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2. Importance of Dividend Yield
Respondent contends that Hawkins gave too much weight to the
capitalization of dividends and the capitalization of 3-year
average dividends multiples. Respondent points out that section
25.2512-2(f)(2), Gift Tax Regs., and Rev. Rul. 59-60, 1959-1 C.B.
237, state that dividend-paying capacity should be considered in
estimating the value of closely held stock, and that the
regulation does not say to consider actual dividends. Respondent
contends that the capitalization of dividends method is
unreliable and rarely used because the payment of dividends
allegedly has little effect on the price of stock. We disagree.
Hawkins gave more weight to actual dividends than to price
to earnings and price to gross cash-flow ratios because Home and
Rock Hill have significantly lower dividend payout ratios than
the guideline companies. The dividend payout rates10 of Rock
Hill (12.62 percent) and Home (25.03 percent) were considerably
less than that of other guideline companies, whose dividend
payout rates ranged from 27.78 percent to 85.31 percent. Six of
10 guideline companies paid dividends totaling more than 50
percent of their net income. Hawkins testified that a public
10 Dividend payout equals dividends (excluding special
dividends) per share divided by the net income available per
share. It measures the extent to which the company pays its
earnings to shareholders.
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