The distribution of profit enterprises established as joint stock companies, largely influenced elected dividend policy, which is a set of principles and methods of payment of dividends in accordance with the objectives of financial and economic activity at a particular time.
The goal of the dividend policy is to optimize the proportions of distribution of net profit for current consumption in the form of dividends and industrial development to maximize the market value of the company. Accordingly, the income of shareholders consists of two parts: consumption and capitalized.
The main indicators of the efficiency dividend policy, include:
1. The payout ratio or dividend yield, describes the proportion of distribution of net profit (after payment of fixed obligations) for the payment of dividends and financing investment needs. Fixed liabilities to be paid from the profits of principal on the loan, the repayment of bonds, payment of dividends on preferred shares.
2. The level of profitability of shares characterizes the amount of income received by shareholders each hryvnia invested in stocks.
3. Joint stock companies for evaluation of developed policies defining figure similar to RSA, according to the estimates of total dividend payments and invested equity.
4. The ratio of price and earnings per share.
The problem of formation of the optimal dividend policy in emerging economies, pay much attention. Because of its choice depends on the welfare of owners of capital, the size of their financial resources and the pace of industrial development on the basis of self-financing, the market cost of capital the company and its financial stability in the long run.
• Should I pay all or only a portion of profits to shareholders in the current period or reinvest it in order to increase future capital gains?
• Under what conditions should change the dividend out?
• Should a long-term follow a dividend policy and when it is advisable to change?
• In the form of pay earned net income to shareholders, in cash, in the form of additional shares or through redemption of shares?
• What specific methods dividends and payments scheme to use?
In world practice, financial management of all the above-mentioned issues are only for ordinary shares, as this type of financial instruments possible alternative forms of distribution of net profit. A payment on preferred shares owned by the mandatory fixed charges, a decision which is associated with the choice of capital structure.
In the case of cash payments can be used various forms of advertisement:
- The amount of the dividend per share by value;
- Percentage of the market price of shares (RSA);
- The percentage of net profit or dividend yield (V);
More focus on the sequence of individual procedures.
Dividend announcement date - the day when the decision is taken and made public on the company size of this dividend, officially the date of the census and payment of dividends.
Ex-dividend date - shareholders who bought shares before that date are entitled to receive the declared dividend. If the transaction of sale of shares was made after the ex-dividend date, the current dividend is paid to the new owner. Accordingly, in the day the market price of the shares falls by the amount of dividend declared.
Census date is usually set for 2-4 weeks before their benefits. On this day a registration of shareholders entitled to receive the declared dividend. Setting specific date of registration of owners due to constant changes in their composition in terms of rotation of the shares on the stock market.
Payment date - the day when money is directly pay dividends to shareholders entitled to receive them.
Principles of dividend policy
Developing an effective dividend policy is based on using the following principles:
- Balancing the various interests of shareholders and creditors of the company as a business entity;
- Taking into account the effects of inflation on the level of dividend payments to shareholders and reinvested amount of net profit;
- The use of at least 5% of net profit for the formation of the reserve fund the company until it reaches 25% of the fund;
- Taking into account differences in the interests of small and large (strategic) investors;
- The formation and preservation of the main contingent of shareholders, which satisfies the dividend policy of the company;
- Reasonable combination of monetary and non-monetary forms of payment of dividends, based on the actual financial and material possibilities of the company;
- Consideration of asymmetric information, ie varying degrees of awareness of shareholders and managers about the real state of affairs and prospects of the company;
- Consideration of risk factors.
Factors determining dividend policy
When selecting specific forms and methods of payment of dividends must take into account the impact of different groups of factors relating to investment opportunities, objective limits achieved performance of others.
The main factors that determine the specific content of the company's dividend policy, include:
1. The stage of the life cycle of the company. In early priority use of the net income is investment development that restricts the payment of dividends. At later stages, by contrast, the growth rate will stabilize profits and dividends can significantly increase.
2. The intensity of investment processes in the enterprise. The need for expanded reproduction and the availability of highly efficient investment projects requiring substantial capitalization of profits and reduce the size of the fund dividend payments.
3. The cost of raising funds from alternative sources and their availability in the financial and monetary markets. The more expensive external financial resources, the need most of the profits to reinvest.
4. The level of creditworthiness of the company and its ability to attract additional debt. If not fully used Loan capacity of the company and have the option to roll over or raise additional long-term loans, the need of increasing the share capital and dividend policy may be more reasonable.
5. The financial constraints. The need for priority repayment of liabilities from defined benefit (loans, bonds, preference shares) dividend reduces corridor, within which can be dividend policy.
6. Limitations. The company in selecting methods and forms of dividend payments must fulfill contractual restrictions included in its founding documents.
7. The composition of shareholders and their priorities. Small shareholders (including pensioners, employees, shareholders) interested in increasing the dividend and, accordingly, raising the dividend payout ratio. Conversely, high yielding shareholders (including strategic investors) are interested in the reduction of total taxes, respectively, vidtotsi net profit as dividends. If formed permanent contingent of shareholders, which satisfies the dividend policy of the corporation, then managers should not frequently change the dividend policy. Conversely, if there is a range of potential shareholders interested in the new dividend policy and demand action from their side will prevail offering of shares of dissatisfied shareholders, the company may change the dividend policy in order to increase the market price of the shares.
8. The level of dividend payments competitors and the risk of losing control of the company. Low level of dividends over competing firms could lead to a significant decrease in the market price of shares and their massive sell-off that could increase the risk of financial Seized competitors.
In theory dividends depending on the degree of risk for the development of the company are three strategies to dividend policy: conservative, moderate (compromise), aggressive.
The method involves residual payments that fund the payment of dividends as a residual formed only after due net profit financed investment needs of the enterprise.
The advantage this type of policy is to ensure high rates of development of the company, increasing its financial stability. Disadvantages of this policy lies in the size of dividend payments instability, unpredictability of their sizes in the future and even full refusal of payment of dividends in periods of high investment requirements that may affect the share price level. This dividend policy should be used only in the early stages of the life cycle of the company related to its high level of investment activity.
In economic justification residual dividend policy should be considered a rule of financial management: investors prefer shares of firms that reinvest profits rather than paying current dividends only if the result of reinvestment return on assets of the company exceed the level of return that investors can get their own investing cash.
Method stable ratio of dividend payments is given by the ratio of distribution of net income (after the obligatory payments) between shareholders and joint stock company, ie fixed dividend payout ratio (dividend yield). The advantages of such a policy is the simplicity of its formation and a close relationship with the size of profits.
The downside is policy instability size of payments per share, increasing the share price drops.
Method stable value of dividends is to set a fixed rate of return on paid-up share capital. The advantage of this method is its high reliability, contributing to the confidence of shareholders in the immutability of the value of current income and the stability of quotations of shares on the stock market. The disadvantage of this method is its weak link with the financial results of the company, ie during the deterioration and low volume of investment profits of an enterprise is reduced to zero.
The method of constant and variable share dividend provides regular stable low dividends and additional payments in favorable years. The advantage of this policy are guaranteed a stable payment of dividends in the minimum prescribed size. There is a close relationship with the financial results of the company, which allows to increase dividends during the effective economic activity. The main disadvantage of this method is that the minimum payment of dividends over a long period reduce the investment attractiveness of the company. According falls and their market price.
Method permanent increase in the value of dividends. With this method a fixed rate of dividend growth. The benefits of this policy is to ensure a high market value of the company and creating a positive image among potential investors. The disadvantages of this policy include the lack of flexibility in its implementation and constant increase in financial stress when the fund dividend payments is growing faster than total revenue. As a result of investment activity coefficient and enterprise financial stability reduced.
In addition to these methods of payments of dividends to influence the liquidity of the shares and retain their market price within the optimal range of the company can use the shredding operation and consolidation of shares.
Share splits (split) provides additional issue of shares without increasing the size of the share capital. Thus according to the scale crushing nominal decreases and increases their number. Reducing the share price makes them more attractive to investors, especially if the amount of the dividend per share is maintained or reduced to a lesser proportion than the face value. As a result, the stock price increases in the future. After shredding company shares more accessible to individual investors. Efficiency splits assessed using correlation coefficient market price and income shares (KC / d) before and after the split. The disadvantage of this operation is the additional cost of issuing shares.
Consolidate (consolidation) shares - on the reverse crushing operation, which is to exchange a few shares a smaller number of larger denomination according to the chosen scale consolidation. Like the previous operation, consolidation does not change the total equity capital and has more psychological impact on investors. A positive aspect of consolidation is to reduce fluktatsiyi share price and keep it in the optimal range. Of particular importance is the consolidation of shares in the event of significant inflationary depreciation of revaluation of shares and assets. But as in the case of Split, the consolidation of shares there are additional costs to issue securities.
The policy of dividend payment in shares. Under this non-cash payments in place of shareholders receiving cash payments additional shares. Typically, joint-stock company to manage the payment of dividends in shares in the event of deterioration in the financial condition or temporary lack of financial resources for the implementation of investment programs for overall financial stability. But in any case it is understood that the payment of dividends in shares is not dictated by a lack of funds in enterprises in general, and the inability of their concentration until the payment of dividends or the presence of more priority areas for joint-use of net profit.
The advantages of this dividend policy include:
• significant tax savings if the dividends paid shares are not taxed or taxed at lower rates;
• maintaining sustainable shareholder (unlike the case of IPO when there is spraying the owners of capital);
• ability to reinvest profits without disclosing the investment (in the event of a new issue of shares and bonds purpose of raising funds must be made public, and therefore the payment of dividends in shares is the only way of investment resources in case the stock company plans to absorb another company, and not disclose their trade secrets);
• increase the liquidity of shares by lowering their market value (instead of using such artificial regulation taking share price as grinding).
Most policy of dividend payment in shares is carried out without changing the volume of the balance sheet through redistribution of sources of equity. As a result of this restructuring is a growth equity by reducing the distributed profits. However, if the share issue carried out at market prices, increases authorized capital by the amount of additional shares within the denomination and additional capital - the total value of the excess of market price over the face value of additional shares issued.
Policy repurchase shares. Due to the fact that the redemption of a shareholding company of its own shares its net income used to pay the owners of capital, this policy can be seen as an alternative cash dividend payment.
Shares may swim:
- Through the stock market at the market price;
- At a specially organized tenders declared period of time at a fixed price;
- Auction the lowest offered price;
- By direct repurchase of shares in one large (strategic) shareholder at a price agreed.
But in terms of the company share buy option has several advantages:
- Firstly, increasing income per share and consequently increasing their investment attractiveness;
- Secondly, due to tax savings shareholders receive indirect revenue as in the case of redemption of shares there is no need to pay tax on the dividend.
In some cases, joint stock company may exercise program automatic reinvestment of profits, which is a mixed form of dividend payments and gives the shareholder the right to choose between two alternatives:
- To receive the dividend in cash;
- Reinvest part or all of the dividend and receive additional shares (usually in order to encourage shareholders new shares are sold at a discount).