Question

The BOD of YOUR COMPANY is planning to declare dividends to its shareholders of record as of April 30, 2018. Based on the information gathered, YOUR COMPANY has investment opportunities of P8,000,000. However, the optimal capital structure is 20% debt and 80% equity. Retained Earnings as of December 31, 2017 is P10,000,000. YOUR COMPANY hired you as a consultant to determine what would be the optimal dividend payout.

Answer 1

A number of considerations go into interpreting the dividend payout ratio, most importantly the company's level of maturity. A new, growth-oriented company that aims to expand, develop new products and move into new markets would be expected to reinvest most or all of its earnings and could be forgiven for having a low or even zero payout ratio.

On the other hand, an older, established company that returns a pittance to shareholders would test investors' patience and could tempt activists to intervene. Apple (AAPL) began to pay a dividend for the first time in nearly twenty years in 2012, when the new CEO felt the company's enormous cash flow made a 0% payout ratio difficult to justify. Because it implies that a company has moved past its initial growth stage, a high payout ratio means share prices are unlikely to appreciate rapidly.

The payout ratio is also useful for assessing a dividend's sustainability. Companies are extremely reluctant to cut dividends, since it can drive the stock price down and reflect poorly on the management's abilities. If a company's payout ratio is over 100%, it is returning more money to shareholders than it is earning and will probably be forced to lower the dividend or stop paying it altogether. That result is not inevitable, however. A company can weather a bad year without suspending payouts, and it is often in their interest to do so. It is therefore important to consider future earnings expectations and calculate a forward-looking payout ratio to contextualize the backward-looking one.

Long-term trends in the payout ratio also matter. A steadily rising ratio could indicate a healthy, maturing business, but a spiking one could mean the dividend is heading into unsustainable territory.

So in Given case Company has an Investment Opportunities of P8,000,000 and retained earning of P10,000,000. so optimal Dividend Payout of Company should not exceed 20%.