Dividend Policy

When to issue a dividend, if at all is the issue many companies face. What is important is the maximisation of shareholder wealth. In the UK dividends are paid every six months with the interim dividend reflecting a company’s half year results and a final dividend when the financial year ends. However, it is known for companies not to follow this pattern of issuing dividends with some companies paying no dividend at all.

Apple Inc. has seen its profits and cash flow sky rocket in the past ten years due to its innovative technology. Yet until recently, when it announced it was going to pay a dividend the company had not issued one since 1995. It was well known that Steve Jobs disliked giving money away which could have been used for R&D or to buy up rivals. However, investors began asking questions after seeing Apple had $97.6bn in cash at the end of 2011. The company has agreed to a pay a quarterly dividend of $2.65 per share from July 2012.

Despite Apple not issuing a dividend they have still maximised shareholder wealth. In ten years the share price of the company has gone from $10 to over $600. Depending on the clientele will determine whether an investor is happy with receiving no dividends or little dividends. People who are retired and who want a steady flow of income will be more inclined to a company which pays high consistent dividends. On the other side of the coin investors who are wealthy will not be concerned with dividends and will prefer an increase in share price to try and make quick returns on their investment.

According to the theory, maximising shareholder wealth means maximising the flow of dividends to shareholders. However, according to Miller and Modigliani (1961) dividend policy is irrelevant to share value if some assumptions are made, such as no taxes and no transactional costs. They propose projects with a positive NPV are what determine value rendering dividend policy useless. However, the problem with this theory is it is based on assumptions and therefore companies see issuing dividends as a way to maximise shareholder value.

Investors welcome dividends because there getting returns on their investments. Surely the issue of dividends cannot be perceived as a negative. Wrong! Some investors may see issuing or increasing dividends as a signal that a company has run out of ideas. Increasing dividends could have a negative effect on a company’s share price giving incorrect signals to the market.

Companies may be thinking about their credit rating when deciding on a dividend policy. If a company issues a consistent dividend policy then it’s perceived as a strong company and therefore achieves a good credit rating. Paying lower interest rates will mean a higher return on projects and thus achieve greater returns to shareholders. Not all companies issue dividends mainly because they can’t afford to. Performance may be poor or their money may be tied up in too many fixed assets.

There is no set formula for how a company structures its dividend policy. Most investors are happy as long as they are seeing good returns on their investment. A company’s performance is what is important because no dividends will be issued if a company is performing badly. 





Sources Used: bbc.co.uk, Arnold: Corporate Financial management (2008)