The payment of dividend income is a very important section in the field of financial policy, as they are a significant cost item for many enterprises. On the one hand, an enterprise should always strive to return dividends to shareholders as much as possible. On the other hand, an enterprise can always, in the interests of shareholders, invest money in something to get more income, instead of paying them out. The main "non-payers" – small or fast-growing businesses that just haven't reached full profitability yet. Of course, investors expect that sooner or later these firms will become profitable and, when the pace of their investment slows down, they too will be able to pay dividends. However, even large and profitable companies today are less likely to pay dividends than before.
Dividend Policy - the process of optimizing the proportions between consumption and profit capitalization in order to maximize the market value of the enterprise.
Key issues of the dividend policy:
1. Should the company pay money to shareholders or should it invest this money in the interests of the owners?
2. What part of the net profit should the company pay in the form of current dividends?
3. Should the entity maintain a steady growth in dividends, or should it change the amount of dividends annually based on its internal funding needs and cash flows?
4. Does the dividend policy affect the market value of the enterprise?
Term "dividend policy" associated with the distribution of profits in joint-stock companies. However, enterprises of a different organizational and legal form also distribute profits, only the terminology changes here - instead of “share” and “dividend” they use the terms “share”, “deposit” and “profit on contribution”, the method of paying income to owners remains the same. Thus, the term "dividend policy", as well as methods of profit distribution using dividend payments, are applicable to enterprises of any organizational and legal form of activity.
The procedure and amount of payment of dividends shall be established by the meeting of shareholders. The dividend announcement states that payments will go to all shareholders registered on a certain date. Dividends can be paid quarterly, every six months or once a year.
Term "dividend" usually correlated with cash payments from net income. If the payment is made from another source, for example, from retained earnings, the term "dividend" is used instead of the term "distribution". If dividends are paid out of capital, then they are called "liquidation dividend".
Dividends are not always paid in cash. Sometimes companies declare dividends in the form of shares or other securities. In addition, there is another way to pay income to shareholders in cash - the repurchase of part of the shares. The repurchased shares are deposited in the company's treasury, and if money is needed later, they are sold again.
Share buybacks, like dividends, return shareholders their money. However, unlike dividends, share repurchases are most often a one-time event. So by announcing a share buyback, the company is not making a long-term commitment at all.
earn and distribute more money.
Also, the payment of cash dividends and the repurchase of shares have a big difference in taxation. If dividends are taxed as ordinary income, then shareholders who sell shares back to the company pay tax only when they receive a capital increase (due to an increase in market value) as a result of such a transaction.
It is impossible to achieve the maximum welfare of the owner without a developed dividend policy. However, the question arises - is the payment of dividends capable of changing the value of shares or not, and if so, what should be their optimal value?
Theoretical approaches explaining the impact of dividend policy on the market value of an enterprise:
Dividend irrelevance theory { dividend irrelevance theory) proves that the dividend policy has nothing to do with the value of the company.
The theory of "tits in the hands" { birds- in- the- hand) shows that an increase in dividend payments leads to an increase in the value of the company.
The theory of "tax differentiation" { tax differential theory) based on the fact that the payment of high dividends reduces the market value of the company's shares.
Dividend irrelevance theory. This theory was first presented in 1961 by Merton Miller and Franco Modigliani. They suggested that the value of a company is determined solely by the return on its assets and investment policy, and the proportions of income distribution between dividends and reinvested earnings do not affect the total wealth of shareholders. Consequently, there is no optimal dividend policy as a factor in increasing the value of the company.
F. Modigliani and M. Miller were based on the following premises:
· there are only perfect capital markets, implying free and equal access to information for all investors, the absence of transaction costs (costs for the issuance and placement of shares), the rationality of the behavior of shareholders;
· a new issue of shares is fully placed on the market;
· there are no taxes;
For investors, dividends and capital gains are equivalent.
The authors of the theory suggested that an enterprise consisting of 100% equity capital plans an investment program. At the same time, it was determined what part of retained earnings will go to finance the program, and the remaining funds will be directed to dividends.
However, the shareholders' meeting may increase the dividend payout with unchanged investment and borrowing policies. One way to finance an investment project in this case is to issue and sell a certain number of new shares. New shareholders will agree to invest their money only on the condition that the price of the shares offered is equal to their true value. But the assets, profits, investment opportunities, and hence the market value of the firm remain unchanged. This means that there must be a transfer of value from the former shareholders to the new ones. New shareholders get newly issued shares, each of which is worth less than before the announcement of the change in dividends, and former shareholders suffer losses from the loss in the market value of their shares. Additional cash dividends paid to former shareholders only compensate for the resulting loss of their capital.
theory dividend irrelevance often criticized because
that the assumptions of Modigliani and Miller are too abstract. In practice, there is no efficient capital market, enterprises, and owners must pay taxes and bear the costs associated with the issuance of shares. In addition, the managers of the enterprise are better informed about the state of affairs in the enterprise, especially in comparison with minority shareholders, as a result, the investor is not indifferent to whether he receives a return on invested capital in the form of dividend payments or in the form of an increase in the firm's share price. Thus, Modigliani and Miller's conclusion about the irrelevance of dividends does not apply to real world conditions.
The theory of "tits in the hands". The payment of dividends is not only the cash income of shareholders, but also an indicator of the successful operation of a commercial organization. Based only on public reporting, it is difficult for investors, and especially minority shareholders, to distinguish a company that is barely making ends meet from a truly profitable and efficient one. On the one hand, many enterprises do not openly publish their financial statements, on the other hand, even if such statements are provided, one cannot rely on the given figures with certainty. Secrecy and fascination with multi-level organizational structures lead to the fact that the published indicators of assets and profits are almost meaningless. In addition, due to the "creative" approach to the preparation of financial statements, the presented state of affairs at the enterprise may differ from reality.
If an enterprise announces a solid profit, and even pays significant dividends, it proves its viability. Investors do not take reported earnings for granted unless they are backed by an appropriate dividend policy. Of course, some businesses may inflate their reported earnings and squander money on generous dividends. But this is unlikely to last if the enterprise is not actually able to earn enough to pay shareholders. By assigning a high dividend that does not have a real recharge from the generated cash flow, the company will eventually be forced to cut back on its investment programs and turn to investors for additional financing. Therefore, in most cases, managers do not increase dividends until they make sure that the enterprise not only now, but also in the future, has enough money to pay them.
Managers do predict the size of dividends. Increase dividends usually after an impressive increase in profits within one year - two years. While this growth may not last beyond the year the dividend was changed, profits tend to be held at a higher level than before and are unlikely to decline. Companies paying dividends for the first time are even more forward-looking when setting dividends. Since dividends herald the sustainability of a new level of earnings, it is not surprising that the announcement of a dividend cut is usually viewed by investors as bad news (stock price falls) and dividend increases as good news (stock price rises). At the same time, investors react not so much to the level of dividends as to their change, which they see as an important criterion for the long-term sustainability of profits. Thus, many researchers, without challenging the dividend irrelevance theory, advocate a high dividend payout ratio.
Another argument for generous dividend payments – "natural" need for shares with high dividends for a certain category of investors. For example, some financial institutions are bound by official restrictions on the purchase of shares that do not have a long history of stable dividend payments. Trust and pension funds are likely to prefer stocks with high
dividends, as dividends are treated as "income" to be spent, while capital gains –
"addition to the base cost", not intended for current costs. According to some observers, individual investors who have control over their capital tend to spend only dividend income.
Therefore, they will probably choose stocks that provide more solid cash receipts that can be freely spent.
Prefer shares with abundant dividends and those investors for whom a portfolio of securities is a constant source of cash. This money is easy to extract from stocks on which dividends are not paid at all; from time to time an investor could sell a small part of his portfolio. However, the regular payment of dividends relieves many of its shareholders from the costs of buying and selling, especially since the percentage of commission on them, as a rule, is inversely proportional to the number of shares sold. In addition, regular cash dividends save shareholders from the risk of being forced to sell shares at "temporarily low" prices.
A high dividend policy is more beneficial to shareholders as it helps to resolve uncertainty. The investor evaluates the share in accordance with the forecasts and taking into account future dividends. Forecasts for expected share price appreciation and for dividends expected in the distant future are more uncertain than forecasts for dividends in the near term. Since investors prefer to get rid of uncertainty, the share price of those enterprises that pay high dividends will be higher.
There is another feature that applies mainly to mature companies with abundant cash flows but few profitable investment opportunities. Shareholders of such companies do not always believe in the ability of managers to effectively use retained earnings and fear that this money can be used to build a grandiose corporate empire, and not to increase the profitability of the enterprise. In such circumstances, investors may demand high dividends not because they value dividends per se, but because they want managers to pursue more conscientious, value-creating investment policies.
Thus, if the value of an enterprise's shares is the sum of expected future earnings and demand for shares, then the payment of generous dividends, other things being equal, stimulates demand, and therefore increases the market value of the enterprise.
The theory of "tax differentiation". Another point of view is that generous dividend payments reduce the market value of the enterprise. Representatives of this theory point to a tax component in the payment of dividend income. If dividends are taxed at higher rates than capital gains, firms must pay the lowest cash dividend they can afford. Available cash should be kept as retained earnings or used to buy back shares.
By implementing a dividend policy in this direction, corporations can turn dividends into capital gains. Since such a financial strategy reduces the tax burden, investors will prefer it, and such stocks with low dividend income will be more expensive.
Under Russian law, dividend income is taxed at a rate of 9%, and there is no tax on income from capitalization. Thus, when paying dividends, part of the capitalization of the enterprise is lost, and with the stability of this
trend, the market value of the enterprise will decrease.
In the modern period, there is no single “correct” dividend policy. At different stages of formation and development, in various situations on the market, enterprises either boost accumulation or increase the dividend income of shareholders.
The majority of scientists, preferring the payment of generous dividends or their complete absence, still do not make an unambiguous conclusion about the direct relationship between the size of dividend payments and the market value of the company.
In practice, the optimal dividend share is a function of four factors:
1. Investors' preference for dividends over capital gains and the significance of dividends for owners.
2. Investment opportunities of the enterprise.
3. Target capital structure.
4. Opportunity to attract borrowed capital.
Factors characterizing the investment opportunities of the enterprise:
life cycle stage (in the early stages of the life cycle, the enterprise is forced to invest more money V its development, limiting the payment of dividends);
· the need to expand their investment programs (during periods of increased investment activity aimed at the expanded reproduction of fixed assets and intangible assets, the need for profit capitalization increases);
· the degree of readiness of individual investment projects with a high level of efficiency (individual prepared projects require accelerated implementation in order to ensure their efficient operation under favorable market conditions, which necessitates the concentration of own financial resources during these periods).
Target capital structure should maintain a balance between a certain ratio of equity and debt capital, formed by the financial management and owners of the enterprise, and the achieved level of financial leverage.
Factors characterizing the possibility of attracting borrowed capital:
the cost of attracting additional borrowed capital;
availability of loans in the financial market;
the level of creditworthiness of the enterprise, determined by its current financial condition;
· the actual amount of profit received and the return on equity.
The combination of these factors forms the type of dividend policy.
Residual dividend policy assumes that they pay dividends after the need for the formation of their own financial resources is satisfied at the expense of profit, ensuring the full realization of the investment opportunities of the enterprise. If for existing investment projects the level of the internal rate of return exceeds the weighted average cost of capital (or another selected criterion, for example, the financial profitability ratio), then the bulk of the profit should be directed to the implementation of such projects, as it will provide a high growth rate of capital (deferred income) of the owners . The advantage of this type of policy is to ensure high rates of enterprise development and increase its financial stability. The disadvantage is the instability of the size of dividend payments, complete
1. the unpredictability of their size in the coming period and even the refusal to pay them in a period of high investment opportunities, which negatively affects the formation of the level of the market price of shares. Such a dividend policy is usually used only in the early stages of the life cycle of an enterprise, associated with a high level of its investment activity.
2. Stable Dividend Policy involves the payment of a constant amount over a long period (at high inflation rates, the amount of dividend payments is adjusted for the inflation index). The advantage of this policy is its reliability, which creates a sense of confidence among shareholders in the invariance of the size of current income, regardless of various circumstances, determines the stability of the share price on the stock market. The disadvantage is a weak connection with the financial results of the enterprise, and therefore, during periods of unfavorable market conditions and a low amount of generated profit, investment activity can be reduced to zero. In order to avoid these negative consequences, a stable amount of dividend payments is usually set at a relatively low level, therefore this type of dividend policy is conservative, minimizing the risk of a decrease in the financial stability of the enterprise due to insufficient growth in equity capital.
3. Minimum stable dividend policy with a premium in certain periods(or the policy of "extra-dividend") - its most balanced type. Its advantage is a stable guaranteed payment of dividends in the minimum prescribed amount (as in the previous case) with a high connection with the financial results of the enterprise, which allows increasing the amount of dividends during periods of favorable economic conditions without reducing the level of investment activity. Such a dividend policy has the greatest effect on enterprises with unstable profits. The main disadvantage of this policy is that if the minimum dividend is paid for a long time, the investment attractiveness of the company's shares decreases and, accordingly, their market value falls.
4. Stable Dividend Policy establishes a long-term normative ratio of dividend payments in relation to the amount of profit (or the norm for the distribution of profit for consumed and capitalized parts of it). The advantage of such a policy is the simplicity of its formation and its close connection with profit. At the same time, its main drawback is the instability of the size of dividend payments per share, determined by the instability of the amount of generated profit. This instability causes sharp fluctuations in the market value of shares for certain periods, which prevents the maximization of the market value of the enterprise (indicates a high level of risk in the economic activity of this enterprise). Even with a high level of dividend payments, such a policy usually does not attract risk-averse investors (shareholders). Only mature companies with stable profits can pursue this type of dividend policy; if the size of profit varies significantly in dynamics, this policy generates a high risk of bankruptcy.
Policy of constant increase in the amount of dividends(carried out under the motto "never reduce the annual dividend") provides for a steady increase in the level of dividend payments per share. Dividends increase, as a rule, in a fixed percentage of growth to their size in the previous period. The advantage of such a policy is to ensure a high market value of the company's shares and the formation of its positive image among potential investors in case of additional issues. Disadvantage - no
3. flexibility in its implementation and a constant increase in financial tension - if the growth rate of the dividend payout ratio increases (i.e. if the dividend payout fund grows faster than the amount of profit), then the investment activity of the enterprise decreases, and the financial stability ratios decrease (with other equal terms). Therefore, only prosperous joint-stock companies can afford such a dividend policy. If this policy is not supported by a constant increase in the profits of the company, then it leads to its bankruptcy.
Dividend policy is an integral part of the general policy of managing equity capital and profits of the organization.
The purpose of the dividend policy is to develop the optimal proportion between the consumption of profit by the owners and its reinvestment in the assets of the organization according to the criterion of maximizing the market value of the organization.
The reinvested part of the profits is an internal source of financing for the growth of the organization, often cheaper compared to the cost of attracting external sources of financing.
Dividends - the cash income of shareholders received in accordance with the share of its contribution to the total amount of the organization's equity capital.
The dividend policy is designed to create a balance between a favorable investment image and coverage of the current investment needs of the organization. In the theory and practice of financial management, the following principles for the implementation of the dividend policy have been developed: the priority of taking into account the interests and mentality of the owners of the organization, the stability of the profit distribution policy and its predictability.
The mentality of the owners of the organization can be aimed at obtaining a high current income or at ensuring a high rate of growth of investment capital. If the owners (shareholders) need a constant inflow of current income or do not accept the risks associated with a long wait for these incomes in the future, they will insist on ensuring a high share of consumed profit in the process of its distribution. At the same time, if the owners do not need high current incomes and prefer an even higher level of these incomes in the coming period due to capital reinvestment, the share of the capitalized part of the profit will increase. This proportion may change over time due to changes in the external and internal conditions of the organization.
The principles of stability and predictability of the profit distribution policy boil down to the fact that the process of its distribution should be long-term, and when the proportions of profit distribution change (due to adjustments in the company's development strategy or for other reasons), all investors (primarily shareholders) must be in advance notified about it. Compliance with these principles is especially important in conditions of “dispersion of ownership” (for example, in large joint-stock companies with a large number of shareholders).
The implementation of the dividend policy provides for the following steps:
1. Analysis of the factors that determine the prerequisites for the formation of a dividend policy. These include factors that characterize the investment opportunities of the organization, the reality of attracting financial resources from alternative sources, the objective limitations of the dividend policy.
2. Choice of the type of dividend policy in accordance with the financial strategy of the joint stock company.
3. Development of a profit distribution mechanism in accordance with the chosen type of dividend policy.
4. Determination of the level and forms of payment of dividends. The main factors are: cash payment, shares, reinvestment in additional shares.
The initial stage in the formation of a dividend policy is the study and evaluation of the factors that determine this policy. In the practice of financial management, these factors are usually divided into four groups:
1. Factors characterizing the investment opportunities of the organization:
2. Factors characterizing the possibility of generating financial resources from alternative sources:
sufficiency of equity reserves formed in the previous period;
the cost of raising additional equity capital;
the cost of attracting additional borrowed capital;
availability of loans in the financial market;
the level of creditworthiness of the joint-stock company, determined by its current financial condition.
3. Factors related to objective limitations:
the level of taxation of dividends;
l taxation of property of the organization;
the actual amount of profit received and the return on equity.
Other factors:
opportunistic cycle of the commodity market (during the period of rising market conditions, the efficiency of capitalization of profits increases significantly);
the level of dividend payments by competing companies;
An assessment of these factors makes it possible to determine the choice of one or another type of dividend policy for the nearest prospective period.
The next step is to choose the type of dividend policy. The practical application of the previously discussed theories made it possible to form three approaches to choosing the type of dividend policy of an organization.
Table Main types of dividend policy
Residual dividend policy. The optimal dividend share is a function of four factors:
investors' preference for dividends over capital gains;
investment opportunities of the organization;
availability and price of external capital.
Residual payment model. This theory assumes that the dividend payout fund is formed after the need for the formation of its own financial resources is satisfied at the expense of profit, ensuring the full realization of the investment opportunities of the organization. If for existing investment projects the level of internal rate of return exceeds the weighted average cost of capital, then the bulk of the profit should be directed to the implementation of such projects, as it will ensure a high growth rate of capital (deferred income) of the owners.
Since both the pattern of investment opportunities and the level of returns vary from year to year, strict adherence to the leftover principle of paying dividends leads to their volatility - in one year a company could declare that there will be no dividends due to good investment opportunities, and pay a large dividend the next year, so as investment opportunities are small. Variable dividends are less desirable than fixed dividends, and changing dividend payments can send false signals and undermine investor confidence.
Policy of stable dividends. There is an opinion that the dividend policy serves the purpose of informing investors. Many money managers seek to maintain a stable or moderate increase in dividends to avoid large fluctuations or volatility in shareholder payout policies. The leaders of an organization do not like to increase dividends if they feel that there may be a reduction in earnings in the future.
For an organization that maintains a stable dividend practice, an unexpected reduction or increase in dividends is usually reflected in stock prices. An increase in dividends can lead to an increase in quotes, because investors will perceive it as a promise of great prospects. Dividend cuts, accordingly, can act in the opposite direction. If managers are trying to maintain dividend stability, then such changes in payout levels may reflect valuable information that investors will perceive unambiguously.
The policy of a stable amount of dividend payments involves the payment of a constant amount over a long period (at high inflation rates, the amount of dividend payments is adjusted for the inflation index). The advantage of this policy is its reliability, which creates a sense of confidence among shareholders in the invariability of the amount of current income, regardless of various circumstances, determines the stability of the share price on the stock market. The disadvantage is a weak connection with the financial results of the organization, and therefore, during periods of low profit, investment activity can be reduced to zero. In order to avoid these negative consequences, the stable amount of dividend payments is set at a relatively low level, which classifies this type of dividend policy as a conservative one, minimizing the risk of a decrease in the financial stability of the organization due to insufficient equity growth rates.
The policy of "extra-dividends" (the policy of a stable dividend amount with a premium in a certain period). This policy is a development of the previous one and, according to a very common opinion, represents the most balanced type. The organization pays regular fixed dividends, however, from time to time (in case of successful activity), extra-dividends (additional dividends) are paid to shareholders, and payments in the present period do not mean their payments in the next. Moreover, here it is recommended to use the psychological impact of the premium - it should not be paid too often, because in this case it becomes expected, and the very method of paying extra dividends becomes meaningless. Such a dividend policy gives the greatest effect in organizations with an unstable size of profit formation in dynamics. The main drawback of this policy is that with the continued payment of the minimum amount of dividends, the investment attractiveness of the organization's shares decreases, and, accordingly, their market value falls.
The policy of a stable level of dividends provides for the establishment of a long-term normative ratio of dividend payments in relation to the amount of profit. The advantage is the simplicity of the formation of this policy and the close relationship with the size of the formed profit. The main drawback is the instability of the size of dividend payments per share, determined by the instability of the amount of generated profit. This instability causes sharp fluctuations in the market value of shares for certain periods, which prevents the maximization of the market value of the organization in the process of implementing such a policy (it “signals” a high level of risk in the economic activity of the organization). Only mature organizations with stable profits can afford to implement this type of dividend policy.
The policy of constant increase in the amount of dividends provides for a stable growth in the level of dividend payments per share. The increase in dividends in the implementation of such a policy occurs, as a rule, in a firmly established percentage of growth in relation to their size in the previous period. The advantage is the provision of a high market value of the company's shares and the formation of its positive image among potential investors with additional issues. The disadvantage is the lack of flexibility in its implementation and the constant increase in financial tension: if the growth rate of the dividend payout ratio increases (i.e. if the dividend payout fund grows faster than the amount of profit), then the investment activity of the organization is reduced, and the financial stability ratios are reduced (with other things being equal). Therefore, the implementation of such a dividend policy can only be afforded by really prosperous joint-stock organizations, but if this policy is not supported by a constant increase in the profits of the organization, then it is a sure way to its bankruptcy.
At the next stage of the dividend policy implementation, a profit distribution mechanism is developed in accordance with the chosen type of dividend policy, which provides for the following sequence of actions:
1. Mandatory deductions formed at its expense to the reserve and other obligatory special-purpose funds provided for by the charter of the company are deducted from the amount of net profit. The "cleaned" amount of net profit is the so-called "dividend corridor", within which the appropriate type of dividend policy is implemented.
2. The rest of the net profit is divided into capitalized and consumed parts. If a joint-stock company adheres to the residual type of dividend policy, then in the process of this stage of calculations, the priority task is the formation of a production development fund and vice versa.
3. The consumption fund formed at the expense of profit is distributed to the dividend payments fund and the consumption fund of the personnel of the joint-stock company (providing for additional material incentives for employees and satisfaction of their social needs). The basis of such distribution is the chosen type of dividend policy and the obligations of the joint-stock company under the collective agreement.
Determining the level of dividend payments per ordinary share is carried out according to the formula:
Where UDVpa - the level of dividend payments per share;
FDV - dividend payout fund, formed in accordance with the chosen type of dividend policy;
VP - dividend payment fund to owners of preferred shares (according to their envisaged level);
Kpa - the number of ordinary shares issued by the joint-stock company.
The final stage in the implementation of the dividend policy is the choice of forms of payment of dividends, the main of which are:
1. Payment of dividends in cash (checks). This is the simplest and most common form of dividend payments.
2. Payment of dividends by shares. This form provides for the provision of shareholders with newly issued shares in the amount of dividend payments. It is of interest to shareholders whose mentality is focused on capital growth in the coming period. Shareholders who prefer current income may sell additional shares in the market for this purpose.
3. Automatic reinvestment. This form of payment gives shareholders the right to an individual choice - to receive dividends in cash, or reinvest them in additional shares (in this case, the shareholder enters into an appropriate agreement with the company or the brokerage house servicing it).
4. Redemption of shares by the organization. It is considered as one of the forms of dividend reinvestment, according to which the company buys a part of freely traded shares on the stock market for the amount of the dividend fund. This allows you to automatically increase the amount of earnings per share remaining and increase the dividend payout ratio in the coming period. This form of use of dividends requires the consent of the shareholders.
To analyze the dividend policy of the organization, the following indicators are used.
Profitability (dividend yield) of a share:
Dividend payout rate (current yield, dividend yield):
Share earnings.
It is calculated taking into account the exchange rate difference that the owner of the share can receive when selling the share:
D - the amount of dividend received during the period of holding the share;
Рpr - share sale price;
P is the purchase price of a share.
Dividend payout ratio.
Indicates what part of the net profit is spent on the payment of dividends, and is calculated both as a percentage and in relative terms:
If the dividend payout ratio exceeds one, this may indicate an irrational dividend policy of the company or signal its possible financial difficulties.
Share value:
The relationship of the main coefficients can be represented as follows:
Dividend Payout Rate = Share Value * Share Return
Despite the existence of developed theories, methods and uniform principles of profit distribution, it is impossible to formulate a single dividend policy. The specifics of the tasks facing each specific organization in the process of its development, the difference in external and internal conditions of economic activity do not allow us to develop a single model of profit distribution, which would be of a universal nature. Therefore, the basis of the profit distribution mechanism of a particular organization is the analysis and consideration of factors that affect the proportions and efficiency of profit distribution.
The most important factors include: the legislative system, the average market rate of return on invested capital, the availability of alternative sources for the formation of the financial structure of capital, the conjuncture of the commodity and financial markets, the "transparency" of the stock market, the inflation rate, the stage of the life cycle of the organization and the level of the current financial stability of the organization.
The main violations in the payment of dividends in Russian joint-stock companies are:
non-payment of declared dividends by issuers, violation of the procedure and terms of their payment;
non-payment or delay in payment of dividends by the issuer's paying agents;
incorrect calculation of the issuer's net profit and the amount of dividends.
One of the reasons for non-payment of dividends is the share capital structure. If an organization has one major owner shareholder, it is highly likely that he will prefer to reinvest profits in the development of the organization, rather than share it with minority shareholders.
Theoretically, the amount of dividends that a company pays to its shareholders should be one of the key factors in choosing the direction of investment for a potential investor. However, the Russian practice of paying dividends has its own significant features. They boil down to the fact that the amount of dividends on most shares is insignificant compared to their market value, and there are a number of reasons for this.
The first reason is that the majority of Russian organizations that attract investment resources from various segments of the financial market have a pronounced debt capital structure and do not use the issue of their shares for large-scale financing by public subscription. As a result, the organization's dividend policy does not have a decisive influence on attracting investments.
The second reason is that the current accounting standards in Russia do not yet provide the necessary degree of transparency. As the analysis of financial statements shows, the results under international standards are often completely different from the Russian assessment of the financial condition of the organization. In addition, few Russian organizations still report according to international standards, so a comparison of Russian joint-stock companies with foreign ones is possible only in terms of certain parameters (capitalization, dividends). Even those organizations that provide investors with the opportunity to familiarize themselves with reporting in accordance with international standards do so with caution and selectivity.
The third reason is that Russian joint-stock companies do not perceive their minority shareholders who bought shares on the secondary market as investors. However, from the point of view of the long-term formation of the financial structure of capital, they should be considered as potential buyers of new issues of shares or bonds.
The fourth reason is the absence of an effective owner in many joint-stock companies. This is especially true for organizations with state shareholders.
The dividend policy of Russian organizations has specific features. Many organizations do not pay dividends or pay them at a low level. Moreover, the size of dividends practically does not depend on the financial performance of the organization, and their payment is carried out with large delays (up to one and a half, or even two years). On the one hand, the state has a significant influence on the dividend policy (for joint-stock companies with state participation), and on the other hand, the owners of large blocks of shares in order to achieve their goals. Under these conditions, the attractiveness of the majority of Russian stocks lies only in the possibility of generating income due to exchange rate differences. This is of interest to investors who use their funds for short-term investments and receive speculative profits, or shareholders seeking to obtain a large block of shares in order to establish control over the organization. The result of this situation is cutting off a significant layer of investors from the process of financing the real sector of the economy, the inefficiency of the financial structure of the capital of Russian organizations. The situation can change only when, when purchasing shares, the investor will know what kind of dividend policy he can count on in the medium or long term.
The part of the company's profit to be distributed among the participants is called. The payment of dividends is usually carried out at the decision of the owners of the company, however, the main rules and conditions (most often in the form of various restrictions) for payments are usually established by national legislation. In the Russian Federation, the procedure for payment and restrictions on the payment of dividends are contained in Art. 102 of the Civil Code of the Russian Federation and in Ch. V of the Federal Law "On Joint Stock Companies".
Dividends are paid out of a company's after-tax profits and are usually in cash. However, according to the decision of the meeting of shareholders, dividends may also have a non-monetary form, for example, they can be paid by additionally issued shares of the company.
Depending on the obligation to pay dividends, the company's shares are divided into two types:
- 1) preferred - the dividend per share is determined in advance and is fixed in the company's statutory documents. Since a fixed dividend implies a mandatory payment, the company can create special funds, through which dividends on preferred shares will be paid;
- 2) ordinary - the payment of dividends is not mandatory (if the relevant decision is made by the general meeting of shareholders) and is carried out in the amount determined by the general meeting; these dividends are paid out only from the company's profit received as a result of work in the corresponding period (net profit).
The fixed size and mandatory payment of dividends on preferred shares often lead to the fact that this category of company securities is often compared with bonds and is considered as a transitional type between borrowed and own sources of financing. From own sources, preferred shares have the property of perpetuity (any shares, unlike bonds, do not have a maturity date), and from borrowed sources they have the property of payment - the obligation to pay income.
Since the size of the dividend is fixed in the statutory documents, any change in this value will inevitably entail the re-registration of the company's charter - this circumstance makes it extremely difficult to use the dividend on preferred shares as a tool for dynamic management of the company's attractiveness for shareholders. Therefore, dividends on ordinary shares remain the only such instrument, and the features of using this instrument are described in a special section of the company's financial policy - the dividend policy.
The dividend policy is a set of rules and principles of the company regarding the distribution of part of the profits received among shareholders. It is an important direction in managing the market attractiveness of a joint-stock company, largely determining the demand for shares of this company in the stock market.
The main goal of the dividend policy is to determine the ratio between the profit distributed among shareholders and the profit remaining at the disposal of the company (capitalized profit), which best meets two conditions:
- 1) effective in terms of ensuring the development of the company;
- 2) ensuring the market attractiveness of the company in the eyes of potential shareholders.
Both of these conditions are in conflict with each other: for the development of the company, it is desirable that the maximum share of the profit remains at its disposal; from the point of view of shareholders, a company that pays higher dividends is more attractive. Therefore, the dividend policy is a kind of compromise between these opposing desires, and the main difficulty in its development is to determine which particular compromise is most effective at a particular stage of the company's development.
An important issue to be resolved in the course of forming a dividend policy is to determine the level of stability of dividend payments. It is clear that both the company itself and its owners are best satisfied with a stable (and, therefore, predictable) scheme for determining the amount of income paid, however, the dynamics of the absolute amount of dividends paid can vary significantly depending on which indicator is chosen as a target in such a scheme. Consider the most common such indicators.
Dividend payout ratio. The calculation formula is as follows:
The ratio fixes the share of profit paid out as a dividend. Thus, the dynamics of the absolute value of the dividend is completely determined by the dynamics of the company's net profit - if the company cannot ensure a stable net profit, the amount of shareholders' income varies greatly from period to period. This can be attractive to shareholders if the company is rapidly growing profits, but if earnings diverge significantly to either side of the trend line, the attractiveness of the company can be severely affected.
Dividend yield of shares (dividend yield). The calculation formula of the indicator has the form
(11.12)
Fixing this indicator in the dividend policy is extremely unprofitable for the company, but it is very attractive from the point of view of shareholders. Dividend yield puts
the absolute value of the dividend payable depending on the market value of the shares, thus, shareholders get the opportunity to manage the amount of income received through the stock market - an increase in demand for the company's shares will lead to an increase in the market value of the shares, which, in turn, will lead to an increase in the absolute value of the income paid .
The company itself, on the contrary, practically loses the ability to manage the share of income paid out - such management becomes possible only through the repurchase of part of its own shares (since no dividends are paid to the repurchased shares held by the company). However, it should be borne in mind that in the practice of financial management, the repurchase of shares can also be considered as a kind of payment of dividend income.
Due to the complexity and poor predictability of the dynamics of the market price of shares, forecasting the absolute value of dividend income is significantly difficult. Therefore, a dividend policy focused on the constancy of the DDA indicator is rare.
Dividend per share (Dividends Per Share – DPS). The calculation formula looks like:
(11.13)
This coefficient, on the contrary, strictly binds the absolute value of the dividend to the share. If we assume that all shares of the company are constantly in circulation, then fixing DPS will cause the company to consistently pay the same amount of dividends, just as it does with preferred shares. Orientation to DPS beneficial for a company whose profits are steadily growing - in this case, a fixed dividend over time will occupy an ever smaller relative share in profits, therefore, an increasing part of it will be directed to the development of the company. Conversely, with a decrease in profits, a fixed dividend will require the distribution in favor of shareholders of an increasing share of profits to the detriment of the development of the company.
Depending on what indicator the company focuses on in its dividend policy, it can use various methods for determining dividend payments:
- - the method of constant interest payments - focuses on the constancy of the dividend output;
- – method of fixed dividend payments – focuses on constancy DPS.
In addition to the two listed, there are several more methods for determining the amount of dividend payments.
Methodology "guaranteed minimum plus extradividends". Using this methodology, the company declares a guaranteed minimum dividend payout. Depending on the results of the company's work during a given period, the meeting of shareholders may decide on an additional amount of dividends. This additional value - extradividends - is declared and paid only if the company, based on the results of work for the period, received good results and the distribution of an additional part of the profit (in addition to the guaranteed minimum) will not affect the company's growth rates.
This method does not imply stable payments (except for periods of not entirely successful work, when only a guaranteed minimum of dividends is paid), but it attracts shareholders with the opportunity to receive additional income in case of successful operation of the company. From the company's point of view, this technique allows to largely protect its own interests during periods of stable growth, however, during periods of recession and, moreover, a crisis, the need to pay a guaranteed minimum can lead to an aggravation of the negative situation.
Methodology "constant growth of dividends". The main advantage of this technique lies in the simplicity of forming an attractive company image in the eyes of shareholders: the company announces that dividends will increase from period to period by a fixed (small) amount, regardless of the company's performance in this period. Thus, in terms of the predictability of shareholders' income, this scheme for calculating dividend payments approaches the fixed payment scheme, however, from the point of view of shareholders, it is more attractive than the latter due to the growth of paid income.
However, for the company itself, this technique is by no means ideal - only those companies that are confident in the stable growth of their performance over a sufficiently long period of time can apply it without prejudice to the financial condition and growth rates.
Methodology "dividend payments on a residual basis ". The amount of dividend payments when applying this methodology is determined at the last step in the distribution of net profit (see paragraph 7.3), after the formation of all necessary funds and reserves, as well as after financing the company's current investment projects. As a result, this methodology to the greatest extent allows to comply the interests of the company itself, since net profit primarily finances its own projects and its own development.From the point of view of shareholders, this scheme for determining the amount of dividend payments is the most unattractive, since the amount of dividends is extremely unstable, in addition, dividends are paid irregularly.Usually, shareholders agree to use of this scheme during periods of growth of the company or the capture of new markets - in the expectation that at the end of this period the scheme for determining the amount of dividend payments will be changed, and the increased financial potential of the company in the future will provide increased income.
All methods described above provide for the payment of dividend income in cash. However, in the life of a company, a situation may arise when the company at the same time wants to save money to finance its own development activities and at the same time does not want to refuse to pay dividends. In such cases, dividends are usually paid in shares of the company additionally issued specifically for that purpose. Such an additional issue increases the size of the share capital, but the relative shares of each shareholder do not change. Subsequently, the shareholder can sell additional shares either in the company itself or in the stock market. We note that the payment of dividends by shares is a one-time event that is not available on a permanent basis for a long period of time.
All of the above methods can be reduced to three main types of dividend policy:
- 1) conservative policy: maximally focused on observing the interests of the company itself; on a residual basis or in a fixed amount;
- 2) aggressive policy: focused on attracting shareholders; provides for the determination of the amount of dividend payments in a fixed share of the company's profit or the constant growth of dividends;
- 3) compromise policy: provides for the payment of a guaranteed minimum dividend and additional payments depending on the performance of the company.
There are three main stages in the development of a dividend policy:
- 1) determination of the main factors that form the dividend policy (investment opportunities, the possibility of attracting various sources of financing, financial and economic condition, etc.);
- 2) choice of the type of dividend policy;
- 3) choice of a scheme for determining the amount of dividend payments.
Evaluating the effectiveness of the dividend policy is a difficult task, since it is necessary to assess how fully the dividend policy allows you to achieve its main goal - the optimal distribution of profits into paid and capitalized parts. For this you need:
- - on the one hand, to assess how much the dividend policy reduces the company's growth rate;
- – on the other hand, to assess how much the dividend policy contributes to the growth of the market value of the company's shares.
The most difficult thing to assess is how much the dividend policy affects the company's market value. In theory, there are three "classical" approaches to determining such influence:
- 1) the dividend irrelevance theory (F. Modigliani and M. Miller), according to which the dividend policy does not affect the value of the company - therefore, the market price of shares does not depend on the dividend policy;
- 2) the theory of the materiality of dividends (M. Gordon, G. Graham, D. Lintner, etc.), according to which, when making a decision to purchase shares, investors are guided by a dividend policy, therefore, the larger the dividends, the higher the market price of the company's shares;
- 3) the theory of tax differentiation (R. Litzenberg and others), according to which the preferences of shareholders depend on the ratio between the level of taxation of dividends and the level of taxation of capital gains; therefore, the lower the overall level of taxation (and, as a consequence, the higher the overall return), the higher the market price of the share.
However, the existence of different approaches to substantiating the relationship between the dividend policy (more precisely, the amount of dividend payments) and the market value of shares, nevertheless, does not allow us to confidently assess the impact of the dividend policy on the market price of a share in the case of a particular company - this task is solved individually in each specific case. .
- From lat. dividendum- that is subject to division.
The main goal of any commercial organization is to make a profit. If the year was successful for the company, then at the end of it the question arises of paying dividends to the owners of the organization.
The term "dividends" refers to the part of the profits that a joint-stock company (JSC) pays to its shareholders and investors.
The profit distribution mechanism is formed by the board of directors and is called the dividend policy (DP).
The main objectives of the organization in the field of conducting DP include:
- recognition of the amount of dividend payments (DV) as one of the main indicators of the company's investment attractiveness;
- increase in DV based on the growth of profit and/or their share in retained earnings.
When choosing a DP, the board of directors decides two issues:
1. What impact does the size of a dividend have on the total wealth of a JSC?
2. What should be the size of the dividend?
The answers to these questions depend on a number of factors. The nature of the DP conducted depends on the position of the company in the market for goods or services, liquidity and forecasts regarding the future development of the organization.
Dividend payment procedure
Dividend payments are made once a quarter, once a half year or annually. Usually, the payout is strictly defined and can be presented in the form of a clear algorithm:
1. Date of announcement of the size of the DV.
2. Ex-dividend date - before it occurs, additional shares can be purchased.
3. Census date when lists of owners are compiled.
4. Date of payment (check mailing or cash settlement).
According to the legislation of the Russian Federation, the procedure for the payment of part of the profit is agreed in advance at the beginning of the issue of shares. Without fail, it must be stated on the reverse side of the security.
The formation of the JSC's dividend policy is carried out in several stages:
1. Assessment of the main factors influencing the choice of DP and its implementation.
2. Selecting the type of DP.
3. Choice of methodology for conducting DV.
4. Development of a profit distribution algorithm depending on the selected type of DP.
5. Calculation of the dividend yield or the amount of payments per share.
In conclusion, the effectiveness of the dividend policy is assessed.
Dividend policy in practice
There are a number of other factors that determine the practical aspects of conducting DP. These include:
- legal regulation of the amount of DI;
- observance of the interests of shareholders;
- comparison of the cost of equity and borrowed capital;
- maintaining sufficient liquidity;
- ensuring the expansion of production by using the necessary amount of funds.
As for the fundamental approaches to the formation of a DP, they can be different. Usually one speaks of a conservative, moderate or aggressive approach.
A conservative approach is to pursue a residual policy of payments and a policy of stable payments.
A moderate or compromise approach is a policy of a minimum stable amount of VC with some surcharge at certain periods.
An aggressive approach is understood as a policy of stable levels of payments and a constant increase in their size.
Each of these approaches is characterized by a certain type of DP:
1. The residual policy of the Far East assumes that the fund for the payment of part of the profit is formed after the satisfaction of the need to provide the enterprise with financial resources.
2. The policy of a stable amount of VC means the payment of their unchanged amount during the entire period of the organization's functioning.
3. The extra-dividend policy implies a minimum stable amount of payments with a premium in certain periods.
4. The policy of a stable level of DV means the establishment of a specific ratio of DV in relation to the total amount of profit.
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As part of the financial management organization, along with investment decisions that determine the degree of increase in assets and the organization's additional need for cash, great importance is given to the dividend policy. Without taking into account the peculiarities of the dividend policy, financial managers cannot make decisions on the structure of funding sources and directions of the organization's investment policy.
Dividend is a portion of the profit that shareholders receive from their shares. Dividends are a reward to shareholders for the capital they invest in the organization.
Dividend Policy- this is a mechanism for the formation of a share of profits paid to the owner, in accordance with the share of his contribution to the total amount of the company's own capital.
The significance of the dividend policy pursued by the management of the joint-stock company lies in the fact that this policy:
Influences the organization's financial program and capital budget;
Affects the organization's cash flow;
Affects the relationship of the organization with its investors. A low level of dividends can lead not only to a weak sale of issued shares, but also to their mass sale by shareholders, to a decrease in share prices, etc.;
Contributes to the reduction or increase of share capital.
Basic goal The development of a dividend policy is to establish the necessary proportionality between the current consumption of profit by the owners and its future growth, maximizing the market value of the enterprise and ensuring its strategic development.
Dividend policy - part of the financial policy of the organization. It is based on the concept of distribution of net profit, which determines the ratio between the consumed and capitalized parts.
When determining this ratio, the following factors are taken into account:
Normative documents regulating the procedure for paying dividends;
Availability of free cash;
Availability of raising funds from other sources and their cost;
shareholder interests.
The guarantee that ensures the rights of shareholders in the Russian Federation is the formation of required reserves. Equally important is the availability of free cash, since the use of short-term loans to pay dividends in case of their shortage leads to additional costs. The decision to expand the activities of the organization is always associated with the choice of sources of funding. And in this case, preference may be given to the use as a source of retained earnings.
On the one hand, the interests of shareholders should not be forgotten, since dividends are the current income of shareholders. The payment of dividends and the trend towards their growth lead to an increase in the market value of the organization's shares and, consequently, to an increase in the welfare of its owners. However, the more net profit falls on the payment of dividends, the smaller part remains for the further development of the organization, which leads to a reduction in the growth rate of equity capital, sales proceeds and, accordingly, solvency.
On the other hand, if the shareholders do not receive the expected dividends, then the attractiveness of the shares will decrease, and, as a result, the market value of this organization will decrease, the current owners may lose control over the share capital.
In the modern theory of dividend policy and its impact on the market value of an organization, there are three main points of view:
1) theory irrelevance dividends (F. Modigliani and M. Miller);
2) theory " tits in hand"(M. Gordon and D. Lintner);
3) theory tax differentiation(N. Litzenberger and K. Ramaswami).
To determine the relationship between the payment of dividends and the amount of capitalized profit, the formula for the price of ordinary shares (C OA) is used:
C OA \u003d (D 1 / C pr) ´ 100 + g,
where D 1 /C pr - current dividend yield; g- capitalized return.
At the core Modigliani-Miller theory are the following assumptions:
There are no income taxes for individuals and legal entities;
There are no transaction costs (expenses for the issuance and placement of shares);
Dividend policy does not affect the value of the company, so the decision of the organization to pay them does not affect the welfare of the shareholder;
The investment policy of the organization is independent of the dividend;
Investors and managers have free and fair information on investment opportunities.
According to the theory of irrelevance, shareholders do not care in what form the distribution of net profit will be carried out: in the form of dividends or income from capital appreciation.
Example. The organization, in order to balance current dividend payments and the future growth of the organization in order to maximize the market price of the share, considers two options for paying dividends on ordinary shares:
1st option - payment of dividends in the amount of 2% and growth of capitalized profit in the amount of 10%;
Option 2 - payment of dividends in the amount of 10% and growth of capitalized profit in the amount of 2%.
The shareholder receives the same 12% return regardless of the chosen dividend policy.
The model of Modigliani and Miller is derived from the abstract assumptions of an ideal environment. Opponents of Modigliani and Miller are M. Gordon and D. Lintner. In their opinion, the dividend policy has a significant impact on capital gains. They believe that investors will prioritize less risky current dividend payouts over potential future capital gains, following the adage "Better a tit in the hand than a pie in the sky."
According to the theory of Gordon and Lintner, the return on common stock (C OA) increases as the dividend yield decreases. This is due to the fact that shareholders prefer the payment of dividends (10%), and in case of their decrease, they demand an increased amount of capitalized yield (by 3%). Then the yield line for common stock shifts from 12% to 15%.
According to theories of tax differentiation(N. Litzenberger and K. Ramaswami), the choice of dividend policy is influenced by the current practice of taxation of shareholder income. In the presence of tax preferences in the field of capital investment, shareholders may prefer capitalization of profits to payment of dividends. The choice of such a dividend policy in this case is justified by the higher profitability from the capitalization of dividends than from their payment. In case of payment of dividends on ordinary shares, their yield decreases from 12 to 10%. However, it is rather difficult to establish a direct relationship between the dividend policy and the cost of equity capital. The final decision is made by the financial managers of the organization by weighing all the arguments in the specific conditions.
The procedure for determining the payment of dividends and their source is regulated by Russian law. The source of payment of dividends is the organization's net profit for the past year. In case of insufficient net profit, dividends on preferred shares may be paid from funds specially created for this purpose at the expense of profits of previous years. The dividend is set either as a percentage of the par value of a share, or in rubles per share. Dividends can be paid both in cash and, in cases provided for by the charter of the company, with other property: newly issued shares joint-stock company , bonds, other types of securities, goods. The decision on the payment of dividends, their amount and form of payment is made by the Board of Directors.
According to the law, an organization is not entitled to declare and pay dividends if:
The authorized capital of the company has not been fully paid;
The Company has not redeemed its own shares in full, for which their owners have the right to demand their redemption;
There are signs of bankruptcy of the company at the time of payment of dividends or these signs will appear in the company as a result of the payment of dividends;
The value of the net assets of a joint-stock company is less than its authorized capital and reserve fund, or will become less than their size as a result of the payment of dividends.
Depending on the chosen dividend policy, the company independently chooses and implements a specific methodology for paying dividends.
In world practice, the following methods are used:
a) a constant percentage distribution of profits;
b) constant growth of dividend payments;
c) payment of a guaranteed minimum and extra dividends;
d) payment of dividends on a residual basis;
e) payment of fixed dividends.
Each of the considered methods corresponds to a certain type of dividend policy (Table 1).
