestockis
underpriced.

RepurchasingmoreshareswhenearningsarerobustisexactlywhattheLintnermodelpredicts,because
targetpayoutincreaseswhenearningsincrease.

References:
J.Lintner,Distributionofincomesofcorporationsamongdividends,retainedearningsandtaxes,
AmericanEconomicReview46(1956),97113.
D.J.Skinner,Theevolvingrelationbetweenearnings,dividends,andstockrepurchases,Journalof
FinancialEconomics87(2008),582609.
B.M.LambrechtandS.C.Myers,ALintnermodelofpayoutandmanagerialrents,JournalofFinance,
forthcoming.