Introduction
Some companies pay dividends while others do not. Companies that pay dividends have to consider a number of factors to come up with the dividend policy before they pay dividends. Dividend policy is the judgment that is given by an organization about the profits that are to be given to stakeholders (Upton, 2011, p. 1). Companies strategize to pay dividends as a strategy while others see it as a concern of the stakeholder. Investors are constantly choosing the best organizations to invest in so that they can benefit. Dividend paying companies are constantly contesting by offering the best interest on tax. While others choose to engage in bond, other investors choose the dividends since they are fluctuating and take the risk.
This paper will assess how companies set their dividends policies and explain the factors that a company will consider in setting its dividend policy and in determining the level of dividends to be paid. This paper will also support the arguments by referring to the British Airways which is listed in the UK FTSE100 company.
How companies set their dividend policy
Companies set their dividends by considering how the dividend’s impact on the shareholders and the continuers income of the organization. They also consider the tax rates and the growth of the business. Companies set their dividends depending on who raised the capital for the company. Shareholders who have funded the entire capital of the company will be given consideration when compared with the compared with the company that is partly funded by the shareholders.
Some companies consider the organizations revenue before they rest on a dividend policy such as deficits for instance pension deficits. The organization must settle its area before it gives dividends. Therefore, the profit obtained is used to settle the disputes. Once the dispute is settled the policy is reviewed (Investopedia, 2009, p.
Other companies consider the projects that the organization has undertaken. Depending on the nature of project the company may be required to support it and then consider giving dividends. The revenue of the organization will first fund the project then dividends will be granted afterwards.
Factors considered in setting dividend policy and the level of dividend to be paid
In line with Upton (2011, p. 1) there are factors that affects dividend policy some which may favor high dividends others which may favor low dividends. The stakeholder and the organizations hold diverse interests which are referred to as agency cost. The organization is able to obtain more capital as well as better management from the market hence the costs running the company becomes lows while the dividends increase.
Rayner (2011, p. 2) indicates that stakeholders can make their own dividends when they sell their stock. An organization therefore engages in the risks that will increase its value by investing and generating revenue. They argue that the stockholder has little interest in the organizations capital budget, access to information and pays no attention to the differences between the capital again and dividends.
More so, capital gains are treated differently from the dividends by the stakeholders. The capital gains are treated as permanent and stakeholders prefer they remain while the dividends are seen as a source of income hence the stakeholders may even spend the dividends (Upton, 2011, p. 1)
Policies that encourage high dividends hold that the future is uncertain hence it is better to deal with the matter at hand. In this case stakeholders interested in investing prefer to have more discounts of capital gains instead (Upton, 2011, p. 1). Rayner (2011, p. 2) mentions that higher dividends will encourage investors and the organizations value. Lower dividends will result in reduced investments and the management will realize little growth with huge expenditures hence the dividends will remain low.
Upton (2011, p. 1) argues that taxation encourage dividend policies that result in lower dividends. Capital gain tax is much lower than the dividends tax. Capital gain is only paid after the stock is purchased. Delays of taxing capital gain make stockholders to refrain from making dividends. Buying the dividends require taxation.
Brokerage costs are also factors considered in dividend policy formulation. When the stakeholder decides to invest again they are required to pay the costs to the brokers in addition to taxation. The cost is even higher if the organization makes use of external sources who may ask for flotation cost. The policy may also be affected if the organization remains with the dividends and invests again without involving the external sources. Rayner (2011, p. 1) adds that capital gain can be taxed at a later date after selling security hence dividends which is an income is taxed in the present. Rayner (2011) differs with Upton (2011, p. 1) when he argues that some stockholders prefer to obtain dividends in the future so that their income is distributed.
Another factor that affects the view that dividend may be considered as a residual. Upton (2011, p. 1) points out that dividends may be given after the organization considers giving dividends only after it has exceeded profits. Considering that dividends may lead to risks or lead to gains, the organization can adopt policies that support projects and hope for future returns. Investors see this as impractical and only academic hence in practice stakeholders are reluctant to take the risk.
Stockholders manipulate the dividends so that they can maximize on the gains hence this must be considered when making dividend policy. Stocks that serve their interest will be held. Stakeholders consider maximizing on their benefits in dividends and capital gains hence the dividend policy will either catch the attention of stakeholders.
The amount of information that is disseminated to the stakeholders is significant in dividend policy making. Before the organization announces an increase in dividends it must consider if the increased dividends will be sustainable. This is because a decrease in the dividends may affect the number of investors who may view the organization as if it is performing poorly. Therefore, information on a decrease in dividends may discourage investment. Thus increase in dividends is an indication of progress for the organization hence stakeholders are likely to invest since most are interested in dividends in the present as opposed to dividends in the uncertain future.
An example of a British Airways a UK FTSE100 company
According to Bland (2009, p. 1) the British Airways Company intends to resume paying dividends. It has seen an increased demand in the recent past and has seen growth in the airline industry, despite challenges that range from labor difficulties to the security alerts. However, the company has been able to stipulate dividend policy that will make the company grow. The dividends will appreciate overtime thus the management chose to begin from low dividends and allow for growth. The company had declined paying dividends to its stakeholders due to difficulties that it encountered and chose to pay dividends in order to begin growth after experiencing increase in its revenue. The company was no able to pay dividends before since it had to settle a deficit of pensions. The company decided to meet a certain target before settling on paying dividends. Thus the company will only pay dividends after meeting the target.
Conclusion
Dividends are fluctuating and companies pay dividends tactfully. They consider the tax involved, the interest of the company and that of the stakeholder. They also consider the revenue of the company and set a target. Factors that are considered in setting dividend policy and the level of dividend to be paid are the agency cost where the interest of the stakeholder and that of the company are evaluated, the tax rates as compared to capital gains and bonds as well as the information that will influence more investors and the views held about the dividends. For instance, stakeholders view dividends as an income. Other costs involved in trading like interests on dividends that are to be invested again. The companies also consider that stakeholders need to gain and compare the companies so that they can have maximum gain. An example is the British Airways which is listed in the UK FTSE100 company that has intentions to pay dividends again. It has considered paying the pension deficit and only beginning paying dividends after the company has attained a certain target. After attaining the target, it will pay dividends and progress from one level to another.
Reference List
Bland, B., 2007. BA hoping to pay dividends again: The telegraph. Web.
Investopedia., 2009. How and why do companies pay dividends? Investopedia. Web.
Rayner, T., 2011. Dividend Policy Decission1 And Dividend Policy And Payout Ratio : Evidence From The Kuala Lumpur Stock Exchange.Web.
Upton, D. E. 2011. The business irrelevant argument. Reference for Business. Web.