Question

Should stockholder demographics or the lifecycle position of  the firm impact the Board's dividend policy decisions?

Answer 1

Solution:-

The dividend policy is one of the most important decisions to be taken by the management. It is incorrect to assume that more the dividend the better it is. It doesn't work that way. An investor invests his cash in the business to take risk and generate high returns on his capital rather than keeping cash invested in non-risky assets and earn little.

Thus, clearly the shareholders would like to keep their initial investment in the business as well as reinvest intermediate profits back into business so that it can generate high returns on capital rather than receiving dividends which will again have to be invested somewhere for extract high returns.

However, there are ceratin exceptions to the above and are as follows:

• If the company doesn't have great growth opportunities, the shareholders would like to receive yearly earnings as dividends rather than seeing them stuck as cash on the balance sheet which business can't deploy
• If investors are dependent on their share investments for income, they would need some dividends to meet their income needs alongwith the capital aprreciation/wealth creation through the increase in stock price

Stockholder's demographics and lifecylce position of the firm directly impacts the above two factors.

If the stockholders are relatively young, they are less likely to be dependent in shares for income and moreover they would be more likely to take extra risk by reinvesting thier earnings in the business growth. If stockholders are old, they will want to to take lesser risk and also be looking to receive regular income.

Similarly, if the firm is mature in its lifecylce it will have lesser opportuinities for growth and would thus want to ditribute earnings as dividends, whereas a growth company would like lesser dividends and more reinvestment of earnings in expansion.

Thus, the said factors do impact the board's dividend policy decisions as detailed above.