ANALYSIS
OF FACTORS FOR DIVIDEND
Background
Dividend strategy of a
company, more particularly which is widely held, should be such that the needs
for funds within the company are satisfied and also the reasonable expectations
of the investing public/ share capital providers are met. Hence, a good course of action should strike
a balance between the outgo on account of dividend, and, retention of funds as
internal accruals of a company.
{ I } Types of Dividend
1. Regular
and stable Dividend.
In this case a sustainable
level of dividend is set and the same is raised only when the company can keep
up higher quantum. Hence, this level forms the base of the dividend payouts.
Efforts should be made to maintain this level or a higher quantum to give
stability and regularity to the dividend payouts. However, in the event of
adverse situations at any time the dividend may be cut, but, this is not
advisable since a reduction in dividend imparts unfavorable impact in the Stock
Market.
2. Constant pay out based on earnings.
In this case dividend is
paid equal to a constant percentage of the earnings of the company. Where there is a volatility in the earnings,
the dividend may also fluctuate in a unpredictable manner which is not advisable.
3. Multiple increase in dividend.
Here, small and frequent
increases in the dividend are done by the company to show that there is a
movement and growth in the company. The
signal of frequent dividend increases is expected to have positive impact in
the Stock Market.
4. Regular and extra dividend.
In this case, the dividends
are bifurcated into two portions. A
regular dividend and an extra dividend. The regular dividend is the one that is
expected to continue from year to year and the extra dividend will be as per
the financial position/performance of each year. The extra dividend may be paid by way of
interim dividend before the final dividend.
{
II } Factors which may be
considered for Dividend strategy
Need for funds by the Company.
Where there is
long term plans for growth, the company may follow the conservative dividend
policy. This will ensure that the
profits are retained in the company for future growth. Where the company does not have any major
future plans, the liberal dividend rule may be followed.
Where the
company needs to raise fresh resources from the investors in the market through
issue of shares/securities, it is necessary that dividend expectations of the
investors are reasonably satisfied.
Stability of Earnings.
If earnings are
relatively stable, a company is then able to better predict what will be its
future earnings. Hence, there is
likelihood to make higher dividend payout as compared to another company with
fluctuating earnings. Such company with
unstable earnings is not certain what its earnings shall be in future, so it is
more likely that it shall retain a higher proportion of its earnings.
Liquidity
In order to pay dividend, a
company requires cash and therefore, the availability of cash resources within
the company will be a determining factor.
Hence, liquidity position will influence the dividend pay-out of a
particular year.
Expectations of the shareholders
Where there are
large or significant institutional investors like mutual funds etc, the
expectations of these shareholders need to be kept in view. Moreover, general
expectations of the other shareholders should also be considered. If higher pay-out is anticipated by them, a
company should seriously consider this aspect.
Rate of Dividend
If dividend is
at a high rate, it may indicate that the company does not have good growth
plans in near future. A significantly
high rate may also make the intelligent investors suspicious. On the other hand, if the company declares
too low dividend, it may indicate a liquidity crunch and perhaps a strained
cash flow situation. This may also make
the investors apprehensive.
Particularly, also, where the Industry, in which the company operates,
is doing financially very well and competing companies pay higher rate of
dividend.
Dividend signaling.
It has been
observed that increase in the dividend is often accompanied by an increase in
the price of shares, and vice versa. A
divided reduction or non-payment of dividend in a year is likely to be bad news in the Stock Market. For this reason the dividend
is an important signal which a company sends to the market
Cost of external financing
This has an impact on the dividend
payout of a company. Where the external
funds are costlier the company may resort to low dividend payout and use the
internal funds for financing its business needs.
General State of Economy
When
the state of economy is uncertain, a company may maintain a low dividend payout
guidelines to withstand business risks.
Promoters Stake
A higher
Promoters’ stake in the share capital of a company may determine the dividend
payout as proportionate quantum of dividend shall be paid to the Promoters
themselves.
Dividend Cover
This indicates the number of times the
dividends are covered by net profits.
This highlights the amount retained by the company for financing of
future operations.
Dividend cover
= Profit after tax
Dividend.
Dividend
payout ratio.
This
indicates the extent of net profits distributed as dividend. High payout
signifies a liberal distribution policy.
A low payout reflects conservative distribution policy.
Dividend payout ratio = Dividend per share
Earning per share.
{III}
Conclusion
Dividend is a
very important pay out factor for companies, more particularly those widely
held companies whose shares are listed on stock exchanges, sending signals to
the market about their business health and the attitude of the management
towards their stakeholders, however, a logical approach by companies may not be
very widely prevalent. It is very imperative that Dividend Strategies should be
given high priority by corporate.
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