Dividend Policy

Dividend policy is an important aspect of public listed company. The dividend is what shareholders earn as returns from investing in the company stock. A firm management is responsible for determining whether the firm will distribute dividends or not. Dividends may be paid either in cash or bonus stocks. In the case given the firm has never distributed cash to its shareholders. Distribution of dividend is important to the firm. Payment of dividends has an impact on the stock prices. This is because payment of dividends is an indicator of the financial well-being of the firm. The certainty of the good financial performance of business results in the increase in stock prices. The increase in stock prices results in achievement of shareholders wealth maximization goals. Those investors who are in need of a secure current income require a firm that pays dividends. This business as indicated in the scenario has no dividend history and is intending to pay dividends it will be viewed as a pleasant company to invest in. When a business is seen as favorable, then stock prices go up as demand for the company stock increases thereby maximizing shareholders wealth.
Various dividend policies business can apply comprising of the stability system, residual or a hybrid of those two policies. The residual dividend policy is one in which the business uses internally generated funds to finance new investments. What remains after financing the new investment is used to pay dividends. Under the stability policy, a firm may set a certain fraction of the company’s earnings to be used to pay dividends.

Under the hybrid policy, the company views debt/ equity ratio as being a long term goal. The company has not paid dividends and therefore has accumulated funds over the period. In the same period, the company has invested in various projects. The firm should use the hybrid approach since the enterprise will be in a position to balance between the long term and short term goals of the company. Several factors influence the dividend policy of a firm. These factors comprise of the liquidity of the enterprise, legal requirements, earnings stability, and tax implications among others. A stock dividend or stock split would suffice since the shareholders want to maximize their wealth. The stock split will see shareholders get more shares on top of what already exists. The firm will then use the cash available for financing projects identified by the company.