Question

Does a company’s Dividend Policy matter? Explain how it is that dividends are so important but, at the same time, dividend policy is irrelevant. Include in your discussion how stock repurchases are similar to dividends and why they have come under recent public scrutiny.

Answer 1

Dividend policy is a policy framed by company which indicates the amount of dividend it will distribute to shareholders out of earning generated .Dividend policy may or may not matter. It depends upon the rate of return generated by the company. If company is generated better profits than expected return from shareholders than they shoul reinvest it into company and In future may pay higher dividends

It may matter while calculating value of stock because as per dividend growth model , value of stock is present value of future expected dividend

Earlier investors were concerned about dividend but nowadays they want capital appreciation of stock and they may sell some shares to cover up the return they want if capital value of stock is appreciated. So dividend is irrelevant due to this but some companies do pay good dividend and they believe in it

Stock repurchases are another kind of dividend. Though it is known by name buyback and not dividend . Share buyback reduces the no of shares in market and this increases EPS of shareholders which ultimately benefits shareholder. They are tax efficient since there is no additional tax on buyback.

A debate is still going on in market to make it illegal because it manipulates share price. As per reports, thism boosts the price for short run but the corporation shall always look to invest and bring return out of their investment