Introduction: Dividend Policy
In the business platform of today, there is very stiff competition between companies. This is because of the increased number of organizations coming up every day making it difficult to survive in the market. In order to survive in the market, organizations need a strong financial background so that they can gain a competitive edge over their rivals. In a bid to achieve this, organizations go public and sell shares to them at a cost. In lieu of their investment in the company, the shareholders of the company are then paid a share from the annual profits of the company, known as dividends.
Important to note, every organization frame its own dividend policy that is later categorized as good or bad by the market players. In general terms, dividend policy of the firm is categorized as good if the financial managers of companies formulate and implement dividend policies that have a balancing effect on value creation and shareholder wealth maximization. For Instance, if the management pays high dividend, the message sent to the market is that of a possible high future profits in order to maintain the high dividend payment level. On the other hand, any action by the management to cut or suspend the dividend policy is categorized as bad dividend initiative as this send negative signal to the market.
Another noteworthy point is that while a healthy dividend policy can help a firm, it is important to recognize the factors that distinguish good from bad policy. A firm’s age and rate of growth can be a major contributing factor. Take, for example, an established company such as GM. A firm of this age and maturity does not need to keep large portions of its net income to reinvest in itself; on the contrary, GM has the materials and plants it needs to continue operating successfully. On the other hand, a company such as Twitter would not issue any dividends because it is relatively new. A newer company has a higher need for future capital expenses to continue its rapid growth, and thus might maintain its net income to reinvest back into operations rather than distribute it to investors. Another way to look at this for investors may be that the money reinvested into the firm will translate into a higher share price down the line, as opposed to a discount in the share price from a dividend for a more mature firm. (Investopedia, 2014)
In order to illustrate the good dividend initiative, we have selected three different companies, namely, Apple Inc, Goldman Sachs and Walmart whose recent dividend activities can be classified as good initiatives.
Apple Inc.
The ruling company in the consumer electronic industry has been consistently increasing its dividend payments that went up to $1.81 in 2014. The dividend initiative here can be classified as good as the total dividend payment by the company accounts for only 22% of its total cash reserves. Thus, increasing dividend payments goes in alignment with the interest of shareholders as the company has ample cash reserves for reinvestment. In addition, increasing dividend payments indicates that the company is assured of its future growth. Below is the recent dividend payment history of the company:
The trend shows an increase in the value of dividend paid, which is an indicator of the trend continuing into the future. Therefore, the company’s share price and market value are expected to exhibit the same trend in the future.
Goldman Sachs:
Goldman Sachs is another company that has proved to have a good dividend initiative. Referring to the financial statements of the company, we found that over the years, the dividend payment of the company has increased consistently with recent payment amount of $2.05. The increase in dividend payments was sourced from the increase in the net margins of the company that went up from 21.34% to 22.59%.
Thus, increased dividend payments by the company at the time of increasing net margins signals the market about expected future growth of the company. Below is the recent history of dividend payments by the company:
Once again, the trend in the dividend payment confirms with the informational signalling theory where the increase in the dividend payments is attributed to expected increase in the share price and market value of the company.
Wal-Mart Inc:
Just as the companies above, even Wal-Mart Inc. has indicated a good dividend initiative. Noted from the financial statement of the company, the company has been consistently increasing its dividend payment since last 10 years itself. The recent dividend payment of the company amounted to $1.88 per share and was in alignment with the significant surge in the revenue and net profit figures by 6.56% and 3.36%, respectively. In addition, the growth of WMT’s revenue has outpaced that of the industry which is 0.9%. Below is the recent dividend payment history of the company:
Based on the information signalling effect theory of dividend payment discussed above, the dividend payment of Wal-Mart Inc. sends a message that attracts investors. Thus, the demand for company’s shares is increased, thus increasing the share prices.
Three negative value companies
After illustrating the companies with good dividend initiative, we will illustrate the companies with bad dividend initiatives, i.e. the companies which have announced dividend cuts or have suspended their dividend payments and have suffered a resultant decline in the stock price post the announcement.
Seadrill
This was the latest company to suspend its dividend payments in 2014. Important to note, the company had never even cut down its dividend payments in past 6 years and the action to suspend its dividend produced negative results as the stock plunged by 19% on the day of announcement.
Sanofi ADR
The French drug manufacturer is at present producing dividend yield of 3.5%. However, the dividend initiative can be classified as bad as over the years the company has not been able to achieve growth in its net margin and dividend payouts as high as 71% indicates that the company is wooing the shareholders through high dividend payments but is not able to enhance its financial performance.
JP Morgan
Coming out of the 2008 financial crisis, firms in the financial sector have become particularly wary of their dividend policy and how it can be used to attract investors. J. P. Morgan came under scrutiny for having bad policy by raising its dividend and buying back shares. By doing this and distributing money to shareholders, the firm has less cash left over to distribute to its creditors and exposes a credit risk. Often times share buybacks and increased dividend payments infringe upon the bank’s ability to absorb future losses without becoming distressed. The cash issued to shareholders in a dividend – let alone increased dividend – cannot be paid out to potential future creditors to avoid a potential crisis or help its short-term financing needs. A firm heavily affected by the credit crunch should be extra careful about these policies since their reputations with investors are slowly being rebuilt.
Conclusion
Works Cited
Key Ratios: Apple Inc. (2014). Retrieved December 28, 2014, from Morningstar: http://financials.morningstar.com/ratios/r.html?t=AAPL®ion=usa&culture=en-US
key Ratios: Goldman Sachs. (2014). Retrieved December 28, 2014, from Morningstar: http://financials.morningstar.com/ratios/r.html?t=GS
Key Ratios: Wakmart Stores Inc. (2014). Retrieved December 28, 2014, from Morningstar: http://financials.morningstar.com/ratios/r.html?t=WMT®ion=usa&culture=en-US
Ciura, B. (2014). Why Apple Is a Great Dividend Stock to Buy. Retrieved December 28, 2014, from The Motley Fool: http://www.fool.com/investing/general/2014/11/20/why-apple-is-a-great-dividend-stock-to-buy.aspx
Haroutunian, M. (2014, September). Enerplus suspends stock dividend program. Retrieved December 28, 2014, from http://www.proactiveinvestors.com/companies/news/56929/enerplus-suspends-stock-dividend-program-56929.html
Holter, M. (n.d.). Seadrill Plunges on Dividend Suspension as Rig Market Sours. Retrieved December 28, 2014, from http://www.bloomberg.com/news/2014-11-26/seadrill-plunges-after-suspending-dividend-as-rig-market-sours.html
Sanofi ADR. (n.d.). Retrieved December 28, 2014, from Morningstar: http://financials.morningstar.com/ratios/r.html?t=SNY
