Question

Since dividend payment is a mechanism that provides the health condition of a corporation, management needs to provide meaningful and comprehensive tools to decide how the dividends should be paid. Do you see any principle affecting the dividend policy?

Answer 1

Dividend is an important element that provides the health condition of the corporation. As the management may cook the books and show a really good picture, dividend confirms such a position that the company is infact performing good and has excess cash available with them which is distributed as dividend.

However, company needs to consider various factors in determining the amount of dividend:

1. Industry Type- Company needs to determine the industry which the company is involved into. Is it cyclical or a stable industry. Company might need cash with them in times of uncertain cyclical movement of the industry

2. Shareholders Expectation - Dividend are sticky in nature. Once dividends are paid there are some expectation by the investors to receive similar amount of dividend in the future as well. Hence such investors expectation should also be kept in mind before issuing dividend.

3. Future Financial Requirements- If there are near future requirements of the funds, company might prefer to keep the funds with them rather than giving as a dividend.

4. Life of organisation - A small new entity might keep the funds with them inorder to compete with big players and grown. Hence legal life of the organisation also plays a role in decision making

5. Maintain Leverage - If the leverage of the company has increased considerably, company might want to reduce the leverage and maintain an optimal capital structure.