Dividend Policy and Shareholder Satisfaction: A Case Study of Kellogg Co

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[Name of Writer]
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Internal Management Information Report:
Title of report: Treasury Department report about Dividend policy to shareholders under
the Order of CFO Kellogg
Introduction:
All For-Profit organizations exist for profit as primary purpose. After realizing profit, the
most difficult decision is how to utilize this profit. Profit distribution decision is not only difficult
but important as well. Decision of profit distribution is managements concern but significantly
affects investors and creditors. Organization can distribute profit as dividend or retain profit for
reinvestment (Ajanthan, 2013). Every organization have choice to choose a mixture of dividend
payment or and profit retain. Portion of profit which is distributed among shareholders called
dividend payout ratio (Gill, Biger & Tibrewala, 2010). Portion of profit retained for investment is
called retention ratio.
Discussion:
Dividend decisions are very important for shareholders because they want to earn more
return. Policy of dividend distribution depends on many factors such as nature of shareholders,
growth chances, market returns and financial status of organization (Iturriaga & Crisóstomo, 2010).
Many shareholders want to receive dividend every year as income from investment. When
majority of shareholders are of such intention then organization is likely to distribute larger
portion of income. Those organizations which are at growth stage do not distribute income as
dividend rather they reinvest for growth purpose (Abreu & Gulamhussen, 2013). If organization is
expecting some lucrative and high yielding projects, then management will decide to reinvest
whole or much portion of income. low payout ratio signals as company has many opportunities

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to grow (Fairchild, Guney & Thanatawee, 2014). Although it is not true that companies with high
payout ratio does not have growth prospects. Market returns is also a derivative of dividend
decision policy, suppose market pays more return than current organization then investors
require high dividend payout ratio to invest in market for greater yield. Financial soundness of
organization also affects dividend policy to greater extent (Karasek & Bryant, 2012). Financially
healthy organizations tend to pay more as dividend compared to financially distressed
organizations.
Dividend distribution is not just income distribution but it also signals investors that
organization is capable to generate enough cash for its investors. A large group of investors
believe that constant payment of dividend is a symbol of healthy organization. They believe if
organization is paying dividend so it means they are generating good cash to fulfil both
operations of business and paying investors as well (Thanatawee, 2011). Few shareholders
perceive dividends as a signal of low growth prospects in organization.
Legally organization are not bound to distribute income as dividend but it is purely a
management decision. Management’s opinion drive dividend policy because some pay a constant
dividend while few have never paid dividend in their entire life of organization. Market trend is
the only and strong element capable to regulate dividend policies (Suwanna, 2012).
Dividend Analysis:
Kellogg Co is multinational organization that deals with consumer packaged goods and
listed on NYSE under the ticker name of K. Kellogg is financially healthy and growing
organization with a very attractive dividend policy. Kellogg Co has a continuous history of
dividend payments due to good net profit. Kellogg paid dividends of $1.9, $1.98, $2.04, $2.12
and $2.20 in 2014, 2015, 2016, 2017 and 2018 respectively as shown in graph below. A careful

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analysis of the dividend payment trend of Kellogg’s reveals that dividends are increasing
continuously. Since 2014, dividend trend is increasing because of increase in net income while in
2015 net income reduced by $18 Million but management didn’t cut dividends. Net income in
2014 was $632 and in 2015 net income reduced to $614 Million. Over last three financial years
2016, 2017 and 2018 net income of Kellogg was $694 Million, $1269 Million and $1336 Million
respectively. A very interesting point is that following the $18 Million reduction in net income,
management increased payout ratio from 39% to 191.3% in 2015. This massive increase in
payout ratio in 2015 signaled shareholders that though organization realized lower income but it
is financially stable. Due to high payout ratio or in 2015, retained earnings of Kellogg decreased
from $6689 Million to $6597 Million. To send positive signal to shareholders in 2015, Kellogg
distributed 100% net income and paid 91.3% of net income from retained earnings making total
of 191.3% payout ratio (moningstar, 2019).
Such a large payout ratio can also be tracked to low growth opportunities. Next year in
2016, Kellogg’s payout ratio was 101.5% and retained earnings reduced by 1.5%. although
payout ratio in 2016 was lower than 2015 but dollar amount of dividends in 2016 well above
from 2015. In 2016, net income increased $80 Million which is mainly due to cut in cost of
revenue. This is what called operating efficiency because Kellogg is a mature organization with
low growth opportunities therefore, management took advantage of low cost of revenue.
Revenue in 2015 was $13525 Million and cost of revenue was $8844 Million while in 2016
revenue was $13014 Million and cost of revenue reduced to $8259 Million.
In 2017, dollar amount of dividends increased significantly with lower payout ratio. This
change is due to huge increase in net income. Net income in 2016 was $994 Million while in
2017 income was $1269 Million with about $275 Million increase in income. Payout ratio in