Companies' dividend policy

Résumé du document

The dividend policy is one of the most important financial policies, not only from the viewpoint of the company, but also from that of the shareholders, the consumers, the workers, regulatory bodies and the Government. For a company, it is a pivotal policy around which other financial policies rotate. The value of the corporate securities depends, to a great extent, on the dividend. Thus, in deciding upon the financial structure of a company, the dividend needs to be assigned due consideration.
Once a company makes a profit, the board of directors must decide what to do with those profits. They could continue to retain the profits within the company, or they could pay out the profits to the owners of the firm in the form of dividends.
Once a company decides to pay dividends, a somewhat permanent dividend policy should be established, which would impact on investors, and the perceptions of the company in the financial markets, by providing information concerning the firm's performance. The choice of the appropriate dividend policy depends on the preferences of investors and potential investors as well as on the company's capital structure and its future plans.

Extraits

[...] If the rate on ordinary income had been held constant and the rate on capital gains lowered, as happened in 1997, this would have made repurchases more attractive. Moreover, with a share repurchase, the stockholder has a timing option. He or she can accept the share repurchase offer or reject it and continue to hold the stock. With a cash dividend, there is no such option. Also, capital repurchase is used for making large capital structure changes. The firm, however, must be careful not to undertake a steady program of repurchase in lieu of paying dividends. [...]

[...] Individual investors are taxed at ordinary tax rates, corporations have an advantage of not paying tax on a portion of the dividends they receive, and pension funds are not taxed at all. It also varies according to the national tax policy. Let's consider some examples: In the United States, due to the tax reform of 1986 companies could profit for at least a short period from the equalized tax rates between dividends and capital gains. Both were taxed at 28%. After this, the individual income tax rate (tax on dividends) has grown significantly to while earnings were hit with the 35% corporate income tax. [...]

[...] Unfortunately, it is impossible to match the above condition in practice because of unequal tax rates on dividends and capital gains. In 1970 Elton and Gruber (hereafter showed that if taxes enter investors' decisions, then the fall in price on the ex-dividend day should reflect the post-tax value of the dividend, relative to the post-tax value of capital gains on that day. Because dividends in most time periods are taxed more heavily than capital gains, the theory suggests that if taxes affect investors' choices, the fall in stock price should, in general be less than the dividend, and the drop could be used to infer marginal tax rates. [...]

[...] Thus, managers use their judgment when setting dividend policy. Also, if different firms have different clienteles, and if the clienteles are all happy, then different companies might have different payouts but similar prices and P/E ratios, which would confuse the empirical tests. Let us then consider some factors that could influence the corporate dividend policy: Signaling Historically, companies have been reluctant to cut their dividends - they don't cut dividends unless things really look horrible to the management. Moreover, investors are aware of the management's reluctance to cut dividends. [...]

[...] For every 20 shares of stock owned, the stockholder receives an additional share. The balance sheet of the company then would be: With a stock dividend, $800,000 is transferred from retained earnings to the common stock and paid-in capital accounts. Because the per value remains the same, the increase in number of shares is reflected in a $100,000 increase in the common stock account. The residual $700,000 goes to the paid-in capital account. Consequently, the firm's shareholders' equity remains the same. [...]