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Basic Theory of Dividend Policy

The basic theory of dividend policy

Dividend policy (Dividend policy) refers to the general meeting of shareholders or the board of directors of a company on all matters relating to dividends, the more principled approach, is about whether the company pays dividends, how much dividends and when to pay dividends and other aspects of the policy and strategy, which involves the company's earnings on the distribution or retention for reinvestment. The main issue involved is whether the company should distribute its earnings or retain them for reinvestment. It is divided into a narrow and a broad sense. Dividend policy in the narrow sense refers to the determination of the ratio between retained earnings and dividend payments, i.e., the dividend payout ratio. The broader dividend policy includes: the determination of the dividend declaration date, the determination of the dividend payout ratio, the dividend payout of funds mobilization and other issues.

The basic theory of dividend policy

Characteristics of profit distribution of joint-stock enterprises

1. Profit distribution of joint-stock enterprises should adhere to the principles of openness, fairness and justice

2. Profit distribution of joint-stock enterprises should be maintained as far as possible, the dividend policy is stable

3. The profit distribution of joint-stock enterprises should take into account the impact on the stock price

Second, the basic theory of dividend policy

(a) Dividend irrelevance theory

Dividend irrelevance theory holds that the dividend policy of an enterprise does not have any impact on the stock price of the company.

This theory was first proposed by American financial experts Miller and Modigliani in their famous paper "Dividend Policy, Growth and Stock Value" in 1961, so this theory is also known as the MM theory.

The basic assumption of the MM theory is the theory of complete market.

The basic meanings of the complete market theory are:

① Capital market has strong-form efficiency. The so-called strong-form efficiency means that the current market price of the stock has reflected all the information that has been disclosed or undisclosed, and anyone, even insiders who have inside information, can not earn excess compensation in the stock market.

② There are no financing costs (including stock issuance and transaction costs).

③ There is no personal or corporate income tax.

④ A company's investment decisions and dividend decisions are independent of each other.

On the basis of these assumptions, MM theory suggests that investors do not care about the distribution of company dividends, and that a company's stock price is determined solely by the company's investment program and profitability, not by the company's dividend policy. In the case that the company has better investment opportunities, if the dividend distribution is less and the retained earnings are more, the company's stock price will also rise, and the investors can sell their stocks for cash; if the dividend distribution is more and the retained earnings are less, the investors will seek for new investment opportunities after distributing the cash, and the company can still raise new funds successfully. Therefore, the stock price and the company's dividend policy is irrelevant.

(II) Dividend Correlation Theory

Dividend correlation theory holds that a company's dividend policy affects the price of the company's stock. Its representative views are mainly:

1. A bird in the hand theory

This view holds that between dividend income and capital gains, investors prefer the former. This is because dividends are realistic and assured returns, while the rise and fall of stock prices are more uncertain and riskier than dividend income. Therefore, investors are more willing to buy stocks of companies that can pay higher dividends, so that the dividend policy will inevitably have an impact on stock prices. This theory is described by a western proverb ? Two birds in the forest are better than one bird in the hand? Therefore, the theory is also known as the "one bird in the hand theory". A bird in the hand theory?

2. Information Dissemination Theory

This theory suggests that dividends actually disseminate information about corporate earnings to investors, and this information is naturally reflected in the price of the stock, so dividend policy is correlated with the price of the stock. If a company changes its dividend policy, which has been relatively stable for a long time, this is tantamount to conveying information to investors about a change in corporate earnings, which in turn will affect the price of the stock. Dividend increase may give investors to convey the company's ability to create future cash enhancement, the company's stock price will rise; Conversely, the dividend decline may give investors to convey the company's business situation worse information, the company's stock price will fall.

3. Assumption exclusion theory

People who hold this view believe that the assumptions of MM theory do not exist in real economic life, first, even if a very perfect and mature capital market, such as the New York stock market, does not have strong efficiency, so the perfect market theory assumptions of MM theory does not exist in practice; second, in the capital market, it is not possible to be without financing costs, nor is it possible to be without individual or individual stock prices. costs, nor the existence of personal or corporate income tax; furthermore, a company's investment decision is sometimes related to dividend policy, and the investment decision may affect the company's dividend policy due to the demand for funds. Based on this, MM theory is untenable in real life.

III. Factors Affecting Dividend Policy

(I) Legal Factors

Constraints on capital preservation, constraints on corporate accumulation, constraints on corporate profits, and constraints on solvency.

1. The constraint of capital preservation

Capital preservation? It is a legal restriction made to protect the interests of investors.

The joint-stock company can only use the current profit or retained profits to distribute dividends, and can not use the company's capital raised from the sale of shares to pay dividends. This is to preserve the shareholders' equity capital of the company for the benefit of the creditors.

2. The constraints of corporate accumulation

The constraints of corporate accumulation require that before distributing dividends, a joint stock company should first withdraw all kinds of provident funds in accordance with the statutory procedures. This is also to enhance the enterprise's ability to withstand risks and safeguard the interests of investors.

China's relevant laws and regulations clearly stipulate that the joint-stock company should make the required deductions from the after-tax profits of l0% of the statutory surplus reserve, and encourage enterprises to distribute ordinary dividends before the withdrawal of any surplus reserve, only when the cumulative amount of the reserve fund has reached 50% of the registered capital, can no longer be withdrawn.

3. Profit constraints

Profit constraints stipulate that only if there is a surplus of profits after the losses of the previous years have been made up, can the profits be used for distribution of dividends, otherwise no dividends can be distributed.

4. Solvency constraints

The solvency constraints stipulate that the enterprise must maintain sufficient solvency when distributing dividends. An enterprise's distribution of dividends cannot be based solely on the amount of net profit on the income statement, but must also take into account the adequacy of the enterprise's cash. If the distribution of cash dividends by the enterprise affects the solvency of the enterprise or normal business activities, the distribution of dividends should be restricted.

(ii) debt covenant factors

Debt covenant? Refers to the creditors in order to prevent the enterprise too much dividends, affecting its solvency, increase debt risk, and in the form of a contract to restrict the distribution of cash dividends.

Such restrictions usually include:

① Provide for a maximum limit of dividends per share;

② Provide that future dividends can only be paid from new earnings after the signing of the loan agreement, and not from retained profits before the signing of the agreement;

③ Provide that cash dividends shall not be distributed when the enterprise's liquidity ratio and interest coverage multiples are below a certain standard, and so on. .

The impact of the company's own factors ---- refers to the various factors within the joint-stock company and the various environments it faces, the opportunities and the impact on its dividend policy. Mainly includes cash flow, debt capacity, investment opportunities, cost of capital and so on.

1. Cash flow

Companies must have sufficient cash in their business activities, otherwise payment difficulties will occur. When a company distributes cash dividends, it must take into account the cash flow as well as the liquidity of the assets. Excessive distribution of cash dividends will reduce the company's cash holdings, affecting the ability to pay in the future, and may even lead to financial difficulties.

2. Debt-raising ability

Debt-raising ability is an important aspect of a company's fundraising ability, and there will be a certain difference in the ability of different companies to raise debt in the capital market. The company in the distribution of cash dividends, should take into account their own debt capacity, if the debt capacity is strong, in the lack of funds in the enterprise, can be easier to raise funds in the capital market, can take a more lenient dividend policy; if the debt capacity is poor, should be taken to tighten the dividend policy, fewer cash dividends, to retain a larger number of provident fund.

3. Investment opportunities

The investment opportunities of the enterprise is also a very important factor affecting the dividend policy. In the enterprise has good investment opportunities, the enterprise should consider less cash dividends, increase retained profits for reinvestment, which can accelerate the development of the enterprise, increase the enterprise's future earnings, this dividend policy is often easy for shareholders to accept. In the absence of good investment opportunities in the enterprise, often tend to pay more cash dividends.

4. Cost of capital

The cost of capital is the basic basis for enterprises to choose the financing method. Retained profits is an important way of internal financing, which has the advantages of low cost and good concealment compared with issuing new shares or borrowing debt. Reasonable dividend policy is actually to solve the proportion relationship between distribution and retention and how to reasonably and effectively utilize the retained profits. If an enterprise pays out a large amount of cash dividends on the one hand and raises higher-cost funds through the capital market on the other, this is undoubtedly contrary to the basic principles of financial management. Therefore, in formulating the dividend policy, it should take into full consideration the enterprise's demand for capital and the enterprise's cost of capital and other issues.

(D) Shareholder factors

Dividend policy must be resolved by the shareholders' meeting to be implemented, the shareholders of the company's dividend policy has a pivotal impact. Generally speaking, the shareholders' factors affecting the dividend policy are mainly the following:

1. The pursuit of stable income, risk avoidance

Some shareholders rely on the cash dividends issued by the company to maintain their livelihoods, such as some retirees, who tend to demand that the company be able to pay stable cash dividends on a regular basis, and are opposed to the company retaining too much profit. There are also some shareholders who are ? Bird-in-hand theory?

Some shareholders are supporters of the "one bird in hand theory", they believe that retaining profits and the possible increase in the stock price of the benefits brought by the greater uncertainty, or to obtain a real

Actual dividends are more secure, you can avoid the risk of these shareholders, so these shareholders are also inclined to distribute more dividends.

2. Worry about the dilution of control

Some major shareholders have a high proportion of shares, have a certain degree of control over the company, they are out of fear that the control of the company may be diluted, and often tend to be less distribution of cash dividends, more retained profits. If the company pays out a large amount of cash dividends, it may result in a shortage of operating funds in the future. This will have to raise funds through the capital market, if by borrowing new debt to raise funds, it will increase the financial risk of the enterprise; if through the issuance of new shares to raise funds, although the company's old shareholders have a preference for share subscription rights, but it must come up with a sizable amount of funds, otherwise its shareholding ratio will be reduced, and its control over the company is in danger of being diluted. Therefore, they would rather distribute less cash dividends than see their control diluted, and when they cannot get enough cash to subscribe for new shares, they will vote against the proposal to distribute cash dividends.

3. Avoiding income tax

According to the tax law, the government levies enterprise income tax on enterprises, and then levies personal income tax on the dividends and bonuses received by shareholders. The tax rate varies from country to country, and some countries use progressive tax rates for personal income tax, with high marginal tax rates. As a result, shareholders in the high-income bracket tend to oppose excessive cash dividends from the company in order to avoid taxes, while shareholders in the low-income bracket may welcome more dividends from the company due to Corporate while shareholders in the low-income bracket may welcome more dividends from the company due to their lighter personal tax burden. In accordance with China's tax law, shareholders from the company's share of dividends and bonuses should be 20% of the proportional tax rate to pay personal income tax, while the income from stock trading is not yet a personal income tax, and thus, for shareholders, the stock price increase gained than the share of dividends and bonuses is more attractive.

Fourth, the type of dividend policy

(a) residual dividend policy

The so-called residual dividend policy, that is, in the enterprise to determine the optimal capital structure, the net profit after tax to meet the demand for investment, and then if there is a surplus to be used for the distribution of dividends.

This is a dividend policy that prioritizes investment. The prerequisite for the adoption of residual dividend policy is that the enterprise must have a good investment opportunity, and the projected rate of return of the investment opportunity should be higher than the necessary rate of return required by the shareholders, so as to be acceptable to the shareholders. Enterprises adopting the residual dividend policy, because of its good investment opportunities, investors will have a better expectation of the company's future profitability, and thus its stock price will rise, and retained profits to meet the need for shareholders' equity capital under the optimal capital structure, which can reduce the cost of capital of the enterprise, and is also conducive to the enterprise's improvement of economic efficiency. However, this dividend policy will not be welcomed by investors who wish to have stable dividend income, because the residual dividend policy tends to lead to high and low dividends from period to period.

The implementation of residual dividend policy, generally should be based on the following steps to determine the amount of dividend distribution:

1. According to the selected optimal investment program, to determine the amount of capital required for investment;

2. In accordance with the target capital structure of the enterprise, to determine the amount of investment needs to increase the amount of shareholders' equity capital;

3. After-tax net profit is used to meet the investment first The net profit after tax is first used to meet the amount of increase in shareholders' equity capital required for the investment;

4. The remainder after meeting the investment needs is used to distribute dividends to shareholders.

Advantages: According to MM theory, enterprises have an optimal capital structure, under which the comprehensive cost of capital is the lowest, and enterprises can realize the financial goal of maximizing shareholders' wealth. Therefore, the dividend policy should meet the requirements of the optimal capital structure.

Disadvantage: If the dividend policy destroys the optimal capital structure, it will not be able to achieve the effect of minimizing the comprehensive cost of capital of the company.

(ii) fixed dividend or stable growth dividend policy

This is a stable dividend policy, which requires companies to pay a fixed amount of dividends over a long period of time, and increase the amount of dividends per share only when the company is certain of future profit growth, and this growth is considered to be irreversible. The stabilizing dividend policy does not affect the dividend payment when there is a general change in the firm's earnings, but keeps it at a stable level. Those who practice this dividend policy support the dividend correlation theory, which argues that a firm's dividend policy affects the price of the firm's stock, and that dividends are paid as a way of conveying some kind of information to investors about the state of the firm's operations.

Advantages and disadvantages:

1. Dividend policy is to convey important information to investors, if the company pays a stable dividend, it shows that the company's operating performance is more stable, less risky, which allows investors to demand a lower rate of return on the stock necessary for the stock price rise; if the company's dividend policy is unstable, dividends fluctuating, which conveys the information of unstable business operations to investors. If the company's dividend policy is not stable, the dividend is high and low, which gives investors the message that the business is not stable, which leads to investors to worry about the risk, which will make investors ask for the necessary rate of return of the stock to increase, and then make the stock price decline.

2. Stable dividend policy is conducive to the regular arrangement of dividend income and expenditure of investors, especially those who want to have a fixed income for each period of the investor more welcome this dividend policy. A fluctuating dividend policy may reduce their demand for such stocks, which will also bring down the stock price.

3. If a company determines a stable dividend growth rate, so that, in effect, it is sending investors the message that the company's business performance is growing steadily, it can reduce investors' concern about the company's risk, which can lead to an increase in the price of the stock.

4. The use of stable dividend policy, maintain a stable dividend level, sometimes may make some investment programs to postpone, or make the company's capital structure temporarily deviated from the target capital structure, or through the issuance of new shares to raise funds, although this may delay the timing of the investment, or make the cost of capital rise, but, hold the view of stabilizing the dividend policy, but still believe that this is also to be much more beneficial than to reduce the dividend or to reduce the rate of growth of dividend, the company will not be able to achieve the same results. Reducing the dividend growth rate is much more favorable, because a sudden reduction in dividends will make investors think that the company's operations are in trouble, performance is declining, and may make the stock price fall rapidly, which is more unfavorable to the company.

This kind of dividend policy may cause greater financial pressure on the company, especially when the company's net profit declines or cash is tight, the company in order to ensure that the dividend is paid as usual, which is likely to lead to a shortage of funds and deterioration of the financial situation. In extraordinary times, the dividend amount may have to be reduced.

Applicability: This kind of dividend policy is generally applicable to the adoption of enterprises with relatively stable operation.

This is a variable dividend policy, the enterprise every year from the net profit at a fixed dividend payout ratio dividends. This dividend policy so that the enterprise's dividend payment and the enterprise's profitability is closely related to the profitability of the situation, the profitability of the situation is good, then the amount of dividends per share will increase, the profitability of the situation is not good, then the amount of dividends per share will decline, dividends with the operating performance? Dividends rise with operating performance.

Advantages: will not cause a large financial burden to the company;

Disadvantages: dividends may be large changes, high and low, which may convey to investors the company's unstable business information, easy to make the stock price fluctuations, is not conducive to the establishment of a good corporate image.

(D) low normal dividend plus additional dividend policy

This is a kind of dividend policy between the stability of the dividend policy and the change of the dividend policy between the compromise dividend policy.

This dividend policy pays a stable lower amount of normal dividends each period, and when the enterprise is more profitable, and then according to the actual situation to pay additional dividends. This dividend policy has greater flexibility, in the company less profitable or investment needs more funds, you can only pay a lower normal dividends, which will not cause greater financial pressure on the company, but also to ensure that shareholders get a fixed amount of dividend income on a regular basis; in the company's profits and do not need more investment funds, you can issue additional dividends to shareholders.

Low normal dividend plus additional dividend policy, both to maintain a certain stability of the dividend, but also conducive to the capital structure of the enterprise to achieve the target capital structure, so that the flexibility and stability of a better combination, and therefore used by many enterprises.

V. Dividend payment methods and issuance procedures

(a) Dividend payment methods

The form of dividends distributed by the joint-stock companies generally have cash dividends, stock dividends, property dividends and liability dividends.

1. Cash dividends

Cash dividends are issued to shareholders in the form of cash dividends.

The amount of cash dividends depends mainly on the company's dividend policy and business performance.

The payment of cash dividends has a direct impact on the stock price, which generally falls after the ex-dividend date of the stock.

2. Stock Dividends

Stock dividends are dividends payable to shareholders in the form of stock.

What can be used to pay stock dividends, in addition to the current year's distributable profit, is the company's surplus reserve.

When stock dividends are issued, they are generally distributed in proportion to the shareholders' holdings as of the share registration date, and the surplus reserve and available-for-distribution profits decided by the shareholders' meeting to be used for distribution are converted into share capital, and the number of shares held by individual shareholders is increased proportionally through the Central Clearing and Registration System (CCASS). Stock dividends do not change the total amount of shareholders' equity on the books of the enterprise, and they also do not change the shareholding structure of shareholders, but they increase the number of shares outstanding in the market, and therefore the issuance of stock dividends by the enterprise will result in a corresponding decrease in the price of the shares, and in general, if the fluctuations in the market price of the shares are not taken into account, the price of the shares after the issuance of the stock dividends should be decreased proportionately in accordance with the ratio of stock dividends issued.

For corporations, the distribution of stock dividends does not increase their cash outflow, so if a corporation is cash-strapped or needs a large amount of capital for investment, it can consider using stock dividends. The company's profit per share is diluted by the expansion of its share capital, and this may lead to a fall in the share price.

For shareholders, although the share of stock dividends did not get cash, but if after the issuance of stock dividends, the enterprise still maintains the original level of fixed dividends, then shareholders can get more dividend income in the future, or after the increase in the number of shares, the share price did not fall proportionately, but out of the filling of the market, so that shareholders will be the wealth will grow.

(ii) the dividend payment procedures

The distribution of dividends by the joint-stock companies must follow the statutory procedures, generally by the board of directors to propose the distribution of the proposal, and then submitted to the general meeting of shareholders resolved to be approved in order to carry out the distribution. After the shareholders' meeting resolves to adopt the distribution proposal, the program of dividend payment should be announced to the shareholders and the share registration date, ex-dividend date and dividend payment date should be determined.

1. Announcement date

The announcement date is the date on which the resolution of the shareholders' meeting is passed and the board of directors announces the payment of dividends.

At the same time as the announcement of the distribution plan, the share registration date, ex-dividend date and dividend payment date should be announced.

2. Shareholding registration date

The shareholding registration date is the deadline for the registration of shareholders entitled to receive the current dividend.

Enterprises set the share registration date to determine the date limit of the shareholders can receive dividends, because the stock is often mobile, so it is very necessary to determine this date. Any shareholder who is registered on the date of the share registration date is eligible to receive the current dividend, while shareholders registered after this date are not entitled to receive the current distribution of dividends, even if they bought their shares before the dividend payment date.

3. Ex-dividend date

The ex-dividend date is the date on which the dividend is removed, i.e., the right to receive the dividend is separated from the stock.

Stocks purchased before the ex-dividend date are eligible to receive this dividend, and stocks purchased on or after the ex-dividend date are not eligible to receive this dividend. The ex-dividend date has a significant effect on the price of the stock, the stock price before the ex-dividend date includes the current dividend, and the stock price after the ex-dividend date no longer includes the current dividend, so the stock price will fall on the ex-dividend date.

4. Dividend payout date

Dividend payout date, also known as the dividend payment date, is the date on which the dividend is formally paid to the shareholders.

A company held on April 6, 20?9, the shareholders' meeting resolved to adopt the dividend distribution plan, and on the same day by the board of directors announced the dividend distribution plan for 20?8 for: distribution of cash dividends per share of 1.50 yuan, the share registration date of April 13, 20?9, the ex-dividend date of April 14, 20?9, the dividend payout date of April 25, 20?9.

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