ROLE OF FINANCIAL MANAGER IN MATTERS CONCERNING DIVIDEND
POLICY?ALTERNATIVES THAT HE MIGHT CONSIDER & THE FACTOR
WHICH HE SHOULD TAKE IN TO CONSIDERATION BEFORE FINALISING
HIS VIEWS ONDIVIDEND POLICY?
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Answer Posted / raj
AS A FINANCE MANAGER,
HERE ARE SOME OF MY COMMENTS.
The blemishes in the traditional dividend policy
There are some blemishes existing in the making and the
process of carrying out the traditional policy:
1.The traditional dividend policy is not devoted to the
maximization of enterprise value
The traditional dividend policy is not devoted to the
maximum of enterprise value, but to the maximum of the
profit or shareholder's wealth. The main blemish of taking
the maximum of profit as the final goal of dividend policy
is that it only considers the interests of enterprise's
operator to emphasize the amount of profit of enterprise to
reach most top in a certain period, but it did not go to
consider the enterprise itself. When pursue the maximum of
profit unilaterally, it may cause the acts and efforts for
expediency of enterprises and is unfavorable to
enterprise's long-term development. While, when we regard
the maximum of shareholder's wealth as the goal, the weak
point is that the maximum of shareholder wealth is related
to the maximum of the market value of the stock, but in
fact, the factor influencing the change of the stock price,
not merely include enterprise's business performance, but
also include investor’s psychology expectation and economic
policy, political situation etc. .All these make it lose
standard and objective Dimensions. In this kind of case,
when make the policy; we will only often consider the
income of shareholder but no consideration for the future
of enterprise.
In addition, the traditional dividend distribution policy
can't systematically have contact with the behavior that
creates value. That is another reason to not realize
maximum of enterprise value. In another word, when we make
the policy, we only think of the matters, such as how to
distribute dividend, which means of payment to choose,
which kind of distribution policy to use, etc., but do not
think of the relationship of the behavior of the value
creation. That’s to say we don’t take the principle of the
value management into the dividend policy.
2.There is no consideration about the sustainable
development of enterprises in traditional dividend policy
First, it doesn’t take “maximizes the enterprise value ”as
the final goals when establish firm’s dividend policy. Just
as we have stated, while set down the policy, firms only
pursue the short-term interests such as the maximum of
profit and shareholder’s wealth, and neglect the long-term
income and the effect to the sustainable development of
enterprise. To a great extent, we cannot say it is stable
and relative independent as a policy. Secondly, it lacks
the whole, overall and long-term planning while establish
the dividend policy. That is without thinking of the factor
of enterprise value, it only pays attention to carrying on
unilateral, short-term planning. All these are unfavorable
to the long-term development of enterprises, and also can't
realize the sustainable development of enterprises.
3 The traditional dividend policy is out of joint with the
overall business decisions of enterprises
The traditional dividend policy often ignores the close
relationship among the dividend policy and investment
decisions and financing decisions. It makes dividend policy
is out of joint with the business decisions. So the
business activities may not accordance with the promoting
enterprises value. In addition, we often don’t take
consider of which kind of effect the dividend policy will
bring to the stock market and how it can influence the long-
term development of the companies. In fact, cutting down
dividend can make a response as negative signal at the
stock market, which might make the company’s stock price
drops.
AS A FINANCE MANAGER, FOR THE DIVIDEND POLICY,
I WOULD TAKE INTO CONSIDERATION THE FOLLOWING:
-investment decision for the future.
-future profit forecast
-business performance
-cash flow status for the next 3/5 years.
-financial situation
-capital structure optimization.
-fianancial risks
-net profit
-company's intentions
-shareholders' intensions
-current stock price
-recommendation of the board
-strategic planning of the company
-liquidity assessment
-net cash flow
-capital expenditure
-debt service
-balance sheet.
etc etc
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