The guidelines and regulations of Dividend Policies

Dividend policies are the guidelines and ordinances that companies develop and implement as the agencies of set uping to do dividend payments to stockholders. Establishing a specific dividend policy is to the advantage of both the company and the stockholder. In order to do certain the policy is feasible, a company should develop a feasible policy and so run this policy through a figure of trial scenarios in order to find what impact the dividend policy would hold on the operation of the concern.

A first premise in much of the academic finance literature is that directors work to maximise the wealth of the house ‘s stockholders. Stockholders, the proprietors of the house, elect the board of managers that, in bend, hires, promotes, compensates, and fires directors. Through this board linkage, directors, at least in theory, work on behalf of the stockholders.

Firms are ever seeking for an optimum dividend policy, one that strikes a balance between current dividends and future growing and maximizes the house ‘s stock monetary values. Dividend policy is needed as fickle dividend policy would intend surprises to market participants which will ensue in a bead in the house ‘s stock monetary value when there is selling off. Therefore, a well-planned dividend policy could forestall these surprises and preserve or even heighten stock monetary value. Dividend policy of a house has deductions for assorted stakeholders such as investors, directors and loaners. For investors, dividends are non merely a agency of regular income, but besides an of import input in rating of a house.

As for directors, the more dividends paid would intend fewer financess available for investing. Lenders may besides hold involvement in the sum of dividend a house declares, as more dividend means less money available for serving and salvation of their claims. In the procedure of maximising the wealth of stockholders, directors must invariably be concerned with how their determinations act upon the monetary value of their houses ‘ portions. Share monetary value is the critical determiner of stockholder wealth. Directors ‘ dividend policy determinations affect common stock portion monetary values and, hence, the wealth of stockholders. By dividend policy, we mean the payout policy that direction follows in finding the size and form of hard currency distributions to stockholders over clip.

2.0 Administration of literature reappraisal

Does Anyone Really Pay Attention to Dividends?

Harmonizing to Ronald C. Lease. ( 2000 ) . “ To supply a glance of what the existent universe thinks about the importance of dividends and dividend policy, we have drawn the following extracts from the popular fiscal imperativeness.

Income directors are worst-off in the Hunt for new investings. Since early 1995, the dividend output [ dividends per portion divided by portion monetary value ] on the Standard & A ; Poor ‘s 500-stock index has plunged to 1.6 % from 2.9 % , as companies buy back stock instead than hiking dividends. To be certain, investors themselves favor capital grasp instead than income, thanks in portion to capital-gains revenue enhancement cuts in the new revenue enhancement Torahs. But strategians and investors argue a ample figure of investors still hunt-in vain-for output. “ Individual investors, with high net worth, or people who are coming near to retirement, want something in their portfolios that will give them yield or income, ” says Greg Smith, main investing strategian at Prudential Securities. “ They ‘ve been portion of a fantastic three old ages in the stock market, but it ‘s left them plus rich and hard currency hapless. ” ( Wall Street Journal, October 22, 1997, p. C1 )

Corporate directors around the universe are clearly attuned to the revenue enhancement effects of redemptions as compared with dividends. See the instance of Reuters Holdings, the London-based media giant, which suspended its move to efficaciously purchase back 5 % of its portions in October 1996, after the British authorities announced it would toughen revenue enhancement Torahs on such trades… . Alternatively of utilizing the particular dividend construction, … “ Reuters might see duplicating up its regular dividend. ” ( Wall Street Journal, October 9, 1996, p. A18 )

Dividend alterations historically are a lagging indicant of corporate profitableness and at the same clip a mark that corporate boards have assurance in the hereafter. Because dividend decreases are seen as a really bad mark, companies hate to raise payouts to an unsustainable degree. ( New York Times, January 3, 1997, Section D, p. 4 )

One large disadvantage of larger dividends is that they erode a company ‘s hard currency shock absorber for recessions. All of the Big Three car shapers rapidly burned through their hard currency militias during the last recession five old ages ago, and they have been determined non to reiterate the experience. Larger dividends and lower hard currency militias besides mean somewhat less confidence to bondholders that a company will be able to refund them in difficult times. As a consequence, companies with generous dividends tend to hold somewhat lower recognition evaluations, which raise their adoption costs. ( New York Times, May 17, 1996, Section D, p.1 )

Changes in dividend policy tend to co-occur with the release of other of import intelligence refering the company. Some houses, like Microsoft, wage no dividend because they can bring forth higher returns for stockholders puting their net incomes back in the company. Interestingly, there is grounds that investors typically underestimate the full importance of fluctuating dividends. In a figure of recent surveies, economic experts were non surprised to happen that the portion monetary values of houses that cut dividends underperformed houses that increased dividends in the 12-month period predating the proclamation of the cut. ( Detroit News, August 4, 1996, p. F2 )

Elisabeth Goth, a heretical member of the household that controls Dow Jones & amp ; Co. , raises inquiries about its dividend policy, contends Dow Jones has increased its dividends at the disbursal of reinvesting its net incomes to fuel future growing. ( Wall Street Journal, March 13, 1997, p. B15 )

Financial theory says that portion splits, redemptions, and dividend cuts should non impact portion monetary values, but they do because investors believe that directors are seeking to convey information with these actions… . [ A ] dividend cut suggests that insiders expect net incomes to pine away for old ages. These moves have gained their signaling power partially because investors do non swear directors to state them the truth. ( Economist, August 15, 1992, p. 14 )

Dividend Coverage Ratio

Harmonizing to article from www.investopedia.com. “ When you evaluate a company ‘s dividend-paying patterns, inquire yourself if the company can afford to pay the dividend. The ratio between a company ‘s net incomes and net dividend paid to stockholders – known as dividend coverage – remains a well-used tool for mensurating whether net incomes are sufficient to cover dividend duties. The ratio is calculated asA net incomes per shareA divided by the dividend per portion. When coverage is acquiring thin, odds are good that there will be a dividend cut, which can hold a desperate impact on rating. Investors can experience safe with aA coverage ratioA of 2 or 3. In pattern, nevertheless, the coverage ratio becomes a pressure index when coverage slips below approximately 1.5, at which point chances start to look hazardous. If the ratio is under 1, the company is utilizing its maintained net incomes from last twelvemonth to pay this twelvemonth ‘s dividend.A

At the same clip, if the payout gets really high, say above 5, investors should inquire whether direction is keep backing extra net incomes, non paying adequate hard currency to stockholders. Directors who raise their dividends are stating investors that the class of concern over the coming 12 months or more will be stable. ”

3.0 Methodology and Analysis of Dividend Policy and Performance among 3 sector Firms: Technology, Consumer Product and Construction

As demand of assignment given, three sector which are mentioned above and five houses from each sector has been successfully identified and collected from Bursa Malaysia web site. The tabular matters of informations will be presented in this study.

3.1 Firms of Technology sector

A

Company

fiscal twelvemonth

gross RM’000

net income after revenue enhancement RM’000

dividend ( sen )

EPS ( sen )

1

Mesiniaga Berhad

2009

263,896

8,557

19

11.46

A

A

2008

263,154

8,970

19

12.34

2

Unisem M’sia Berhad

2009

1,036,309

60,745

2.5

11.92

A

A

2008

1,233,381

18,336

2.5

4.21

3

Kobay Technology Berhad

2009

2,921,581

1,428,534

2

2.47

A

A

2008

7,394,795

3,361,206

2

11.56

4

KESM Industries Berhad

2009

41,862

7,938

3

A

A

A

2008

55,132

20,099

3

A

5

Malaysian Pacific Industries Berhad

2009

1,150,630

-65,897

20

-20

A

A

2008

1,539,126

147,299

37

58

Figure 3.1: Fiscal public presentation of Technology sector in Bursa Malaysia for the twelvemonth 2008 and 2009

Changeless Nominal Dividends ( Regular Dividends )

This type of policy claims that a house maintains a nominal sum ( fixed ringgit dividend ) of dividend irrespective of a houses degree of income. This is besides called a regular dividend, which is a degree that the board of managers hopes to keep in the hereafter. However, regular dividend could be increased ( decreased ) if proven additions ( lessenings ) in net incomes are reported. This type of dividend is much sought by investors as this gives a consistent sort of income to stockholders therefore cut downing the uncertainness of their dividend income.

Base on analysis of Technology sector in Bursa Malaysia shows in figure 3.1, it found that, bulk of the company ( 4 out of 5 ) has a same type which is Changeless Nominal Dividends policy. The sum of dividends ( sen ) in both old ages ( 2009 and 2008 ) are remained same, irrespective of public presentation in gross and Net income after revenue enhancement on both old ages.

Fiscal Performance against Dividend Policy.

Base on analysis in figure 3.1, Malaysia Pacific Industries Berhad has turned lost in net income in a twelvemonth 2009, but still capable to pay 20 ( sen ) dividends, a small spot less if comparison to ( 37 ) sen in 2008. In their Annual Report 2009 said that the fiscal twelvemonth ended 30 June 2009 ( “ FY 2009 ” ) had started with a strong public presentation in the first one-fourth. However, the subsequent two quarters experienced a crisp decrease in gross, but this was followed by a gradual recovery in the last one-fourth. The volatile public presentation reflected continued uncertainnesss in the planetary economic conditions. Gross for FY 2009 was RM1,151 million, stand foring a 25 % diminution from the old fiscal twelvemonth ended 30 June 2008 ( “ FY 2008 ” ) . Loss attributable to equity holders of the parent was at RM40 million, compared with a net income of RM112 million recorded in FY 2008.

Reflecting the unfavorable concern environment, capital outgo was significantly reduced to RM129 million from RM267 million. However, the Group continued to pay out a entire dividend. The sudden and dramatic autumn in gross had caused the Group to concentrate on pull offing its hard currency. Capital investings were postponed with the Group disbursement RM129 million, the lowest for many old ages and compared with RM267 million for FY 2008. The Group ‘s debt fell by RM48 million from FY 2008 and a dividend of 20 sen per portion was declared for FY 2009.

3.2 Firms of Consumer Product sector

A

Company

fiscal twelvemonth

gross RM’000

net income after revenue enhancement RM’000

dividend ( sen )

EPS ( sen )

1

Panasonic Manufacturing ( m ) Berhad

2009

600,868

43,247

105

71

A

A

2008

562,490

48,478

115

80

2

Proton Retentions Berhad

2009

6,486.60

-301.8

5

-54.9

A

A

2008

5,621.60

184.6

33.6

3

Tan Chong Motor Holdings Berhad

2009

2,856,886

154,304

11

23.42

A

A

2008

3,195,826

245,721

10

36.9

4

UMW Retentions Berhad

2009

10,720,861

647,212

20

34.6

A

A

2008

12,769,581

955,813

29.8

52.3

5

KHIND Retentions Berhad

2009

183,601

8,061

10

20.12

A

A

2008

185,361

7,637

3.7

19.12

Figure 3.2: Fiscal public presentation of Consumer Product sector in Bursa Malaysia for the twelvemonth 2008 and 2009

Fiscal Performance against Dividend Policy.

Figure 3.2 illustrated that, Proton Holdings Berhad has turned lost in net income in a twelvemonth 2009, but still capable to pay 5 ( sen ) dividends, comparison to none in 2008. In their Annual Report 2009 said, in position of the demand to guarantee that PROTON is viably strengthened and able to accomplish long-run and sustainable growing, the Board of Directors are non urging the declaration of any dividends for the fiscal twelvemonth ended 31 March 2008. With improved profitableness in the hereafter, the Board expects to once once more be able to urge a suited dividend payment. Thus, No dividend has been paid or declared by the Company. In 2009, the company paid Interim dividend of 5 sen per portion less revenue enhancement at 25 % , it has been paid on 14 January 2009 even though the consequence of net income after revenue enhancement has lost about -301.8 million. This is due to derive confidents to stockholder about better public presentation will achieved in the following coming fiscal twelvemonth.

Particular Dividend Payout Policy

The particular dividend payout policy was implemented by PANASONIC. As a consequence of analysis in the fiscal twelvemonth ended 31 March 2009, the Company ‘s gross of RM600.9 million increased by RM38.4 million or 6.8 % compared with RM562.5 million recorded in the old fiscal twelvemonth. The combined entity ‘s net income before revenue enhancement for the fiscal twelvemonth was recorded at RM60.8 million. This was nevertheless, RM4.1 million or 6.3 % lower than the old fiscal twelvemonth ‘s combined entity ‘s net income before revenue enhancement of RM64.9 million chiefly due to the addition from disposal of belongings amounting to RM3.5 million recognised in the old fiscal twelvemonth. With the prudent and steady hard currency flow direction, the Company was able to keep a solid hard currency place and strong Balance Sheet against the market convulsion. The Company continues to develop strong returns for its stakeholders, in peculiar, maximizing stockholders ‘ wealth via dividend distribution.

In a twelvemonth 2008, The Board of Directors is pleased to urge a concluding dividend of 35 sen per ordinary portion of RM1.00 and a particular dividend of 65 sen per ordinary portion of RM1.00 less 25 % income revenue enhancement, collectible on 22 September 2008. An interim tax-free dividend of 15 sen was paid on 25 January 2008. This brings to a entire gross dividend of 115 sen per ordinary portion of RM1.00 in regard of fiscal twelvemonth ended 31 March 2008.

In regard of the fiscal twelvemonth ended 31 March 2009, the Board of Directors is pleased to urge a concluding dividend of 35 sen per ordinary portion and a particular dividend of 55 sen per ordinary portion less 25 % income revenue enhancement, collectible on 18 September 2009. Together with an interim dividend of 15 sen per ordinary portion which was paid on 20 January 2009, this brings to entire gross dividends of 105 sen per ordinary portion for the fiscal twelvemonth ended 31 March 2009.

3.3 Firms of Construction sector

A

Company

fiscal twelvemonth

gross RM’000

net income after revenue enhancement RM’000

dividend ( sen )

EPS ( sen )

1

YTL CORPORATION BERHAD

2009

8,892,125

1,401,615

2.5

54.1

A

A

2008

6,549,860

1,376,487

25

51.54

2

Gamuda Berhad

2009

2,727,302

204,154

6

9.65

A

A

2008

2,403,660

338,928

18

16.27

3

IREKA Corporation Berhad

2009

12,584,923

252,651

10

0.05

A

A

2008

10,900,784

39,387,288

10

1.34

4

EKOVEST Berhad

2009

277,759

6,822

3.75

4.82

A

A

2008

441,992

16,757

3.75

11.83

5

Bina Goodyear Berhad

2009

333,764,272

-24,241,042

2.22

-51.9

A

A

2008

276,773,368

442,247

3.65

0.7

Figure 3.3: Fiscal public presentation of Construction sector in Bursa Malaysia for the twelvemonth 2008 and 2009

Fiscal Performance affected Dividend Payment

Base on figure 3.3, Gamuda Berhad will be representative of this statement analysis. Harmonizing to the Annual Report 2009, the company claimed, to get the better of the background of a planetary economic meltdown, the group has managed to accomplish a applaudable fiscal public presentation in FY2009. Net net income of the group came in at RM193.7m, down 40 % from the old twelvemonth, despite gross deriving 13 % to RM2.7 billion. Both the building and belongings development divisions recorded weaker public presentations as a consequence of the ambitious economic status. For the most portion of FY2009, the group switched to a defensive scheme which meant that attempts were focussed on lasting the economic meltdown. This entailed taking drastic steps to control disbursals, consolidate operations, streamline capex plans and postpone enlargement programs. Pull offing hard currency flows became a primary focal point, and fiscal prudence necessitated a drastic cut in dividend payments. As such, the group paid out a sum of 8 sen a portion in FY2009 compared with 25 sen a portion the old twelvemonth. Thus, the dividend payment has been dropped to 6 sen in FY2009 from 18 sen in FY2008.

Figure 3.4: Dividend payment method of interim dividend of Gamuda Berhad. ( www.klse.com.my )

Cash Dividend Payments and Payment Mechanisms

With mentioning at figure 3.4, the method of dividend payment is called Interim dividend which means the company paid dividend in 2 times in a twelvemonth. The hard currency dividend is paid on the payment day of the month to all stockholders of record on the record day of the month. To be a stockholder of record, and therefore have a dividend, one must hold purchased the stock before the ex-dividend day of the month. Alternatively of hard currency dividends, many companies have automatic reinvestment programs in which extra portions of stock are purchased. Therefore, the concern keeps the hard currency and portions are given to stockholders.

DividendA Declaration

Most houses in the United States payA dividendsA quarterly. After doing theA dividendA determination during a board meeting, a house ‘s board of managers releases information on the size of theA dividendA on theA proclamation day of the month. Further, the proclamation states that the hard currency payment will be made to “ stockholders of record ” as of a specificA record day of the month. However, because of holds in the portion transportation procedure, the stock goes “ ex-dividend ” two concern yearss before the record day of the month, or theA ex-dividendA day of the month. After the stock goes ex-dividend, the portions tradeA withoutA the rights to the forthcomingA quarterlyA dividend. TheA dividendA cheques are mailed to stockholders of record on theA payment day of the month, which is about two hebdomads after the record date.A Figure HYPERLINK “ hypertext transfer protocol: //library.books24x7.com/book/id_3455/viewer.asp? bookid=3455 & A ; chunkid=219644075 # ch01fig04 ” 3.5A below shows the clip line of the period from the board meeting through the mailing of theA dividendA cheques. ( Ronald C. Lease, 2000 )

A

Figure 3.5: A DividendA Time Line. ( Ronald C. Lease, 2000 )

4.0 Decision

From the research analysis determination, it found that the most of Technology sector houses rehearsing a Changeless Nominal Dividends Policy whereas the others sector are inconsistence and to a great extent relied on the company fiscal public presentation. If public presentation better, so the dividend better. Dividend policyA canA have an impact on stockholder wealth due of assorted market imperfectnesss. Bear in head, dividend are n’t guaranteed, a company can make up one’s mind to cut down or extinguish it ‘s dividend in clip of fiscal adversity.