Dividend is the share of the profit that a company decided to distribute
to its shareholders. Dividend comes in many forms; in cash or stock. However,
there are some limitations or restrictions in paying out dividend. If in the
case of paying out dividend would hurt the company’s future plan or company’s
current financial situation is liable to pay debt or tax, then the company has
to give priority to tackle these issues.
Therefore, the dividend policies are differed from a company to company.
Having a dividend policy is beneficial for company and shareholders. However, there
are no clear cut dividend policies; therefore, the investor has to make
assumption on what has occurred in the past. If a company’s dividend
history is more volatile, the shareholders will identify the factors lead to
the up and down movement of the dividend and determine how these factors will
impact on current dividend period.
How UK companies pay the dividend? In public company, the usual practice
is to declare the interim dividend in first six month of the company’s
financial year and final dividend is recommended by the directors at the Annual
General Meeting based on the profit made in the full year. But for private
companies, the practice varies widely. The profit sharing to the people who own
and run the company usually involves two ways. The directors will get through
their salaries and it is usually taxed under the PAYE system in UK. The other
way is to pay dividend to shareholder. Again the dividend is a taxable income
but the tax rate is lower than for other source of income.
High yielding dividend stocks are attracting to many investors and
majority of them would like to invest in them. However, there are a lot of
arguments about dividend whether to pay or not for a company as well as whether
to invest in such company or not. Warren Buffet’s famous quote is remarkable.
“Our shareholders are far wealthier today than they would be if the
funds we used for acquisitions had instead been devoted to share repurchases or
dividends”
His company “Berkshire Hathway” doesn’t pay dividends. He believes for
each dollar retains in his company he can generate income 12% of return. He sees
not paying dividend is correct action and by reinvesting in the business will
compound the benefit overtime for the investor. His idea seems not appealing for
those who looking for the safety by dividend collecting investment. Some company believe paying out dividend creates the better image for the company and building the trust to their stockholders. The most factual thing is it all
matters to investor and his or her investing style. The choice is the desire
on how to reap their investment.
The recent news about Air Asia announcement relating to paying dividend
is quite interesting. The carrier’s board announced that they are confident that they will stick
with a previously announced policy of paying an annual dividend policy of
paying 20% of net operating profit despite 19 percent drop in fourth quarter
earnings.
A company is liable to increase the profit. Air Asia’s present financial
status is not much healthy as per their announcement. I wonder what their Board
of directors are expecting by paying out dividend. An investor or a stockholder
naturally expects a company has a responsibility to increase the profit. Paying
out dividend while suffering the drop in earning has brought many unanswered questions.
What is the Air Asia’s real strategy in paying out dividend?
Reference:
Lecture notes
