Page
  1. 1
    1
  2. 2
    2
  3. 3
    3
  4. 4
    4
  5. 5
    5
  6. 6
    6
  7. 7
    7

Discuss the factors which a company may need to take into consideration when determining their dividend distribution and identify the three most commonly used dividends distribution policies.

Extracts from this essay...

Introduction

Discuss the factors which a company may need to take into consideration when determining their dividend distribution and identify the three most commonly used dividends distribution policies. A dividend policy is the plan of action adopted by the directors of a company whenever it is decided whether to distribute a company's profits as payments to individual shareholders. The decision of dividend policy is the responsibility of a company's directors. Under UK company law, directors cannot be forced to recommend a dividend and the shareholders cannot vote themselves a higher dividend than that recommended by the directors, although they may vote for a lower one. There are a number of factors that may influence a company's decisions regarding dividend distribution. One of these factors is profitability. The 1985 Companies Act prevents distribution of dividends from sources other than distributable profits; therefore, if a company is not profitable then it will not be able to pay dividends. A company with liquidity problems will also have difficulties in sustaining dividend payments. A company should also take tax issues into consideration when determining its dividend policy. Income from dividends and the capital gains that are realised when shares are sold may attract different rates of tax. The different rates will affect whether shareholders will prefer cash dividends or for the money to be reinvested to enhance the value of the company and the share.

Middle

The danger with this type of policy is that if earnings fall in any given year, it may send out the wrong signals to the market and lead to shareholders selling shares and falls in the company's share price. Constant dividend per share is when a fixed sum is paid out every year. The dangers of this approach are that the dividend will either become frozen at a low level that will discourage new investors, or directors will be reluctant to reduce payments even when it is practical to do so because they fear that shareholders and investors will interpret their action negatively. Low regular dividend with periodic enhancements is a payment of a small regular dividend, supplemented in high earnings years by an enhanced dividend as part of the final dividend payment. Although this policy offers the shareholder certainty of a regular income and allows the company flexibility in dividend policy, there is a danger that the enhanced element will become part of the shareholders' expectation. There are a number of theories surrounding dividend policies. It is often questioned whether dividend policies are important in terms of influencing share value. If dividend policy is influential, it is important to decide on the optimal dividend policy of what proportion of earnings should be distributed as dividends, or retained for other purposes, to maximise a company's share value. One of the theories relating to dividend policy is the residual theory of dividend policy.

Conclusion

A rise in dividend payment is generally viewed as a positive signal about a company's future earning prospects. A decrease in dividends is viewed as a negative signal, resulting in a decrease in share prices. This may be why many companies choose to adopt a constant dividend policy. The Bird in the Hand theory suggests that shareholders are adverse to risk and prefer dividend payments to reinvestment because any capital growth that this promotes will only take place in an uncertain future. Agency cost theory states that agency costs are incurred as a means of resolving the agency problem that arises from the managers of a company being a distinctly separate group from the shareholders who expect the agents to act on their behalf. From looking at the figures presented by EMI, I would infer that the dividend policy used by the company is the constant dividend per share policy. This is because that despite the company's profits decreasing rapidly throughout the years, the dividends have always remained constant. EMI may wish to keep their dividends constant to prevent shareholders from selling their shares and to keep share prices up. It will also aid them in attracting new investors. This relates to the dividend signalling theory. The company may not be able to increase their dividends to keep share prices up and do not want them to decrease, so instead they keep the dividends constant to promote a positive future for the company.

The above preview is unformatted text

Found what you're looking for?

  • Start learning 29% faster today
  • Over 150,000 essays available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Over 180,000 student essays
  • Every subject and level covered
  • Thousands of essays marked by teachers

See related essaysSee related essays

Related AS and A Level Accounting & Financial Management essays

  1. A2 Business CourseWork

    However they will be more interested in what they are doing for the whole economy. If Tesco's has success, the government will benefit. The more profits that Tesco generates, the more tax they will have to pay, and more money will go to the government.

  2. Business Income and Expenditure

    It is as revenue expenditure because the money is coming out from the business in a day to day basis. They could reduce the quantity they do spend on which is by buying less and also they could start recycling things that they could use again as papers.

  1. Sources Of Finance

    A bank loan can help in many ways as it is usually a large sum of money that is borrowed over a longer period of time, it can be used for buying premises which can be very expensive, to the stores features and equipment.

  2. The maintenance of accurate records supplies the company with the financial data that assists ...

    a result this caused shareholders to lose confidence in Enron as soon as it hit the headlines and sell of their shares. (http://en.wikipedia.org/wiki/Enron) Arthur Anderson is an accounting firm which has been suspected to have been involved in the fraudulent accounting and auditing of Waste Management, Inc., WorldCom, Enron and many other firms.

  1. Financial Ratio Analysis.

    ¬ Appendix 1 - Financial Ratios JIN YANG LTD APPENDIX 1 FINANCIAL RATIOS 1998 1999 2000 2001 Profitability Ratios ROCE (%) 15.77 18.28 18.20 20.47 ROE or ROOE (%) 8.03 9.44 9.57 12.70 Operating Profit Margin (%) 11.62 12.07 10.98 11.64 Net Profit Margin (%)

  2. business plan unit

    I was offered another job at another Hilton hotel but I decided to look for work else where in a different field. Then I found out about a head chef position at the Ritz Carlton Hotel Doha. I went for the interview and I got the job position.

  1. DIvidend Policies and Financing

    If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend. Extent of Share Distribution Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy.

  2. Sainsbury's Ratio Analysis

    This money then contributes towards covering the other expenses of the business. The business would want this margin to be as high as possible, since a high margin will leave more profit for covering the remaining expenses. The percentage figures indicate that because they have a higher gross profit in

  • Over 180,000 essays
    written by students
  • Annotated by
    experienced teachers
  • Ideas and feedback to write
    your own great essays

Marked by a teacher

This essay has been marked by one of our great teachers. You can read the full teachers notes when you download the essay.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review on the essay page.

Peer reviewed

This essay has been reviewed by one of our specialist student essay reviewing squad. Read the full review under the essay preview on this page.