To begin with, this paper aims at understanding the relationship between the dividend policy employed by an organization and its effect on the overall performance. There are a number of performance metrics that may be used but profitability is the one in consideration. Nevertheless, the relationship between dividend policy and the profitability is intertwined in the sense that the policy may affect the profitability and in the same token, the profitability may affect the dividend policy.
However, as per the definition of a dividend policy, it is clear that policy employed plays a fundamental role in how the organization performs. The set of guidelines that are employed by the company in order to determine the portion of the earnings will be used in paying the shareholders is crucial for the everyday functioning. As such, it can be called a reward to the stakeholders for investing in the operations of the porganisation.Many investors want maximum returns on the investments made and this is something of concern. On the other hand, the company wishes to have funds that may be used to expand the areas of operation. It is, therefore, the uniting factor between the interests of the shareholders and the company.
Therefore, this research is imperative to both the investors and the company in consideration. There are a number of dividend policies that are employed by different organizations and as such, there is usually the need to observe the organiosational and stakeholders demands prior to the implementation of any. By focusing on these policies and their general results on the profitability of the organizations, one of the hypothesis is that the policy affects the amount of investments made. Moreover, the policy affects the methods of company operations and can therefore, lbe used to initiate company changes.
As stated in the introductory section, the dividend policy determines the percentage of the company that is to be paid out to the investors (Nissim & Ziv, 2001) Based on the company structure as well as the long term goals of the company, this pay out may be either small or large. Nevertheless, it acts as an incentive for more investments and as such should be appealing.
Approaches of dividend policy
The main approaches to dividend policy are three: stability, residual or a combination of stability and residual.
The stability policy
It is meant to reduce the uncertainty of payouts.Uncertianity has been witnessed in the other policy approaches and as such, there is the use of quarterly dividends. (Goaeid & Naceur, 2006) These dividends are set as a percentage of the earnings obtained at the end of each business year. Nevertheless, these payouts are usually regular with no variability
Nevertheless, there are three types of stable dividend policy. To begin with, the constant dividends per share is only implemented by firms which are well established and their earnings are stable and guaranteed (Mehta, 2012). As such, there is a reserve created in order to cater for the needs of the stakeholders during a year when the earnings may not be enough. Losses may also mean that the company will utilize the reserve funds.
As with the constant payout ratio, the dividend payment is a percentage of the net earnings within the year (Denis & Osobov, 2008). Companies may prefer to use this policy to pay out dividends since it considers the amount of earnings within the year and as such, is directly proportional to the money muscle. Nevertheless, the dividends fluctuate throughout the years and will be high during seasons of higher earnings.
Finally, there is the policy of a stable rupee dividend in addition to other dividnds.However, this policy is most preferred by companies who have varying years of profitability. There is a constant dividend that is payable to every share but in times of profitability, there is an extra dividend that is paid.
All that noted, there are a number of advantages of using the stable dividend policy. To begin with, it enhances the confidence of the stakeholder on the operations of the company. Secondly, the policy may be used to stabilize share values. All this is based on the fact that some implementation procedures correspond to the profitability as well as the earnings of the organization. Thirdly, the policy may be used to ensure that the stakeholders are guaranteed of regular earnings. Finally, the policy may be used in order to ensure that the goodwill of the organization is maintained throughout the years of operation.
The residual policy
This is mainly implemented by companies that implement new projects using finances that are generated from internal equity (Ghosh, 2008).Therefore, dividend has not been prioritized and is only paid out after all the companies financial objectives are achieved. As a matter of fact, the policy derives its name from the leftover of the equity that is generated. Therefore, the costs of operation as well as other business operations have to be fully utilized prior to payment. As such, unlike the stability policy, the dividend payment is volatile and is unpredictable. In this, it may be unsuitable for some organizations as well as investors
There are three vital links that are used in this framework: a schedule of investment opportunity, a structure of capital that forms the target and, the total value of capital not within the organization. These three links are used together to determine the dividend payment. In essence, the first step is to pre-determine the ratio that will be used in dividend payment. Moreover, this first step is also used to determine the budget that is suitable for the operations of the company. The second step is determining the amount of equity needed to fund the pre-determined budget. Some professional advice that this amount of equity should be determined through earnings that have be retained. Finally, the stakeholders dividend payout is determined from the left over of the earnings.
As such, the major advantage of this model is the fact that the company can manage its budget. With the leftover, the primary objective of the organization is the long term goals which ensure the continuity. By prioritizing these projects, the long term objectives are easily achieved. However, the major disadvantage is that these dividends will vary over time because of the change in business operations over the years.
The hybrid policy of dividends
The policy is formed by the two aforementioned policies. In essence, the policy focuses on the long term goals of the equity ratio, as compared to short term goals. However the policy is nowadays implemented by organizations that tend to pay the stakeholder dividends. Companies using this policy will set aside dividends to maintain the operations during periods of fluctuations. However, these dividends are very small and can be easily maintained throughout the year. In addition to these dividends, the company also considers the possibility of profits and the dividends arising from them.
Other types of dividend policies
In addition to the three mentioned there are others such as the irregular and no dividend policies. To begin with, the irregular policy is one which offers varying dividends as payout. However, there era four specific reasons that may make the company apply this policy: Uncertainty in the company’s earning, the unavailability of resources that are liquid, unsuccessful operations in business and the fear of paying out regular dividends. On the other hand, the no dividend policy is done in extreme situations where the company wishes to accumulate funds for its growth or for other prioritized need (Milton, 2004)s.
Choice of a dividend policy
Considering the variability of business operations, the board is mandated with the choice of a dividend policy. The policy selected is based on the understanding that a business should be able to reward the investors using dividend payout. This is highly affected by the profitability of the company.
To begin with, the company has to consider the profitability of the company. Companies that’s tend to be profitable may choose policies that are not regular and there is a delay in dividend payout (harada & Nguyen, 2011). Ensuring that there is a limit to the payout means that a company does not liquidate the shares which means availability of capital for expansion. Companies that focus on assets are suited for policies that ensure faster payout.
Secondly, the board has to determine the stability of the business statements. Business statements such as income statements provide an overview of the company’s financial years and as such, a description of the company’s weak and strong periods. Nevertheless, the company should implement policies that ensure that there is a financial cushion during low financial periods. As such, the volatility of the company determines the policy used which in turn determines the types of investors.
The type of investors that the company wishes to attract also determines the policy to be implemented. Investors who are affluent and stable tend to prefer companies which can pay put dividends at a regular rate. Moreover, stable dividends may ensure that there is dividend support at the stock market (Mirza & Azfa, 2010). Dividend support may mean an increase in the number of investors and the number of shares purchased.
In this analysis, the two companies of concern are: Australian Agricultural Company limited and Bellamy’s Australia limited. The former is a leading supplier of beef while the latter deals with baby food. Nevertheless, the annual reports are for the year 2015/2016.
That stated the main research question is: how do the dividend policy employed by an organization affect the profitability. The two companies used in the study have different turnover rates which may be used as a result of the policy employed. Moreover, the fact that they have different sets of shareholders makes the study all the more intriguing. In essence, the research will be used to speculate, if not identify, the policy that is used.
Australian Agricultural Company
As with the Australian Agricultural company, the following table indicates the profitability as well as the share ratio at the organization.
The companys, profitability statement
Payment of dividends
As with the company, the financial statements indicate that there were losses from the year 2012 to 2014.Howwever, the years 2015 as well as 2016 saw the company gain profits. One hypothesis to this is that there might have been a change in the financial management of the organization and more specifically, on the dividend policy.
As with the policy used in paying out the dividends to the stakeholders, it may be assumed that the policy used is the no dividend. The no dividend policy has been described to consider the long term profitability of the company over the needs of the stakeholders. The dividend payout ratio as well as the dividend payment is 0 which indicates there was no dividend payed to the stakeholders. As a matter of fact, the annual report indicates that no payment was made on either the interim or final dividends.
Bellamy’s Australian Limited
The interim dividend payout of this organization was at 4.1% while the final dividend payment was at 7.85 for each share in the financial year 2015-2016.Moreover, the report indicates that this represents 30% of the profits made in that specific financial year. Nevertheless, this represents an increase in the value of dividends per share from the previous year,. The interim dividend per share for the year that ended 2015 was 0% while the dividends per share were 2.86% for the year 2015.
In essence, the most likely used dividend policy used by the company was the residual policy. The literature indicates that the residual policy considers the profitability of the company as well as the equity ratio.Dividentds are paid out from the remainder of the finances derived from the equity. Nevertheless, the company considers the general profitability prior to considering the dividends to be paid out to the shareholders.
As with the two companies, the stability as well as the security of the the balance sheets as well as the financial statements has been imperative in selecting the type of policy to be used. This emanates from the fact that there is need for proper and adequate reserves in both the companies. These two companies are humongous and as such, there needs to be sufficient funds to sustain the operations when the stress kicks in.The small rates indicate that the board is cautious about the amounts of money available since pushing too high may lead to stalling of the projects objectives. Nevertheless, this may not be as per the expectations of the passive income investors of both the companies.
|author||topic||Research question||Type of policy||Finding|
|Milton, T||Dividend policy and profitability||Which policies are important in sustaining profitability||Residual policy||Residual policy applies to com[panies willing to make investments and considers the equity ratio prior ton payout|
|Mehta, A||Profitability and policies||What type of policy is applicable to companies making losses and/or seek investment||No dividend policy||Used in maintaining the funds available and there is no payout|
|Nissim & Ziv||Policy and profitability||Does the policy used affect the long term profitability as well as investment in the company||Al types of policies||The policies should align with the objectives of the company as well as provide returns to the shareholders|
The study has focused on the impacts of dividend policy on the overall profitability of the company. However, the reverse is also true where the profitability of the organization can be used to determine the policy However, the profitability of the company is the most likely determinant of the policy that will be used by the organization.
In line with the companies that have been used in this research, the two most likely used policies are the no dividend and the residual dividend policy. The first company, Agricultural Company of Australia has not paid dividends to the stakeholders since the year 2012 and this may be due to the long term goals of the organization. The long term goals may be imperative to the board to the extent that they consider not paying out dividends. On the other hand, Bellamy’s Australia has varying rates of dividend payment between the years 2015 and 2016.As a matter of fact, the year 2016 has higher rates of payment as compared to 2015.
Therefore, the choice of a dividend policy determines the profitability of the company. However, there are other factors that come into play and can be determined by the structure of the organization. More so is the fact that the policies implemented by the two companies may represent the preferred policies by companies in the two industries.
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