Dividend Theory And Growth Model

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

Dividend per share ratio is the sum of all dividends a company pays out over a fiscal year divided by the number of outstanding shares. It is used to share the profit of the company with shareholders. If this share decreases, it needs reinvestment in the operation, debt reduction and poor earnings of the company. In this case, there was an increase in the year of 2015 in J.B Hunt. It is used to share a company's profits with its shareholders. The reason for decreasing the value in dividend per share refers to reinvestment in the operation of a company, poor earnings, and debt reduction.

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

These ratios are the most closely viewed by creditors, investors and management (Cornett, Adair & Nofsinger, 2009). The dividend payout ratio is the amount paid to stockholders and the retained earnings ratio is the opposite (Sustainable Personal Finance, 2011). It is the amount that must be held back in order to make the payout.

When dividends are received, the amount is credited to the dividend revenue as they are regarded as a reduction in the investment made. Here the percentage of stocks purchased fall between 20 and 50 percent. For companies owning more than 50% of the total share, the consolidated financial statements are used. They include consolidated balance sheets, income statements, and cash flow statements. The equity method is used to account for the investment in the subsidiaries (Levy,

The provision of dividends is always associated with several problems in the process. Paying dividends regularly can easily lead to unrealistic expectations among the shareholders. Any irregularity in a dividend provision policy might raise issues of discontent among the investors or parties dependent on it, which results in the pressure on the company to maintain the dividends, such as the Linear Technology; they will have to maintain their policy of increasing the dividend’s percentage. Therefore, a company’s bad or poor performance that might affect the dividends is easily realized by the investors, which is disadvantageous for business.

Though stocks have statistically delivered higher returns in the long term compared to bonds, bond prices are less volatile. The dividends paid out on stocks are uncertain and depend on the distributable profits of the company, the company’s investment plans and cash needs for the same, and other such factors. On the other hand, bonds generally make a pre-specified interest payout to all bondholders periodically, thereby ensuring an assured, known cash-inflow in the hands of a bond-holder. Further, on maturity of the bond, a pre-determined principal amount is paid out by the issuer to the bondholder, to purchase back the bond. Hence, a bondholder who holds the bond to maturity, knows exactly how much he /she will receive both by way of interest as well as principal on maturity. This is completely untrue for stocks, where neither the dividend flow nor the capital appreciation is predictable with certainty.

The dividend payout ratio that compares dividends per share (DPS) to earnings per share (EPS) explains how much money the company is returning to shareholders compared with that holds in hand for further reinvestment. It is a productive tool for assessing a dividend 's sustainability. M&S makes up an overall 25% higher percentage than Next in both financial year 2014 and 2015.

When deciding on changes to dividend pay-out ratio, there are several factors which must be considered. This piece looks at the different underlying theories which affect management’s decision, before looking at what policy would be considered best for FPL and how to implement a change.

21   Investment Ratios: ............................................................................................................................................. 23  1.  Dividend Payout Ratio ......................................................................................................................... 23   2.  Earnings per Share (EPS)...................................................................................................................... 24

Thus, shareholders rely on dividends, dividend announcement and changes in dividend between periods as a basis for company valuation, performance evaluation and to forecast future earnings. An increase in dividends is often regarded as a positive signal, which causes share prices to increase, and cause investors to buy more shares. On the other hand, a decrease in dividend will cause a decrease in share price, as investors sell their shares.

Symbolically, P = [m (D+E/3)]  Where P is the market price,  M is the multiplier,  D is dividend per share,  E is Earnings per share.  Drawbacks  of  the  Traditional  Approach:  As  per  this  approach,  there  is  a  direct  relationship  between P/E ratios and dividend pay­out ratio. High dividend pay­out ratio will increase the P/E ratio  and low dividend pay­out ratio will decrease the P/E ratio. This may not always be true. A company’s  share prices may rise in spite of low dividends due to other factors.  15.3 Dividend Relevance Model  Under this section we examine two theories – Walter Model and Gordon Model.  15.3.1 Walter Model  Prof.  James  E. Walter  considers  dividend  pay­outs  are  relevant  and  have  a  bearing  on  the  share  prices  of  the  firm.  He  further  states,  investment  policies  of  a  firm  cannot  be  separated  from  its  dividend  policy  and  both  are  inter­linked.  The  choice  of  an  appropriate  dividend  policy  affects  the  value of the firm. His model clearly establishes a relationship between the firm’s rate of return r, its  cost of capital k, to give a dividend policy that maximizes shareholders’ wealth. The firm

Dividend policy is a major financing decision that involves with the payment to shareholders in return of their investment. Every firm operating in a given industry

A dividend is the part of a firm`s earnings that are paid to the shareholder, either in monetary terms or as shares. In the UK, dividends are paid by UK-quoted companies semi-annually and are taxed depending on an individual`s income (Arnold, 2008 & GOV.UK, 2015). According to the Financial Times (2015) however, a dividend payment to shareholders is not an obligation, in fact a business`s board of directors are able to opt whether they desire to make a dividend payment or not, depending mostly on the health of the business. If so, the dividend payment to shareholders is made from a firm`s accumulated profits or reserves pots, with the anticipation that the firm can cover this withdrawal of monetary funds by injecting further cash quickly and efficiently into the firm or shareholders may receive dividends in forms of shares, in this situation, a firm is unlikely to lose much as shareholders would be likely to reinvest into the firm. Conversely, if a firm`s board of directors opt the opposing decision, not to make a dividend payment, this is likely to be due to a firm supporting an insufficient cash-flow or the monetary fund’s being identified as needed urgently for more meaningful purposes, such as reducing debt (The Financial Times, 2015). Despite this, the main question in consideration is: whether a rational investor considers dividends when determining the value of shares? In order to answer this question effectively, this essay shall commence further through exploring

In order to test the relationship between dividend yield and expected return, Black & Scholes (1974) created 25 portfolios of common stock in New York Stock Exchange which consistent with dividend irrelevance hypothesis. The results showed not only no significant association between dividend yield and expected return, but also there is no evidence that difference dividend policies will lead to different stock prices.