Dividend Policy : Review Of Theories

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.

George C. Philippatos and William W. Sihler, 'Models of Dividend Policy', Financial Management (Allyn and Bacon), 228-229

The capital structure of a company changes the risks exposure highlighting the need to determine the impact of debt levels on financial risk (Pearson Learning, 2014). The dividend payout is the ratio of dividends per share to the earnings per share, and both ratios increased for the three years. The increase in the DPS rose at a decreasing rate resulting in slower growth in the dividend payout. The dividend per share is dependent on the total number of dividends paid out in an interim year, and the increase in the DPS was in line with the management’s efforts to reward the investors as the earnings improved. The dividend yield representing the dividend paid out relative to the share price, and the lower divided yield in December 2014 can be attributed to the higher share price hovering over $40, which was more than double the share price in the previous

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.

Dividend Policy | -Pay out dividend to shareholders in profitable period | -100% plowback to reinvest in the business |

The Modigliani-Miller clearly postulates that the dividend policy is irrelevant. The value of the assets of FPL should be independent of the financial structure of the firm. Also, the choice of dividend payments or share repurchases should not influence the share price as both methods are ways to distribute cash to the shareholders. However, this is true only in the Modigliani-Miller world where there are no costs related to taxes or financial distress.

We studied long term trends in stock earnings and dividends from 1871 to the present. We observed two distinct periods: 1) from 1871 to 1945 where the common dividend policy was to focus on high payout ratios; 2) after 1945 companies started managing the amount of dividends paid per share. In the latter period, companies were slow to increase dividends as earnings increased, effectively reducing the payout ratio and providing them with a cushion to maintain dividends when earnings dropped temporarily. As a result, the payout ratio dropped, hitting a historical low of 30% in 2011. Since then, companies

The fact that shareholders are taxed twice through this repayment methodology infers that dividends are not their repayment technique of choice. Furthermore, paying out cash reserves through dividends also has the effect of both reducing the company’s assets and also inhibited the company’s ability to fund future growth as Dividends reduce the company’s retained earnings.

The dividends that stockholders receive and the value of their stock shares depend on the business’s profit performance. Managers’ jobs depend on living up to the business’s profit goals.

If we take a look at the company’s compounded annual growth rate in EPS we can see that Georgia Atlantic’s growth rate is really low compared to the industry average. Furthermore we can see from the first table that Georgia Atlantic’s P/E ratio is also lower in all the years as compared to the industry and the M/B ratio is also relatively low compared to the industry. Due to the fact that Georgia Atlantic is operating in a relatively mature market, there is a very low possibility for growth, that’s why we consider Georgia Atlantic as a low growth company. For low growth companies it is normal to have a low P/E ratio and a low B/M ratio because most of the company’s value comes from their current operations and assets. Because

A dividend is a usually distributed in cash form to stock holders of a corporation approved by the board of director. It may also include stock dividend or other forms of payment. A stock dividend represents a distribution of additional shares to common stockholders. Dividends are only cash payments regularly made by corporations to their stockholders.

Students will generally claim that dividends are valuable to shareholders, and that this decision is a big deal for EMI. This discussion motivates an introduction to the

“Corporate finance theory, teaching and the typically recommended practice at least in the US are all built on the premise that the primary goal of a corporation should be the maximization of shareholder value.”

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 DDM has a strict reliance on dividends means that the value of stock will be underestimated if the companies pay out less than they can afford and causing accumulation in the equity. For example, Amazon earned large profit but they choose to reserve the equity rather than paying out so much dividends.