DIVIDENDS

CHAPTER SUMMARY



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A Requirement
Presented to the Faculty of the Graduate School
Polytechnic University of the Philippines
Sta. Mesa, Manila


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In Partial Fulfillment of the Requirements for the Degree
Master in Business Administration





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By
Allan Gresly Gaa






Dividend
Dividend Policy is the policy or the rules which the company follows to decide the amount which the
share holders will be paid. Management must decide on 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. They can be paid either in cash or Share capital depending on the
frequency. Normally the dividends to be distributed are the net profit of the company incurred in the
time period.
Once the company decides on whether to pay dividends they may establish a somewhat permanent
dividend policy, which may in turn impact on investors and perceptions of the company in the financial
markets. What they decide depends on the situation of the company now and in the future. It also
depends on the preferences of investors and potential investors.
There are certain factors which may affect the amount of dividend to be issued:
1. Corporate growth rate
2. Restrictive covenants
3. Profitability
4. Retained earnings
5. Debt
6. Taxes
Dividend policies to be used are to be determined by the following factors such as growth rate, retained
earnings, liquidity, operating risk.
The type of dividends policies would include:
1. Stable dividends per share
2. Constant dividend payout ratio
3. Residual dividends
Importance of Dividend Policy
Here are the reasons why the dividend policy is important:
It creates an environment for investors approach on the business. Shareholders do not favour
the cut of dividend since it mean the companies are going on a straight financially. If the
shareholders are not satisfied with the dividend policy they may sell their shares and would
make the market price drop. It may occur that outside group may take advantage
Impacts the finances and capital budget of the company
It affects the cash flow. Companies with limited cash liquidity will be forced to limit the dividend
payments.
It lowers the owners holdings. Retained earnings are use to pay dividends .
Dividend Dates
The following are dividend dates are important for any shareholders:
Declaration date: The declaration date is the day the Board of Directors announces their intention to
pay a dividend. On this day, the company creates a liability on its books; it now owes the money to the
stockholders. On the declaration date, the Board will also announce a date of record and a payment
date.
Date of record: It is the day upon which the stockholders of record are entitled to the upcoming
dividend payment. Astock will usually begin trading ex-dividend or ex-rights the fourth business day
before the payment date. In other words, only the owners of the shares on or before that date will
receive the dividend. If you purchased shares of Coca-Cola after the ex-dividend date, you would not
receive its upcoming dividend payment; the investor from whom you purchased your shares would.
Date of payment: This is the date the dividend will actually be given to the shareholders of company.
Ex-dividend date - On (or after) this date the security trades without its dividend. If you buy a dividend
paying stock one day before the ex-dividend you will still get the dividend, but if you buy on the ex-
dividend date, you won't get the dividend. The market price would consider the share been ex- dividend
and decreases by the amount of the dividend.
Dividends are normally paid in cash and are expressed in monetary value per share. Though there are
dividend on preferred shares that is shown as percentage of par value.
Types of Dividend Policies
The objectives of any financial manager id to maximize the owners investments and provide stable
financing for the business. Only when the manager is certain that earnings will be sustained will there be
increased dividends.
Stable Dividend Policy - Stable dividends have a positive impact on the market price of shares. If
dividends are stable it lessens the chance of market speculations and investors desiring a fixed
rate of return will naturally be attracted towards such securities. Stability of dividend means
either a constant amount per shares or a constant percentage of net earnings being received by
share holders. This is being preferred by investors. as it provides constant dividend payout even
if the business shows net loss for the time period.
Constant payout ratio dividend policy stockholders receive dividends at a fixed percentage
rate from earnings every financial period that resulted in a profit. In financial periods when loss
is incurred, no dividends are distributed. Dividends increase or decrease based on the amount of
profit the firm made during a particular year. This type of dividend policy is not recommended
because fluctuations in the dividends from one period to another may adversely affect the share
price.
Compromise policy- This a combination between peso amount and percentage amounts of
shares to pay a stable lower peso amount of share. This the flexible type of policy. This gives
owners some trepidation as to the amount they will receive. This is used if earnings vary over
the years.
Residual-dividend policy- The amount of retained earnings depends the availability of
investements for the year. The dividends are drawn from the earnings after the investments
are met.
Factors that affect Dividend Policy
Business enterprise growth rate- a fast paced growth of the company may have to limit
dividends to keep funds even if it is earning to finance growth.
Restrictive covenants- restriction in credit agreement would limit the dividends
Profitability- Earnings affect the dividends. Bigger earnings bigger share value
Earnings Stability- Constant or Stable flow of earnings would distribute a higher percent of
earnings than unstable one.
Maintenance of control- Internal financing provides control in the business. Finance manager
that are hesitant to issue additional share will have a higher percentage of earnings.
Degree of financial leverage Business with high debt to equity ratio will retain profits to ensure
that enough funds to pay debts.
Ability to finance externally- If the external funds is limited, Business will retain more of the
earnings to complete the obligation.
Uncertainty- payment of dividends reduces the uncertainty of the shareholders on the
companies financial standing.
Age and size- the larger the company and the older is considered more secure than younger
company.
Tax Penalties- Avoiding tax penalties for excess earnings will be more inclined to pay higher
dividends
Tax position of investors-
Share capital dividends:
Share capital dividend is the additional share capital issued to stock holders. It is declared when the cash
available is not enough for the cash dividend. It increase the number of shares however the proportion
of the business enterprise owned will still be the same.
Share Splits
Additional shares are being issued by the company reducing the value of the company share.
Differences between Share Capital Dividend against Share Split
1. Share Capital dividend reduces the retained earnings by distributing the shares. While the share
split increases the shares but does not lower the retained earnings but lowering the values of
market per share.
2. Par value shares remain the same in share capital as it is opposite for share split.
Similarities:
1. No cash has been released
2. Shares are increased
3. Stock holders equity remains the same.
Share Capital Repurchases
Companies instead of paying dividends would purchase the treasury shares. This will increase the
market share and par value of stocks.
Effects of repurchasing capital
Advantages:
1. The company has the alternative to use the excess cash without paying the higher dividends
that could not be maintained
2. Treasury shares can be used for future use in acquiring investments.
3. Treasury shares can be resold if additional funds are needed.
Disadvantages:
1. Share prices may benefit form a dividend than reacquisition of share capital
2. Treasury shares may have been bought at a higher price than was originally sold to the
discomfort of share holders.
3. Market prices may drop if the shareholders have an impression that company cannot find other
alternative for investment opportunities.
4. The Business would be under the SEC investigation if there were any sign of manipulating the
companys share price. BIR would also be doing investigation if the company is avoiding tax on
dividend and may file tax penalties due to improper accumulation of earnings.