Importance of Dividend Policy in Corporate Finance

This report explores the importance of dividend policy in corporate finance and its impact on shareholder value. It reviews the dividend policy and performance of Kellogg's Company over the last 5 years. It outlines different types of dividend policies and recommends a future dividend policy for Kellogg's.

Corporate Finance

Table of Contents

INTRODUCTION
Corporate finance is the financing branch that deals with the companies that how
they manage funding resources, investment decisions and capital structuring (Booth, Cleary and
Rakita, 2020). The primary focus in corporate finance is the maximization in shareholder capital
by long and short-term money management and the execution of different strategies. The
activities of corporate finance scope from financial decisions to wealth management. This report
based on the dividend performance of Kellogg’s Company which is American based food
manufacturing multinational Company. Currently Kellogg’s manufacture and distributed their
products in 180 countries and offer wide range of products to attract customers. This report
covers several topics such as importance of dividend decision, review company’s dividend
policy and performance over last five years. In addition, evaluate major dividend policy and
recommend for the future.
MAIN BODY
1. Explain the importance of dividend policy
A dividend is the allocation of the profits from a corporation to a subset of its owners, as
decided by the boards of directors of the organization. Usually, ordinary stockholders of
dividend-paying firms are qualified as long since they own the shares by the ex-dividend date.
Dividends can be expected to pay out in cash or even in the form of extra stock. The
shareholders must accept the dividend via their right to vote. Even though cash dividend
payments are the most frequent, dividends may also be issued as company shares or other assets.
Diverse hedge funds and exchange-traded funds (ETF) also make investments alongside firms.
A dividend policy is the strategy a company utilizes to construct its shareholder quarterly
dividend. In theory, a few other researchers suggest the dividend policy is meaningless because
when they need financial resources, shareholders can sell a portion of their shareholdings or
investment. This would be the theory of dividend irrelevance that also concludes that dividend
payouts have minimal effect on the price of a stock (Coles and Li, 2019). Dividends are mostly a
part of a larger strategy for a firm. People are not under obligation to accept profits to
shareholders. The three forms of dividend payout such as stable, constant and residual. While
companies think that businesses are not expected to pay dividends, others believe it is a leading
indicator of the financial stability of the individual company.
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Due to several reasons dividend policy is important for the organization and they need to
formulate such policies which contain information for the use of stakeholder. Its importance
discussed below:
 It provides information to the investors: Dividend policy is important also because
the amount, technique, duration and extent of the paying dividends are outlined. That is
true that dividend policy is entirely responsive or implied informally. One of the dividend
strategy aims is to give out messages to existing owners and draw new buyers. Sound
dividend strategy tells a shareholder what they should expect when they participate in
equity shares of a company. Each time a payout is decided to declare, it also support
decision of the management in the opportunities for the business. A sound policy
of dividends builds confidence and gives investors confidence in their investments. This
implies the company is strong, reliable, well operate and productive.
 Encourages management discipline: Having a dividend policy requiring payment of a
monthly payout creates a standard of control to be enforced by management in using
funds (Cloyne And et.al., 2018). They understand that not all cash is available in the
business or in investments for capital investment. So when allocating cash they have to
choose cautiously.
 Dividend policy influence stock price and value: Dividend discount model is used to
evaluate the value of the Dividend stick that the company covers. The dividend discount
model is using today’s annual dividend payout and the dividend expected to rise in the
future. Finally, the company's stock is supported by a dependable and periodic dividend
paying policy. This is particularly true all through times of executive stock market
decline.
Above discussion shows that why dividend policy is essential and it actually help the
organization to provide effective management, valuation of stock and provide each and every
detail regarding dividend distribution to their investors.
2. Review the company’s dividend policy and performance over the last 5 years
According to the annual report of Kellogg’s Company, it has been observed that
organization follow the regular or constant dividend policy where they pay fixed percentage to
its shareholders of their earnings (He and Tian, 2018). Higher the earnings provide higher
dividend and lower the earning provide lower dividend which affect the decision making process
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of the shareholders regarding future investment. Dividend payout ratio of the company for the
period of 2015 was 1.15 %, in 2016 it was 1.04 %, in 2017 it was 0.59 %, and in 2018 it was
0.57 % and 0.81 % in 2019. It has been analysed that, dividend distribution decreases throughout
the period from 2015 to 2018 but in 2019 Kellogg’s payout ratio increases to 0.81%.
Dividend per share increases which is beneficial as well as profitable for the organization
to attract more inventors and it create stakeholder’s value (Annual Report of Kellogg’s, 2019). In
2015, dividend per common share was $ 1.98, $ 2.04 in 2016, $ 2.12 in 2017, $ 2.20 in 2018 and
$ 2.26 in 2019. Increase in the dividend per share shows that company’s performance increases
which are beneficial for the Kellogg’s to attract more shareholders to invest in their company. In
addition, total equity of the Kellogg’s company also increases in comparison to previous years.
In 2018 it was $ 2601 and in 2019 it was $ 2747. Company quarterly distribute the dividend to its
shareholders and make sure that each and every one will satisfy with this distribution policy.
3. Outline the dividend policy
Most businesses consider a dividend policy an essential component of their business
strategies. Management will agree on the size of the payout, the duration and external factors
affecting dividend payouts (Johnson, 2019). There have been three kinds of dividend policies
such as stable dividend policy, constant dividends, and residual dividend policy. Kellogg’s
Company can use any of the dividend policy and they can change it over the period as well.
 Stable dividend policy: A secure dividend strategy is perhaps the most usually and
simplest to use. The policy’s target is a stable and reliable dividend distribution per year
that is what most investors are searching for. Investors collect a dividend if the profits are
up or down. The aim is to match the dividend policy with entity's long-term performance,
rather than the uncertainty of earnings reports. This strategy offers the investor more
flexibility with respect to the payout sum and timing. Kellogg’s company can use this
dividend policy in the future in order to attract inventors who willing to take low risk or
get the stable amount of dividend every year.
 Constant dividend policy: The negative aspect of stable dividend strategy is that
creditors cannot see a rise in dividends in boom period. Each year a business pays a
proportion of its profits as dividends under the constant dividend policy. Investors
witness the maximum variability of company profits in this manner. If earnings go up,
shareholders get a greater rate of return; if profits go down, investors might not get a
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dividend (Liu, 2018). The main downside to the system is profit and dividend
uncertainty. Financially preparation is hard because dividend income becomes extremely
unpredictable. This dividend policy currently followed by the Kellogg’s Company where
dividend distribution is fixed and further it will be based on the organizational
performance and profitability.
 Residual dividend policy: It is also extremely risky but it is regarded by some
shareholders as the only appropriate dividend strategy. The business pays out just what
dividend payments remain after the firm pays their capital expenditure (CAPEX) and
operating expenses, using a residual dividend policy. This strategy is unpredictable but,
in terms of company activities, it makes good sense. Investors wouldn't want to invest in
a business that has a need to pay a dividend to justify its growing debt. It is one of the
risky as well as greatest earning opportunity strategies. Shareholders get the dividend
after paying all the company’s expenses. If organization earns high revenue then
investor’s gets the higher dividend. Shareholders also ensure that company does not
borrow debt to just pay dividend to impress their investors.
In context of Kellogg’s Company, management implement constant dividend policy where
organization pays a proportion of their earning to the shareholders every year. In case of higher
earnings, shareholders get the higher dividend and similarly, if company earn low revenue then
the dividend amount also decreases. Management of Kellogg’s can change their dividend policy
as per the company’s requirement and performances which maximise shareholder’s value.
4. Recommend future dividend policy for Kellogg’s
Dividends is a part of shareholders return which is rendered to them every year once
profits are generated. Dividends are the return shareholder receive for making investments in the
company and rendering capital to the form for operating their business. Kellogg's is a public
company which trade their shares on share exchange raising capital for their operations and in
return giving a small amount to the shareholder according to their shareholding in the company
(Nakatani, 2019).
From above discussion and analysis of company's dividend policy and procedures
Constant dividend policy is implemented by Kellogg's through which shareholder receive huge
dividend once profits rises. But accordingly, another dividend policy which is suggested to the
organization is Stable dividend policy.
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This policy is recommended with the foremost reason is that shareholders do need returns
over their investments, even they want higher returns every year but few investors requires
stability and sustainability. Stable dividend policy renders investors regular incomes through
dividends which they are sure about that they will receive it every year till they have holdings in
company. Moreover, another benefit of this dividend policy is company will be securing long
term investments and investors.
Stable dividend policy is easy to manage and maintain as at the time of finalising
finances it will be very easy to calculate reducing all chaos and efforts for making each
transactions as dividends are dependent upon profits units and regularly fluctuating. This
dividend policy will be helpful to Kellogg's as investors can be easily attracted. With the help of
stable dividend policy Kellogg's will be getting easy investors as those who wants returns
regularly and on timely basis for their investments will be buying huge number of shares making
it easy for company to acquire funds through external sources and by offering equity to the
public.
Dividends are must be paid by businesses in order to be flourishing in the market as a
public company it is the responsibility of Kellogg's to make sure that investors are kept happy
and satisfied (Malmendier, 2018). This policy of frequent dividends will allow Kellogg's to keep
people informed and render them regular returns on their investment which influence their
investing decision and keep investing for longer period of time as regular purchase and sale of
shares will also affects company's reputation in market and its share prices.
CONCLUSION
The above report is acknowledges a very essential aspect of corporate finance that is
dividend concluding that managing finances, investment decisions of investors and capital
structuring is must for the company. Dividend is the foremost part of it and in the report the
importance of dividend policy of a company is evaluated showcasing its need for better and
sustainable investments along with it enables in keeping investors informed and satisfied.
Moving further, dividend policy is analysed which is constant dividend policy which is used by
entity for providing returns to investors over their investments. Including to it stable dividend
policy is suggested for those who requires frequent and steady returns over their investments
with very few risks and losses.
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REFERENCES
Books & Journals
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