The Guidelines and Regulations of Dividend Policies

Dividend policies are the guidelines and regulations that companies develop and implement as the means of arranging to make dividend payments to shareholders. Establishing a specific dividend policy is to the advantage of both the company and the shareholder. In order to make sure the policy is workable, a company should develop a viable policy and then run this policy through a number of test scenarios in order to determine what impact the dividend policy would have on the operation of the business. A first assumption in much of the academic finance literature is that managers work to maximize the wealth of the firm’s shareholders. Shareholders, the owners of the firm, elect the board of directors that, in turn, hires, promotes, compensates, and fires managers. Through this board linkage, managers, at least in theory, work on behalf of the shareholders. Firms are always searching for an optimal dividend policy, one that strikes a balance between current dividends and future growth and maximizes the firm’s stock prices. Dividend policy is needed as erratic dividend policy would mean surprises to market participants which will result in a drop in the firm’s stock price when there is selling off.

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Thus, a well-planned dividend policy could prevent these surprises and preserve or even enhance stock price. Dividend policy of a firm has implications for various stakeholders such as investors, managers and lenders. For investors, dividends are not only a means of regular income, but also an important input in valuation of a firm. As for managers, the more dividends paid would mean fewer funds available for investment. Lenders may also have interest in the amount of dividend a firm declares, as more dividend means less money available for servicing and redemption of their claims. In the process of maximizing the wealth of shareholders, managers must constantly be concerned with how their decisions influence the price of their firms’ shares. Share price is the critical determinant of shareholder wealth. Managers’ dividend policy decisions affect common stock share prices and, therefore, the wealth of shareholders. By dividend policy, we mean the payout policy that management follows in determining the size and pattern of cash distributions to shareholders over time.

Does Anyone Really Pay Attention to Dividends? According to Ronald C. Lease. (2000). “To provide a glimpse of what the real world thinks about the importance of dividends and dividend policy, we have drawn the following excerpts from the popular financial press. Income managers are worst-off in the hunt for new investments. Since early 1995, the dividend yield [dividends per share divided by share price] on the Standard & Poor’s 500-stock index has plunged to 1.6% from 2.9%, as companies buy back stock rather than boosting dividends. To be sure, investors themselves favor capital appreciation rather than income, thanks in part to capital-gains tax cuts in the new tax laws. But strategists and investors argue a sizable number of investors still hunt-in vain-for yield. “Individual investors, with high net worth, or people who are coming close to retirement, want something in their portfolios that will give them yield or income,” says Greg Smith, chief investment strategist at Prudential Securities. “They’ve been part of a wonderful three years in the stock market, but it’s left them asset rich and cash poor.” (Wall Street Journal, October 22, 1997, p. C1) Corporate managers around the world are clearly attuned to the tax consequences of repurchases as compared with dividends. Consider the case of Reuters Holdings, the London-based media giant, which suspended its move to effectively buy back 5% of its shares in October 1996, after the British government announced it would toughen tax laws on such deals…. Instead of using the special dividend structure,… “Reuters might consider doubling up its regular dividend.” (Wall Street Journal, October 9, 1996, p. A18)

Dividend changes historically are a lagging indication of corporate profitability and at the same time a sign that corporate boards have confidence in the future. Because dividend reductions are seen as a very bad sign, companies hate to raise payouts to an unsustainable level. (New York Times, January 3, 1997, Section D, p. 4) One big disadvantage of larger dividends is that they erode a company’s cash cushion for recessions. All of the Big Three auto makers quickly burned through their cash reserves during the last recession five years ago, and they have been determined not to repeat the experience. Larger dividends and lower cash reserves also mean slightly less assurance to bondholders that a company will be able to repay them in hard times. As a result, companies with generous dividends tend to have slightly lower credit ratings, which raise their borrowing costs. (New York Times, May 17, 1996, Section D, p.1) Changes in dividend policy tend to coincide with the release of other important news concerning the company. Some firms, like Microsoft, pay no dividend because they can generate higher returns for shareholders investing their profits back in the company. Interestingly, there is evidence that investors typically underestimate the full importance of fluctuating dividends. In a number of recent studies, economists were not surprised to find that the share prices of firms that cut dividends underperformed firms that increased dividends in the 12-month period preceding the announcement of the cut. (Detroit News, August 4, 1996, p. F2) Elisabeth Goth, a dissident member of the family that controls Dow Jones & Co., raises questions about its dividend policy, contends Dow Jones has increased its dividends at the expense of reinvesting its earnings to fuel future growth. (Wall Street Journal, March 13, 1997, p. B15) Financial theory says that share splits, buybacks, and dividend cuts should not affect share prices, but they do because investors believe that managers are trying to convey information with these actions…. [A] dividend cut suggests that insiders expect profits to languish for years.

These moves have gained their signaling power partly because investors do not trust managers to tell them the truth. (Economist, August 15, 1992, p. 14) Dividend Coverage Ratio According to article from www.investopedia.com. “When you evaluate a company’s dividend-paying practices, ask yourself if the company can afford to pay the dividend. The ratio between a company’s earnings and net dividend paid to shareholders – known as dividend coverage – remains a well-used tool for measuring whether earnings are sufficient to cover dividend obligations. The ratio is calculated asA earnings per shareA divided by the dividend per share. When coverage is getting thin, odds are good that there will be a dividend cut, which can have a dire impact on valuation. Investors can feel safe with aA coverage ratioA of 2 or 3. In practice, however, the coverage ratio becomes a pressing indicator when coverage slips below about 1.5, at which point prospects start to look risky. If the ratio is under 1, the company is using its retained earnings from last year to pay this year’s dividend.A At the same time, if the payout gets very high, say above 5, investors should ask whether management is withholding excess earnings, not paying enough cash to shareholders. Managers who raise their dividends are telling investors that the course of business over the coming 12 months or more will be stable.”

Financial performance of Technology sector in Bursa Malaysia for the year 2008 and 2009 Constant Nominal Dividends (Regular Dividends) This type of policy claims that a firm maintains a nominal amount (fixed ringgit dividend) of dividend irrespective of a firms level of income. This is also called a regular dividend, which is a level that the board of directors hopes to maintain in the future. However, regular dividend could be increased (decreased) if proven increases (decreases) in earnings are reported. This type of dividend is much sought by investors as this gives a consistent kind of income to shareholders hence reducing the uncertainty of their dividend income. Base on analysis of Technology sector in Bursa Malaysia shows in figure 3.1, it found that, majority of the company (4 out of 5) has a same type which is Constant Nominal Dividends policy. The amount of dividends (sen) in both years (2009 and 2008) are remained same, regardless of performance in revenue and Profit after tax on both years. Financial Performance against Dividend Policy. Base on analysis in figure 3.1, Malaysia Pacific Industries Berhad has turned lost in profit in a year 2009, but still capable to pay 20(sen) dividends, a little bit less if compare to (37)sen in 2008.

In their Annual Report 2009 said that the financial year ended 30 June 2009 (“FY 2009”) had started with a strong performance in the first quarter. However, the subsequent two quarters experienced a sharp reduction in revenue, but this was followed by a gradual recovery in the last quarter. The volatile performance reflected continued uncertainties in the global economic conditions. Revenue for FY 2009 was RM1,151 million, representing a 25% decline from the previous financial year ended 30 June 2008 (“FY 2008”). Loss attributable to equity holders of the parent was at RM40 million, compared with a profit of RM112 million recorded in FY 2008. Reflecting the unfavourable business environment, capital expenditure was significantly reduced to RM129 million from RM267 million. However, the Group continued to pay out a total dividend. The sudden and dramatic fall in revenue had caused the Group to focus on managing its cash. Capital investments were postponed with the Group spending RM129 million, the lowest for many years and compared with RM267 million for FY 2008. The Group’s debt fell by RM48 million from FY 2008 and a dividend of 20 sen per share was declared for FY 2009.

Financial performance of Consumer Product sector in Bursa Malaysia for the year 2008 and 2009 Financial Performance against Dividend Policy. Figure 3.2 illustrated that, Proton Holdings Berhad has turned lost in profit in a year 2009, but still capable to pay 5(sen) dividends, compare to none in 2008. In their Annual Report 2009 said, in view of the need to ensure that PROTON is viably strengthened and able to achieve long-term and sustainable growth, the Board of Directors are not recommending the declaration of any dividends for the financial year ended 31 March 2008. With improved profitability in the future, the Board expects to once again be able to recommend a suitable dividend payment. Thus, No dividend has been paid or declared by the Company. In 2009, the company paid Interim dividend of 5 sen per share less tax at 25%,it has been paid on 14 January 2009 even though the result of profit after tax has lost about -301.8 million. This is due to gain confidents to shareholder about better performance will achieved in the next coming financial year. Special Dividend Payout Policy The special dividend payout policy was implemented by PANASONIC.

As a result of analysis in the financial year ended 31 March 2009, the Company’s revenue of RM600.9 million increased by RM38.4 million or 6.8% compared with RM562.5 million recorded in the previous financial year. The combined entity’s profit before taxation for the financial year was recorded at RM60.8 million. This was however, RM4.1 million or 6.3% lower than the previous financial year’s combined entity’s profit before taxation of RM64.9 million mainly due to the gain from disposal of property amounting to RM3.5 million recognised in the previous financial year. With the prudent and steady cash flow management, the Company was able to maintain a solid cash position and strong Balance Sheet against the market turmoil. The Company continues to develop strong returns for its stakeholders, in particular, maximising shareholders’ wealth via dividend distribution. In a year 2008, The Board of Directors is pleased to recommend a final dividend of 35 sen per ordinary share of RM1.00 and a special dividend of 65 sen per ordinary share of RM1.00 less 25% income tax, payable on 22 September 2008. An interim tax-exempt dividend of 15 sen was paid on 25 January 2008. This brings to a total gross dividend of 115 sen per ordinary share of RM1.00 in respect of financial year ended 31 March 2008. In respect of the financial year ended 31 March 2009, the Board of Directors is pleased to recommend a final dividend of 35 sen per ordinary share and a special dividend of 55 sen per ordinary share less 25% income tax, payable on 18 September 2009. Together with an interim dividend of 15 sen per ordinary share which was paid on 20 January 2009, this brings to total gross dividends of 105 sen per ordinary share for the financial year ended 31 March 2009.

Financial performance of Construction sector in Bursa Malaysia for the year 2008 and 2009 Financial Performance affected Dividend Payment Base on figure 3.3, Gamuda Berhad will be representative of this statement analysis. According to the Annual Report 2009, the company claimed, to overcome the backdrop of a global economic meltdown, the group has managed to achieve a commendable financial performance in FY2009. Net profit of the group came in at RM193.7m, down 40% from the previous year, despite revenue gaining 13% to RM2.7 billion. Both the construction and property development divisions recorded weaker performances as a result of the challenging economic condition. For the most part of FY2009, the group switched to a defensive strategy which meant that efforts were focussed on surviving the economic meltdown. This entailed taking drastic measures to curb expenses, consolidate operations, streamline capex programs and defer expansion plans. Managing cash flows became a primary focus, and financial prudence necessitated a drastic cut in dividend payments.

As such, the group paid out a total of 8 sen a share in FY2009 compared with 25 sen a share the previous year. Thus, the dividend payment has been dropped to 6 sen in FY2009 from 18 sen in FY2008. Figure 3.4: Dividend payment method of interim dividend of Gamuda Berhad. (www.klse.com.my) Cash Dividend Payments and Payment Mechanisms With referring at figure 3.4, the method of dividend payment is called Interim dividend which means the company paid dividend in 2 times in a year. The cash dividend is paid on the payment date to all shareholders of record on the record date. To be a shareholder of record, and thus receive a dividend, one must have purchased the stock before the ex-dividend date. Instead of cash dividends, many companies have automatic reinvestment plans in which additional shares of stock are purchased. Thus, the business keeps the cash and shares are given to shareholders. DividendA Declaration Most firms in the United States payA dividendsA quarterly. After making theA dividendA decision during a board meeting, a firm’s board of directors releases information on the size of theA dividendA on theA announcement date. Further, the announcement states that the cash payment will be made to “shareholders of record” as of a specificA record date. However, because of delays in the share transfer process, the stock goes “ex-dividend” two business days before the record date, or theA ex-dividendA date. After the stock goes ex-dividend, the shares tradeA withoutA the rights to the forthcomingA quarterlyA dividend. TheA dividendA checks are mailed to shareholders of record on theA payment date, which is about two weeks after the record date.A Figure HYPERLINK “https://library.books24x7.com/book/id_3455/viewer.asp?bookid=3455&chunkid=219644075#ch01fig04″3.5A below shows the time line of the period from the board meeting through the mailing of theA dividendA checks.( Ronald C. Lease, 2000)

 

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The guidelines and regulations of Dividend Policies. (2017, Jun 26). Retrieved November 30, 2022 , from
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