Determinants of divident policy of corporate enterprises
Many a times, company having high profit, may have majority of profit blocked in working capital or it may acquired assets.
There should be other conditioning factors also for the issue of stock dividend. A different group of shareholders will have different expectations. A stock dividend has no immediate effect upon assets.
Reduction in dividends can be affected but not without the co-operation of shareholders. Inflation With rising prices due to inflation, the funds generated from depreciation may not be sufficient to replace obsolete equipments and machinery.
Preference dividends are fixed dividends paid as a percentage every year to the preference shareholders if net earnings are positive. As the prices rise, the companies need to increase their capital reserves for their purchases of fixed assets.
Determinants of corporate dividend policy
A highly profitable company have a capacity to pays higher dividends and a company with less profits will adopt a conservative dividend policy. In case the firm has easy access to the capital market, it can follow a liberal dividend policy. The equity of the shareholders in the corporation increases. Most importantly providing depreciation is mandatory before making payment of dividend. To sum up, the decision with regard to dividend policy rests on the judgement of the management, since it is not a contractual obligation like interest. If the stock holders prefer cash to additional stock in the company, they can sell the stock received as dividend. The formulation of dividend policy requires a balanced financial judgement by judiciously weighting the different factors affecting the policy. Inflation With rising prices due to inflation, the funds generated from depreciation may not be sufficient to replace obsolete equipments and machinery. Whereas, a high institutional ownership will favor a high dividend payout as it helps them to increase the control over the management.
In other words, the reserves are capitalised and their ownership is formally transferred to the shareholders. However, a company with no capital requirements should opt for a higher dividend. On the other hand, it entails the payment of a fair rate of return, taking into account the normal growth of business and the gradual impact of external events.
based on 11 review