Factors Influencing Dividend Policy
It is difficult to arrive at a specific answers to or determinants of any policy decision on a general basis because. in the ultimate analysis. Dividend decisions have to be taken considering the special circumsatances of each individual case. Ideally, a company should be financially able to pay steady dividends to shareholders. The stability of dividends have a positive effect upon the market price of share, as they may tend to resolve uncertainty in the minds of investors. Particularly when earning per share drop (Van Horne).
Many companies appear to follow the policy of a target payout ratio of dividends to earnings keeping, in view the long-term investment needs of the company. As John I. inter points out, over a period of time dividends are adjusted to changes in earnings, but only which a lag-that is, increasing dividends only when it is felt that an increase in earning can be sustained. The rate of adjustment is generally not the same as the rate of change in earnings.
Other factors of the consideration that innocence directors in establishing a dividend policy are :
(i) Legal restrictions or the legality of proposed dividends e.g., necessity of having in surplus (current of past profits) as dividends cannot be paid out of capital.
(ii) Nature of earning-amount and behaviour or earning from year to year to be taken into account.
(iii) Cash needs of the company. As dividends represent a cash flow, dividend policy must dividend payment on net working capital, is Profitability does not always mean standing Profitability does not always mean better liquidity as the funds so generated may go fixed assets and permanent working capital. Better the liquidity the greater is the ability to dividend, and vice-versa.
(iv) Ability to borrow which is another means of providing for liquidity flexibility and protection against uncertainty. Better the ability to borrow. lesser will be affect of cash dividend on a firm’s liquidity.
(v) Desire to maintain control-large dividends may necessitate raising of capital through the issue of equity shares in a letter period, thereby diluting the controlling interest of the present management of the company.
(vi) Restrictions in debentures, loan agreements and provisions in character on dividend payment may also affect payout ratio.
(vii) Welfare of the investors-Depending upon the nature and types of shareholders desiring current income or capital gains, the firm can establish a low or high pay-out ratio, as the case may be. In a largely help public limited company. It can judge these desires only in terms of the market price of its shares.
(viii) Previous year’s dividends – Once a dividend pattern is established. The companies generally want to maintain it reduction in dividends may affect the company reputation and share price adversely. That is why, stability of dividend has become a part of the dividend policy of many companies.