January 10th, 2018
Dividend Payout Policy|Is there any ‘Optimal’ Dividend Policy?
Establishing a universally applicable dividend policy would prove quite difficult since every entity is faced with its specific attributes that curtail such application. In addition, whereas some factors lead to a high payout others are thought to result into low payouts. Other factors also are theoretically proposed to lead to a fluctuating dividend payout and others promoting constant dividend payouts. Surveys in the reviewed literature also identify a growing trend towards use of alternative methods of investor returns such as repurchases as opposed to dividend payment (Fama & French 2001; H. DeAngelo, L. DeAngelo & Skinner 2004; Skinner, 2008). The search for an optimal dividend policy could thus lead back to the inquiry as to whether dividends are the best mode of return for investors. This section of the paper however is restricted to the assessment as to whether there exists an approach to modeling the dividend policy that would be applicable to every firm.
In the discussions then the effect that various determinants are thought to have on the dividend paid are presented (Summarized in Appendix table). First are those factors that would promote a high payout ratio. The existence of a natural clientele for high dividend paying stocks would for instance lead to a high payout policy to prevent share price declines in the market (Azzopardi 2004). Such would perhaps be advised on the uncertainty in future dividend payment that would make current dividends more alluring in terms of “spendable” income (Azzopardi 2004). Similarly high dividend payment could result where investors’ perceive such as ways to guard against management excesses in use of free cash flows (Easterbrook 1984). Finally the management could use the dividend policy to convey the internal status of the organization when they perceive the market value to be lower than the intrinsic value of the firm (Bhattacharya 1979).
Secondly are those forces that would lead to a lower dividend payout. One among these is the tax system operating in different regimes. Azzopardi (2004) for instance demonstrates that investors would receive different amounts of cash under different tax systems even when equal distribution amounts are assumed. Secondly existence of high growth opportunities would lead to preference of low payout to reserve funds for expansion activities that would lead to higher returns in future (Anil & Kapoor 2008; Denis & Asobov 2008). Such would also be said of low liquidity levels in the firm that would lead to plummeting of the net assets of the company g below “the aggregate of its called-up share capital and its undistributable reserves” if dividends are distributed (HM Revenue & Customs n.d, p.1). This legal provision would imply that public entities with low liquidity levels would strive to maintain the amounts of dividend distribution within the ranges that do not bear substantial risk in respect of lowering the net assets of the company.
Other forces could lead to a fluctuating dividend policy. For instance, the residual theory propositions would lead to such a policy. In the theory; only the project that has the best net present value (NPV) is chosen as the appropriate use of available profits (Azzopardi 2004). Considering dividend payment, investment and payment of debts to be the alternative uses of the available distribution profits; dividend payments would only be opted for if it proves to be the best use in accordance with NPV analysis (Azzopardi 2004). The effect of this is that in some periods there would be high dividend payments, in others low and yet in others no payment.
Finally historical dividend payments could affect the dividend paid in future. Managers for instance may be reluctant to increase the dividend where such would require a reversal of the decision in future (Lintner 1956). Decreases in the dividend payment may also signal unfavorable company information to the investors thus managers could avoid such decreases. Further, stable dividend policy may attract clienteles who require regular cash incomes and some degree of certainty in income (Azzopardi 2004). Such diverse needs of investors and attributes of dividend determinants imply that no one format of dividend policy can suite all firms. Such is further compounded by the fact that investors might not always act rationally when making investing decisions. Go to the conclusion here.