Introduction. Dividend policy has been a controversial
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IntroductionDividend policy has been a controversial issueand an unsolved problemin the corporatefinance field for a long time. Many findings have contributed to the diversified results in theevaluation of different dividend policies. This essay will cover three Hong Kong-listedcompanies with different dividend payout patterns to illustrate the empirical change ofdividend payout over time and conclude several critical factors regarding the change ofdividend policy.Different dividend payout and policies in three companiesThe first company is CLP Holdings Limited. It is a utilities company that specializes inelectricity. According to the CLP Holdings shareholder guide, it states that the company hasadopted a stable residual dividend policy to provide consistent increase in ordinary dividendlinked to the performance of their earnings. In other words, a certain percentage of earnings,whilst considering future business expansionand maintaining balance in their debt/equityratio, would be distributed to shareholders.The actual payout is similar to the stated policy. In 2000, its dividend payout was $1.87per share. After 15 years, in 2014, its dividend payout has gradually increased to $ 2.61 pershare. During this period, there was no significant dividend cut.In terms of the dividendpayout ratio, it was fluctuating between 2000 and 2014. Its dividend payout ratio was 0.81 in2000 and deceased to 0.50 in 2005, then increased to 0.74 in 2012. In general, the trend of theactual payout was expected to increase as stated in the policy.However, the stated policy wasquite arguable regarding the consideration of future business expansion.It can be reflected onthe years in which the dividend payout ratio declined slightly. It was estimated that thecompany reserved more earnings for business expansion instead of dividend payout.CLPHoldings rarely discloses the specific estimates and effects on future expansion. This wouldbe a reason or excuse for dividend cut in the future.The second company is Vitasoy International Holding Limited. It is a leadingmanufacturer and distributor of plant-based food and beverages, headquartered in HongKong. Vitasoy has a high and stable dividend payout policy to provide a vast portion of theascertaining earnings as dividend. It is also stated that the management would attempt tomaintain a dividend payout ratio of 100% if the company has no expansion during the period.According to the dividend history, the actual payout attested to the dividend policy. Thedividend was $0.095 per share in 2000 and has steadily increased to $0.266 per share in 2010.Hereafter, the dividend declined to $0.183 per share in 2011 and kept stable in the currentyears. Regarding the dividend payout ratio, it is apparent that the ratio has increased sharplyfrom 2000 to 2003 and maintained a 100% dividend payout ratio from 2004 to 2010.However, in 2011 to 2014, the company provided a constant dividend payout ratio of 67%.Under further investigation, it is discovered that Vitasoy has trimmed its dividend payoutratio from 100% to 67% in 2011 because of the expansion into the China market. It boughtnew facilities and equipment which were financed by cash and loans, and therefore the
company held some earnings for the expansion. It could be concluded that the actual dividendpayout is generally constant to the stated dividend payout policy.The last company is Esprit Holdings Limited. It is a fashion retailer and manufacturerproducing clothing, accessories and footwear. The company is adopting a constant payoutratio policy, in which management would maintain a certain percentage of earnings asdividend payout. The company has stated in 2007 that a regular payout of 70-80% would berecommended. A recent annual report has stated that the company would maintain a regularpayout of 60% going forward.The actual payout is similar to the stated policy only when the company has a satisfiedperformance. From 2001 to 2008, the company was able to maintain a constant payout ratioat around 70-80%. However, the company cannot guarantee a constant payout ratio when itfaced operation difficulties. Starting from 2008, some of the operations discontinued whichcreated a huge impact on the net profits and resulted in a declining dividend payout. Thesituation became worsen in 2013 when the company has recorded a net loss of $4388 milliondollars and declared no dividend for the year. Fortunately, its performance in 2014 improved,meanwhile the board of director has declared a $0.07 dividend per share. The dividendpayout ratio for that year was 64.8%. Although the actual payput ratio seems consistent to thegeneral stated rule of the policy, it is not identical each year in fact.Factors associating with the individual companies’ dividend payoutThe major factors influencing the change of dividend payout over time isfour-fold.Firstly, thefinancial performancewould greatly influences director’s decision on declaringdividends. Internal financing, which occupies around 80% of total cash flow, is the majorsource of cash flow to the company. While the ability to distribute dividends is constrainedby the amount of excess cash available. In other words, dividend payout could be based onthe earnings generated.For company who has stable or even growing profitability such asCLP and Vitasoy, they can, of course, declare and maintain their dividend payout policy.However, for organizations which face financial difficulties or unstable earnings such asEsprit, they may even find it difficult to declare dividend, not to mention maintaining theirdividend payout policy.Secondly, the fund raising strategy would also affect the dividend payment.Anorganization may use several debt financing methods, which include repaying compulsorilyat the maturity, to meet its investment needs. When acorporation has toretain its profits forthe purpose of repaying debt, the dividend payment capacity would be affected. Moreover,whenthe needs for additional financing arise,issuing additional common stock would be lesspreferred by the management of the firm because of the potential dilution effect inmanagement’s control. Therefore, a firm may prefer to retain more earnings to satisfyadditional financing needs which reduces dividend payment capacity. For example, CLP andVitasoy do not rely a lot on debt financing. This claim is supported by their debt-to-equityratio, which are 0.72 and 0.08 in 2015 respectively. The low debt-to-equity ratio providesthem higher ability to deliver higher dividend than other company.