Question

There are importance and effects of dividend buyback decisions. Does the stock market appear to reward high-dividend payout? What about low-dividend payout? Does it matter what type of investor owns the shares? What is the impact on the share price of dividend policy?

Answer 1

The stock market is based upon investor expectations which may also be based on perceptions. A high dividend payout will generally result in an increase in the stock price. This is because a high dividend payout gives the perception of better future prospects and higher growth of the company. The converse is true in case of a low dividend payout. A low dividend payout gives the impression that the company is unable to earn sufficient profits in order to pay a dividend to the shareholders. This has a negative impact on stock prices.

The type of Investors Holding the shares also has an impact on the share prices. Investors who expect continuous dividend from the company will base the stock prices on dividend payout. Investors would do not require a continuous stream of income will be indifferent to the dividend payout since they are looking for capital gains in terms of appreciation in the stock prices.

Generally the stock prices are dependent upon the present value of future income expected from the stock. As per the dividend discount model the stock price is calculated as present value of dividends and in this case the share price will increase with a higher dividend payout and vice versa.However many argue that the stock price should be dependent upon the free cash flows and not the dividend payout.