FMAccounting.com » Dividend Policy

High Dividend Policy Payout To Induce Investors

slang — Fri, 21 Aug 2009 08:39:54 +0000

Earlier, we have noted few schools of thought on the impact of dividend pay out to attract investors which indirectly help to increase the share value.

Recently, RHB Research Institute Sdn. has advocated the go-ahead to buy high dividend yield stocks to ride out the stock market’s volatility.

The shares recommended are:

Hai-O Enterprise Bhd, a seller of Chinese wines, herbs and medicines,
Tanjong Plc and
chipmaker Malaysian Pacific Industries Bhd

Hai-O has a dividend yield of 7.8 per cent, the highest among RHB Research’s dividend stock picks, while Public Bank offers a 6.5 per cent return, and Carlsberg has a 5.7 per cent yield, according to the report. The dividend yields are higher than the 10-year Malaysian government securities’ 4.17 per cent yield.

Dividend for TNB shareholders

slang — Thu, 01 Feb 2007 13:47:43 +0000

Reported in The Edge (31/1/07) Tenaga Nasional Bhd (TNB) is now reviewing its dividend policy to reward shareholders. This is particularly so with its rising spare cash so as to make this utility stock more appealing, especially to foreign investors.

According to Chief executive officer Datuk Seri Che Khalib Mohamad Noh:-

· when the company was doing well, there was no reason not to pay dividend.

· TNB is now looking at its dividend policy which is going to be TNB’s first ever dividend policy

· TNB had hired a merchant bank to advise on the group’s dividend policy that would be announced when the group released its second quarter results, expected in April.

· He noted that foreign investors preferred to invest in companies that had a “structured dividend policy.”

Earlier in my articles, it’s not easy to shape up a dividend policy. Generally, investors prefer a company that at least has clear structured dividend policy rather than one which is erratic in paying dividend. An erratic unclear dividend pay out might occasionally confused investors as if management is not planning ahead .

Dividend Payout Policy: Approach To The Dividend Decision (Part 2)

slang — Thu, 29 Jun 2006 15:04:43 +0000

In my earlier article on the different schools of thought pertaining to the effect of dividend payout ratio, irrespective of the impact to its share price, there is a need that before we can determine an appropriate dividend policy, the company needs to embark on the following steps:

Estimating Future Residual Funds

Determine an appropriate target payout ratio

Setting the dividend rate

Estimating future residual funds:

Logically, this is the starting point as we need to establish a cash flow projection over a reasonable time horizon typically 5 years. The projected level of capital expenditures and operating cash flows are the most important factors to take into account. Simply, a company should pay out that portion of its cash flow which it is unable to reinvest profitability. From the economic value added concept (considering the cost of capital), whereby the investment cannot further add value to its shareholder equity, the money which are from the shareholders should be returned to them.

In the five years cash flow projections, different scenario of the timing and quantum of capital expenditure needs to be included relative to the changes in business decisions, etc. Therefore, future operating cash flow is not entirely predictable hence the cash flow projections should reflects the different range of distributable amounts which results in the different range of feasible target payout ratio.

Determine an appropriate target payout ratio

To do this, we need to analyse the payout ratio of comparable companies in the same industry. Comparable would mean that it should resemble wherever possible the company in terms of its size, product mix, operating characteristics and others.

The average industry standard should also be considered.

Finally, the range of feasible target payout ratios from the aforesaid cash flow coupled with the range of customary payout ratios be considered further with the shareholder mix to finally get the long-term target payout ratio.

Setting the dividend rate

It is quite crucial not to send a wrong message to both the existing or potential investors hence the need to consider the appropriate dividend rate. What it means is that the rates should preferably not be erratic which can send a wrong message to the investors. Given its target payout ratio and its earning projections, the quarterly or interim dividend rate should be established at the highest comfortably sustainable level which should prudently be below the expected maximum rate earlier set up in the cash flow projection.

The above approaches showed that to set a dividend policy decision, it will need many painstaking homework and top management review/decision. The ultimate objective perhaps is to use this dividend decision as a tool to further win the heart of the existing and potential investors.

Dividend Payout Policy: Does It Affects The Company’s Share Price? (Part 1)

slang — Thu, 29 Jun 2006 14:14:50 +0000

In a public listed company, the spread of shareholding is wide. Because of this diversified shareholder mix, any dividend payout will disappoint at least some of the shareholders. Therefore the main question is whether a company’s choice of dividend policy can affect its share price.

To answer the question, we need to understand the different schools of thought:

Traditionally, we have the “ bird-in-the-hand view” that shareholders would like companies to pay high dividend. It augur well the thinking that “immediate” dividends over less certain and more distant capital gain;

Another school takes the opposite stance whereby shareholders prefer capital gains over dividends and hence low payout ratios, because capital gains are taxed at a lower/zero rate than dividend;

The third school of thought maintains that a company’s stock market value is relatively insensitive to its choice of dividend policy. Accordingly, as dividend is a passive decision, hence management should first determine its capital investment program and then pay out as dividends whatever cash is left over. [ Merton Miller & Franco Modigliani’s theory];

There is no correct answer however, there is a strong trend to believe that dividend policy or changes plays a very important role as it is able to signal to the existing or potential investors regarding changes in management’s expectations as to the company’s future earnings.

From the Malaysian perspective, we can see more listed companies are establishing higher dividend payout ratio to satisfy its existing and potential investors.

Nevertheless, as part of our financial strategy, financial executives need to strive to balance the desires of all of its shareholders against one another. As there no panacea to cure all shareholders desires, the company perhaps should wherever possible review the range of feasible target payout ratios together with the range of customary payout ratio and any special shareholder mix consideration.