Dividend policies are crucial to a company and helps with the relationship between the shareholders and investors. Dividends are the sum of money paid to the company's shareholders out of the company's profits to reward them for their investment in the company. A company must decide on a policy which states the value they will pay out to the company's shareholders in dividends. A company spend a huge amount of time deciding on the dividends policies to help satisfy the needs of the shareholders; Setting a low dividend policy can lose investor confidence and setting a high dividend policy means it is unsustainable in the long term and the business may not be able to year on year make the high dividend payments to shareholders due to fluctuations in the market and not been able to predict certain future business events. The company needs to aim for stable dividends with stable growth.
Once the company has agreed a dividend policy and have implemented it into the business if profits are down over the year, then normally managers will still pay the agreed dividend policy. Managers will do this to send a signal to shareholders that the fall in earnings is only temporary and will be resolved soon, it also helps to maintain the company's share price. If profits are very high over the year, directors will become very cautious to payout high dividends due to uncertainty of been able maintain this high level of dividend payout in the future. Therefore company's may adopt a conservative approach, due to uncertainty over the future. Thus, set dividends at a low enough rate to ensure the company can always maintain future dividend payments, whilst maintain enough to satisfy future investment requirements and in the long term avoid shareholders from missing out on the high returns.
Constant Growth Dividend
This policy is favored by shareholders as it is agreed of growth year after year which will boost the returns for the company's shareholders. The company may have issues if they promise too much of the company's ability for growth to the shareholders. A company must know what they can deliver and keep the shareholders happy. Problems will quickly arise if a company's earnings have fallen and do not meet the level the company expected and thus cause issues with paying the increasing dividends. With the failure of success in the company's own dividend policy this will cause financial problems as the company pays out dividends which they cannot afford but satisfy the agreed arrangements in the policy. Also shareholders will lose confidence in the company as they notice the issues of paying out increasing rate of dividends, and will question the future returns of dividends. If the company is able to pay the shareholders the increasing dividends then this will benefit shareholder satisfaction along with delivering good returns and helping to maximise shareholder wealth.
Constant Payout Dividend
This policy agrees on the set amount to be paid to shareholders each year without the company having to promise growth. This policy can keep shareholders happy with payouts on shareholders investments as the shareholders will no the set amount they can expect to receive. Advantages for the company is that it is less pressured to keep growing revenue and will not put huge amounts of strain on the company's cash flows if profits are currently lower than expected.
Experian dividend payment method
Experian the global information service company in 2014 paid 37.50 cents per share, it is a constant dividend payment made to the shareholders with the promise that they are able to deliver every year a return to shareholders. Any increase in dividend payment from the previous year is due to high growth of return that the company has seen and therefore split the increased return between shares. The company however remains with a constant dividend payment as the information services industry is facing increasing risks in the future and are struggling to anticipate future growth rates and therefore uncertain if the company can pay any rises in the dividend policy if the company chose to opt for the constant growth dividend policy. Experian is one of few companies in the information services industry that actually pay dividend payments but this is due to the company been market leader and have an objective of to make returns to the company's shareholders.
Consequences of changing a policy
A policy once agreed and implemented in the business should remain consistent without changes to the policy to keep shareholders happy as it creates certainty of the amounts of payouts the shareholder will receive for their investments, also not changing the policy will help attract new investors and build up their confidence on what to expect thus improving the possibilities of investments for the future of the company. Changing a policy can create tension and uncertainty among a business, if the company has a constant growth dividend policy thus increase in dividends every year but the company is unable to fulfill the growth then changing the policy to what the company is actually able to achieve with the payments of dividends this will create negativity between the business and shareholders. Changing the policy means shareholders needs no longer fulfilled and this may cause them to see shares in the company and seek shares from elsewhere that does meet the shareholders needs. The only time that shareholders will want to see a change in policy is if the dividend payout rate is too low and not in line with the earnings of the business therefore greater amounts of dividends can actually be paid to shareholders. Changing the policy for this reason making the payout of dividends higher to reflect earnings of the business will help to generate higher returns for shareholders and help maximise shareholder wealth. Some companies do not make dividend payments every year such as Amazon due to the financial crisis and some companies with agreement from shareholders would see money spent in investment instead with the hope of returning bigger financial gains to shareholders in the future.
Conclusion
Overall the company must put in place the correct dividend policy which takes into account shareholders demands and capabilities of future growth in revenue/profit. The policy should not change so shareholders know what to expect. Planning of the policy is crucial before the policy is implemented in the company. A dividend policy is very important to keep shareholders happy and stop shareholders from selling shares and going elsewhere to invest.
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