DIVIDENDSCHAPTER SUMMARY __________________ A Requirement Presented to the Faculty of the Graduate School Polytechnic University of the Philippines Sta. Mesa, Manila __________________ In Partial Fulfillment of the Requirements for the Degree Master in Business Administration __________________ 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 Director’s 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 company’s 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.