The stage of development of company is generally divided into the start-up stage, the stage of rapid growth, stable growth stage, maturity stage and decline stage. Because every stage has different production characteristics, capital needs and product sales, the type of dividend policy would be different.
In the start-up stage, company faces the high operational risks and financial risks. Company needs a lot of money into financing. Therefore, in order to reduce the financial risk, company should implement the principle of “allocation after development”. The residual dividend policy is the best choice.
In the stage of rapid growth, the company’s product sales rise sharply. Because of a rapid increase in investment opportunities, capital requirements are urgent. On this stage, company should not pay too many dividends. But this time, the prospects for the developments of the company are relatively bright and clear, so shareholders have requirements of dividend distribution. In order to balance these two requirements, company should choose normal dividend plus an additional dividend policy. And the dividend payment should avoid cash payment.
In the stage of steady growth, as a result of the market capacity of company’s products and the sales revenue grow steady, the decline in investment demand, the company has the ability to continue to pay higher dividends. At this time, the ideal dividend policy should be steady growth dividend policy.
In the mature stage, the product market becomes saturated; the sales revenue is no longer growing and the profit level remain stable. At this time, the company usually has accumulated surplus funds, in order to fit with the company’s stage of development; company should convert the steady growth dividend policy to a fixed dividend payout rate policy.
The recession phase, there is a decrease in product sales revenue and the profits. In order to avoid dissolving or mergers and reorganizations, company needs to put into new industries and fields. Therefore, company does not have a strong dividend payment capacity. So, residual dividend policy should be adopted.
In short, the listed company dividend policy should be considered various factors. But, if a company accepts one dividend policy, it should announce its policy clearly and stick with it. Here introduces “The transmission of information theory” (Watson, 2010). Dividend information thought originated from Lintner survey of financial managers of listed companies in the United States. The investigation found that the company’s managers focus on the changes in the dividend level. Unless the managers believe that the growth of the company's income is sufficient to cover the long-term increase in the dividend, and then pay the dividends. Company managers usually not easily cut dividends. On this basis, Miller and Modigliani (1961) officially proposed dividend signal, which pointed out to follow a stable dividend policy, the dividend of any changes will be a signal of the company's future profitability assessment for investors. Transmission of information theory is that the listed companies can through a dividend distribution behavior to pass information about their own future profitability. For investors in the market; the dividend behavior’s differences may reflect differences in the quality of listed companies. If management expects good prospects for the company's development, the future performance of substantial growth, it will increase dividends and express this information in a timely manner to tell shareholders and potential investors; Conversely, if the expected to the company's development prospects are recessionary, they tend to maintain or even reduce the existing level of dividends. Therefore, the dividend is able to pass the company's future profitability, which also has some impact on the stock price. So, there is evidence that company should announce the dividend policy to the market.
In terms of stable dividend policy, the list companies should stick with their dividend policy. Listed companies should be based on the stage of development, the actual situation of the development, make medium-and long-term dividend policy. And be disclosed in the annual report of each fiscal year, to maintain the stability and continuity of the dividend policy. Stable and continuous dividend policy will help to enhance the value of the enterprise, helps to convey good information to the market and investors. The company should develop a strategic dividend policy, once formulated dividend policy, and should insist on the implementation, instead of extraordinary change in the company's dividend payout ratio. At the same time, the stock market supervisors should also strengthen the stability of the norms of the company's dividend policy.
Here is a comparison between USA and China in stability of dividend policy. The dividend distribution behavior of the United States shows stability. If the distribution of dividends of listed companies is changing, dividend reduction will lead to deterioration in the creditworthiness of the listed companies, which have an adverse impact on raising capital or operating activities. Empirical studies have shown that changes in the dividend behavior of U.S. listed companies are closely related to changes in the company's share price. In general, stable dividend behavior increase cash dividends and share price of listed companies, while the fluctuations of dividend price will reduce a listed company's share price. Therefore, in order to balance the level of dividend distribution and maintain a good image of the company, U.S. listed companies generally try to maintain a stable dividend distribution behavior. Similarly, more mature capital markets like Japan, the listing of the company's dividend policy is generally maintained stable. But in China, there are a great deal of instability in the listed company’s dividend policy, which lack of long-term planning and relative stability. Most of the listed companies in China have not clear dividend target, some listed companies or even free to change the distribution scheme. Therefore, the dividend distribution or dividend payout ratio of China's listed company’s frequently changing, lack of continuity, not to form a relatively stable dividend policy.
Conclusion
First of all, this essay analyzes the ideal dividend policy for company. The only factor is the company’s current stage of development. Different situation should choose different policy. Then use the transmission of information theory to explain the importance of announcing its policy clearly and sticking with it. In the last part, compare the situation of dividend policy between USA and China. China has lots work to do with the instability dividend policy, especially in the form of payment and pay the amount of instability.
Bibliography
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Ritchie, M., 2009. Introduction to Corporate Finance. [online] available at: < > [Accessed 28 October 2012]
Arnold, G., Essentials of corporate financial management. Harlow: Financial Time Prentice Hall, 2007.
The research of stability and the transmission of information, 2008 [online] available at:< > [Accessed 27 October 2012]
Watson, D., & Head, A., 2010. Corporate Finance Principles &Practice. Harlow: Financial Times Prentice Hall.
by
canming (student)
