Question

A roofing materials manufacturing firm has a particularly profitable year due to the weather disasters that have plagued several parts of the country. They have not seen such a high profit margin in their entire history. Should the company increase its dividend payout ratio to the shareholders based on their current performance? Why or why not? You must include the financial management principle/terminology in your answer.

Answer 1

The payment of dividend by the company will totally dependent on the dividend policy of the company.

1) If the company follows the regular dividend policy company pays dividend every year.If company earns abnormal profit then it retains extra profit and pays dividend even in the year of loss because of regular dividend policy.

2) Stable dividend policy :- If the company follow this policy Company has to pay a fixed percentage of dividend every year in the event of profit and dividend fluctuates depending upon the level of profit.

3) Irregular dividend policy :- In this policy company has no fixed obligation to pay dividend and the dividend will depend upon th discretion of its management.In this policy company can pay any amount of dividend and their is no bar on payment of dividend.

4) No dividend policy :- In this policy company doesn't pay dividend at all irrespective of profit earned by company entire amount is invested back in the company.

So whether to increase the payout or not totally dependent on the dividend policy of the company and its past trends of payment of dividend.