What Is Involved in Dividend Policy Analysis?

Dividend policy refers to the more principled approach adopted by the company's shareholder meeting or the board of directors on all matters related to dividends, such as whether the company will pay dividends, how much dividends will be paid, and when to pay dividends. And strategies, which mainly involve the company's strategy of distributing or retaining its earnings for reinvestment. It has narrow and broad sense. In the narrow sense, the dividend policy refers to the question of the proportional relationship between retained earnings and dividend payment of ordinary shares, that is, the determination of the dividend payment ratio. The broad-based dividend policy includes issues such as the determination of the date of dividend declaration, the determination of the dividend distribution ratio, and the financing of dividends.

Dividend policy

Dividend policy refers to the more principled approach adopted by the company's shareholder meeting or the board of directors on all matters related to dividends, such as whether the company will pay dividends, how much dividends will be paid, and when to pay dividends. And strategies, which mainly involve the company's strategy of distributing or retaining its earnings for reinvestment. It has narrow and broad sense. In the narrow sense, the dividend policy refers to the discussion

(1) Residual dividend policy

The dividend policy is based on meeting the company's capital needs first. Under this policy, the company determines its dividend distribution amount as follows:

1. Determine the company's optimal capital structure;

2. Determine the company's capital requirements for the next year;

3. Determine the amount of shareholder equity required to meet the capital requirements in accordance with the optimal capital structure;

4. The company's after-tax profit will first meet the company's increased demand for the next year, and the remaining part will be used to pay out cash dividends for the year.

(2) Stable dividend policy

The determined cash dividend distribution amount is given priority consideration as the primary goal of profit distribution, and generally does not fluctuate with the fluctuation of capital demand. This dividend policy has two advantages.

1. Stable dividends give the stock market and company shareholders a stable message.

2. Many shareholders (including individual investors and institutional investors) who are long-term investors hope that the company's dividends can become a stable source of income, so they arrange consumption and other expenses. The policy of stable dividends is conducive to the company's attraction and stability. Investment by some investors.

Adopting a stable dividend policy requires the company to make a better judgment on its future payment capacity. Generally speaking, the amount of stable dividends determined by the company should not be too high, and there should be room to avoid the dilemma of the company's inability to pay.

(3) Fixed interest rate policy

The policy company pays cash dividends from its after-tax profits at a fixed rate each year. From the perspective of the company's ability to pay, this is a truly stable dividend policy. This policy will cause frequent changes in the company's dividend distribution and pass on the unstable information of a company to the outside world, so few companies use this dividend. policy.

(IV) Normal dividend plus additional dividend policy

With this policy, in addition to paying a fixed dividend amount to shareholders each year as a normal cash dividend, the company also distributes cash dividends that are higher than the normal dividend amount to shareholders in years with high corporate profits and abundant capital. . The higher part is the additional dividend.

Choice of four dividend policies

Due to the differences in the above aspects and the company's operating conditions, especially the different development cycles, the four dividend policies require companies to choose according to actual conditions.

1. Residual dividend policy

Residual dividend policy applies to companies that have good investment opportunities, have a large demand for funds, can accurately determine the target (optimal) capital structure, and have a return on investment that is higher than the necessary return on the stock market. They also require shareholders Reliance on dividends is not very strong, and there is no preference or preference for capital gains in terms of dividends and capital gains. Considering the company's development cycle, this policy is more suitable for startups and growing companies. It is also applicable to some companies that are in recession and need to invest in new industries to survive. Of course, from the perspective of financing needs, if the company has less pressure to distribute dividends during the period of rapid growth, it can also adopt the residual dividend policy to seek the lowest cost of capital. In fact, few companies use the theory of residual dividends for a long time or mechanically, and many companies use this theory to help establish a long-term target payout rate.

2. Fixed dividend or stable growth dividend policy

The fixed dividend or stable growth dividend policy applies to mature companies with reduced demand for production capacity expansion, sufficient profits and relatively stable profitability. Considering the life cycle of the company's development, companies with a stable growth period can use a stable growth dividend policy. Mature companies can learn from the fixed dividend policy. For those companies that are relatively small in scale, in the growth stage, have abundant investment opportunities, and have relatively large capital requirements, this dividend distribution policy is not suitable.

3. Fixed dividend payment rate policy

Although the fixed dividend payout policy has obvious advantages, the negative impact is also relatively large. Therefore, few companies will adopt this dividend distribution policy alone, and most of them fully consider their own factors and compare with other policies. In conjunction with.

4.Low normal dividend plus additional dividend policy

The policy of low normal dividend plus extra dividend is applicable to companies in high growth stage. Because the company's rapid expansion at this stage requires a lot of funds, and since it has passed the start-up period, shareholders often have the requirement to distribute dividends. This policy can well balance the requirements of capital and dividend distribution. In addition, it is undoubtedly an ideal payment policy for those companies whose profit levels fluctuate greatly over the years.

The above analysis of the company's development life cycle theory to analyze how to choose four dividend policies in a timely manner. However, the problem that needs to be noticed is that it does not mean that the company should only consider from the perspective of life cycle when choosing a dividend policy. This is only a relatively important aspect of choosing a dividend policy. Since there may be more investment opportunities in a certain period, and the demand for funds is relatively large, at this time, the remaining dividend policy can also be adopted from the perspective of financing costs. These types of dividend policies do not necessarily exist in a single way. For example, only a few companies will adopt a fixed dividend payment rate policy alone, and most of them are integrated with other policies to formulate policies suitable for the company itself.

Dividend policy types

· Cash dividend

· Stock dividends

· Stock repurchase

Allocate cash to shareholdings through repurchase

The company's dividend distribution plan is usually decided and announced by the company's board of directors.

Influence company

Residual Dividend Policy

Residual Dividend Approach

The dividend policy is based on meeting the company's capital needs first. Under this policy, the company determines its dividend distribution amount as follows:

Determine the company's optimal capital structure;

Determine the company's funding requirements for the next year;

· Determine the amount of shareholder equity required to meet capital requirements in accordance with the optimal capital structure;

· The company's after-tax profit will first meet the company's increased demand for the next year, and the remaining part will be used to pay out cash dividends for the year.

Stable Dividend Policy

Constant growth dlidend

The determined cash dividend distribution amount is given priority consideration as the primary goal of profit distribution, and generally does not fluctuate with the fluctuation of capital demand. This dividend policy has two advantages.

Stable dividends give the stock market and company shareholders a stable message.

· Many shareholders (including individual investors and institutional investors) who are long-term investors hope that the company's dividends can become a stable source of income "in order to arrange consumption and various other expenses. Investor's investment.

Adopting a stable dividend policy requires the company to make a better judgment on its future payment capacity. Generally speaking, the amount of stable dividends determined by the company should not be too high, and there should be room to avoid the dilemma of the company's inability to pay. ^[1]