Organization Dividends

Abstract

                Shareholders in an organization are entitled to receive dividends from a company’s profit at the end of the financial year. However, the dividends ought to be declared by the management of the company in order for the shareholders to get their share. This means that dividends are not compulsory and shareholders always get those that the directors of the company have recommended. In most cases, dividends are declared at the general meeting of the company. Various companies have a set constitution on how dividends ought to be shared among its shareholders. Moreover, certain states have by-laws of which companies ought to follow when sharing dividends among the shareholders. This paper illustrates various issues related to dividends that are enacted by companies for the well-being of shareholders.

 

Organization Dividends

1. Why company pay dividend to shareholders? Why dividends not really affect the shareholders? What the shareholders prefer low or high dividends? Why, Explain?

            A company may opt to pay dividend to its shareholders in order to make considerable earnings of the corporate profits. State’s law varies on how dividends ought to be paid. Dividends do not really affect the shareholders because it is not compulsory for a company to pay dividends. Kurtz & Boone, (2011) indicates that companies are under no legal obligation to pay dividends to shareholders. Shareholders prefer high dividends because they earn more profits from their shares on the company (Kurtz & Boone, 2011). 2. In term of Dividends and Signals, Asymmetric information – managers have more information about the health of the company than investors. Changes in dividends convey information:

– Dividend increases

• Management believes it can be sustained

• Expectation of higher future dividends, increasing present value

• Signal of a healthy, growing firm

– Dividend decreases

• Management believes it can no longer sustain the current level of dividends

• Expectation of lower dividends indefinitely; decreasing present value

• Signal of a firm that is having financial difficulties

Which is better for investors to increase their wealth? In what cases manage prefer to increase the dividend payment? And when they prefer to decrease? Explain what the reason behind the dividend and signal that the company needs to change the dividend policy to take a decision either to pay more dividends or not? Explain (When they should pay more and when should they pay less) Base on the signal , the market price will be up or down?

         Investors ought to increase their dividends in order to increase their wealth. The reason behind this fact is that increase in dividends shows company’s financial health (Kurtz & Boone, 2011). Dividends are of significant importance to the shareholders because they keep enjoying their contribution from the company’s profit. There are some cases when the management of a company may prefer to increase the dividend payment. For example, a company may opt to increase dividend payment when it intends to look for secure current income. However, a company may opt to decrease dividend payment when it intends to reinvest its funds. This assists in increasing the value of the firm and increasing the market value of its stock (Kurtz & Boone, 2011).

           A company may opt to change the dividend policy and increase dividend payment or fail to increase because of its future market predictions. Divided signaling tends to predict the future performance of a company (Kurtz & Boone, 2011). This means that a company may opt to pay more dividends when they signal considerable and great profits in future. However, a company may decide to pay less dividends after predicting a possibility of making minimal profits in future.

3. In Selling stock to raise funds for dividends also creates a “bird-in-the-hand” situation for the shareholder. Again, we are back to “all else equal.” Can a higher dividend make a stock more valuable? If a firm must sell more stock or borrow more money to pay a higher dividend now, it must return less to the stockholder in the future. The uncertainty over future income (the firm’s business risk) is not affected by dividend policy.

          A higher dividend cannot make a stock more valuable. If a company opts to pay more dividends in a certain date and then pay fewer dividends on another date, the value of the stock will remain the same. For example, if a company, which has 100 outstanding shares, opts to pay $110 at date 1 then pay another $242 at date 2, the following expression shows how it the total value of its stock will be; Let assume that 10% is the required rate of return, $110/1.10+$242(1.10)2=$300 This means that each share of the company is worth ($300/100) =$3. The same case applies if the company opts to pay $200 dividend at date 1. This translates that the company ought to sell stock worth $90 in order to pay $200 at the end of its financial year. In this case, the available dividend at date 2 is $242 and the new stockholder requires a return of 10%. This means that the shareholders will have to be paid ($90*1.10) =$99. Moreover, this means that there will be ($242-$99) =$143 for the initial stockholders. On this case the value of dividends that each stakeholder will receive is: $200/1.10 +$143/ (1.10)2 = $300 This means that each share of the company is worth ($300/100) =$3. The above information and calculations demonstrates that a higher dividend cannot make a stock more valuable.

4. In term of , Clientele Effect: • Some investors prefer low dividend payouts and will buy stock in those companies that offer low dividend payouts • Some investors prefer high dividend payouts and will buy stock in those companies that offer high dividend payouts a) What is the clientele effect, and how does it affect dividend policy relevance? b) What do you think will happen if a firm changes its policy from a high payout to a low payout? c) What do you think will happen if a firm changes its policy from a low payout to a high payout? d) If this is the case, does dividend policy matter?

 

      (A) Clientele effect refers to the market imperfection where the stock price tends to move according to the plans of investors in reaction to how the dividends affect the company (Baker & Kolb, 2009). Clientele effect tends to affect the dividend policy relevance in the fact that if the company decides to decrease the amount of dividends, the more it will have many investors.

      (B) If a firm decides to make changes on its policy from a high payout to a low payout, there is a high possibility that most of the shareholders may move to another company where they can be able to receive higher dividends (Baker & Kolb, 2009).

      (C) If a firm decides to make changes on its policy from a high payout to a low payout, there is a high possibility that most of the shareholders will remain in the company in order to benefit from the dividends (Baker & Kolb, 2009).

      (D) The above information on this case indicates that dividend policy matters in the fact that the more the company will maintain higher dividends on its shares, the more the shareholders will manage to stay in that particular company (Baker & Kolb, 2009).

5. In term of Corporations “smooth” dividends, what is the benefit from smoothing dividend and how it raises the shareholders wealth?

Dividend smoothing entails setting up a certain amount of divided price of which does not conform with retained earnings of the company at the end of its financial year. Various benefits emerge when a company engages in divided smoothing. Some of these benefits include having more investors (Baker & Kolb, 2009). There is a higher chance for investors to place a higher value on various stocks from companies that tend to distribute smooth dividends. In most cases, corporations or institutional investors tend to own dividend-smoothing stocks compared to individual investors. The other benefit of dividend smoothing is the fact that corporations are able to solve various problems related to signaling and agency. Most of these corporations tend to have bond ratings. This is because only these firms that in most of the time deals with dispersed public investor in their bonds. Smoothing of dividends also tends to raise the shareholders wealth in the fact that the corporation does not go into a loss as it strives towards dividend stability and consistency (Baker & Kolb, 2009).

6. In term of, Homemade dividend policy. What is the benefit from it for shareholders? and how it raises the shareholders wealth

Through the concept of homemade dividend policy, the shareholders are able to receive or invest some of their dividends. The advantage of homemade dividend policy is that investors can be able to invest their dividends at a small discount. Moreover, investors can be able to invest dividends of one or a group of companies. However, the company ought to be entitled in packaging capital gains mostly in form of a call option (Baker & Kolb, 2009). The homemade dividend policy raises the shareholders wealth in the fact that the investor can be able to buy several of the underlying shares at a fixed price. This means that the option of buying the shares becomes valuable especially in the situation where the shares appreciate beyond the set price (Baker & Kolb, 2009).

 

References

Baker, H. K., & Kolb, R. W. (2009). Dividends and dividend policy. Hoboken, N.J: Wiley.

Kurtz, D. L., & Boone, L. E. (2011). Contemporary business. Hoboken, N.J: Wiley.