Changes to Dividend Pay-out Ratio

The dividend policy has grown over the years. This may be so that the company projects itself as a less risky share and thus also gaining investors faith. The investors buy its shares and thus increase its demand. This helps to gives positive signals to the investors signalling that the company is stable and can generate earnings steadily. This hypothesis is gains standing from the dividend hypothesis theory.

* Corporations incur taxes at the corporate level at marginal rates; while, distributions to shareholders are taxed at dividend rate

When a company decides to pay dividends, it has to be careful on how much it will be given to the shareholders. It is of no use to pay shareholders dividends

Double taxation: A corporation must pay income taxes on its profits, and then shareholders must also pay personal taxes on the dividends they receive from the corporation.

In order to understand the dividend policies of a company the dividend payout ratio and the dividend yield ratio are identified. Investors focus on the stock price and the dividends to decide whether to cash in on a stock. At the same time, the performance of a stock when compared to the overall industry performance is necessary when buying and purchasing stocks. Investors receive dividends regularly, based on the declared dividends that are mostly affected by the earnings.

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

In practice, dividend policy will be affected by taxes as tax rates for different categories of investors will differ. Also, a firm’s dividend policy is perceived by the financial markets to be a signaling mechanism. A cut back in dividends may signify that the firm perceives tough

Investors often look at utility companies for their high dividend yields and growth over time. Although a high dividend is something sought by investors in utility companies, a high payout ratio can represent a negative signal. The high FPL’s payout ratio gives the company little room for error; if earnings would be adversely impacted in the future the company would be faced with the possibility of not being able to pay the dividend.

If the company didn’t make profit, you might not receive cash dividends, but the situation is different in stock dividends. For example if the price of stock decrease 5%, but the company pays 5% dividend, you will not loss.

Based on the financing needs, as above dividends would be additional stretch on company finances

While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first

Paying dividends will reduce the available funds of the company but is a way to increase shareholder value. Increasing or decreasing of DPR spells out the standing of the company to its shareholders. Reduction or not giving dividends for a period will reduce AFN but will mean that the company is struggling to provide enough profit. Shareholders may see this as a signal that further investments for the company are riskier.

The results of the regression did not show a significant relationship between the dividend policy and ownership duality. So, we cannot establish a relationship between dividend policy and ownership duality; hypothesis H2, in this case, is not validated. Concerning foreign ownership, the results indicate a positive and significant relationship between the level of the presence of foreign shareholders and the level of dividend distribution. The relationship between the two variables is significant at the 5% level. In other words, the more the level of foreign ownership increases, the more the level of distribution of dividends increases. Consequently, Hypothesis H3 is supported.

There are many theoretical and empirical results describing the decisions companies make in this area. At the same time, however, there is no generally accepted model describing payout policy. Moreover, empirical findings are often contradictory or difficult to interpret in light of the theory. In their seminal paper, Miller and Modigliani (1961) showed that under certain assumptions dividends are irrelevant; all that matters is the firm’s investment opportunities. Miller and Modigliani considered the case of perfect capital markets (no transaction costs or tax differentials, no pricing power for any of the participants, no information asymmetries or costs), rational behaviour (more wealth being preferred to less, indifference between cash payments and share value increases) and perfect certainty (future investments and profits are given). In real life, however, people seem to care about dividends. Lintner.s (1956) classical study on dividend policy suggests that dividends represent the primary and active decision variable in most situations. Lintner suggests a model of partial adjustment to a given payout rate.

The first objection is related to the fact that this is a totally new approach concerning dividend policy, and nobody can predict what is going to happen. We consider that this may have positive effects on share prices, especially taking in consideration that it will stabilise the market price of the company.