Types Of Dividends And Policies Of The Same In A Company (Other (Not Listed) Sample)

Dividend policies
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QUESTION I
Dividend policies
1. Dividend policy this is the strategy each company chooses and regulates how dividends are paid out, in what form and the time taken between dividend payouts. They are factors considered while a company is selecting a dividend payout policy. These factors include;
The availability of lucrative investing opportunity- this leads to investing the money meant for dividend in the better deal,( Michaely & Roberts, 2012).
Taxation issues, the government charges taxes to the amount of profits paid to the shareholders as dividends. If the amount is too high, many companies chose alternative policies to the cash payment.
They are three types of dividend policies
I. The first kind of policy can also be referred as the ideal policy. This is one of the most used policies especially in established companies. This policy is based on the idea of paying dividends regardless of the company’s earnings or income. These dividends are paid at regular intervals and always of the same measure. The principle of this payment is that the company pays the dividend even if it make a profit or loss. The policy is preferred by many businesses due to the confidence it gives to the shareholders or investors. This policy is also called steady policy, ( Michaely & Roberts, 2012).
II. The second policy is a policy base on the idea of ploughing back profit. This policy depends on the remainder amount of funds after the company’s expenditure, and loans are deducted. The dividends are given the least priority. This policy is mostly found in small companies that intend to grow bigger, or a new company trying to establish itself in the market. This is because the major part of the profit is used in the development of the firm. This policy is also called residual policy, ( Michaely & Roberts, 2012).
III. The third option of dividend payout policy is one that applies a hybrid combination of the other two policies. This policy pays a fixed fraction of the total income of the company. Hence a lower income means a lower dividend payout. This policy main drawback is that it is affected by the immediate future inconsistencies and changes of company’s earnings. The policy is called Constant policy, ( Michaely & Roberts, 2012).
QUESTION 2
Saudi Airlines Catering (Saudi Airlines Catering Co) case study
Shares analysis
2. The Saudi Airlines Catering uses dividend stability policy too, which are paid quarterly. The companies’ dividends payouts have been relatively stable in the last four years. This is an indication of financial stability. The company uses account transfers as the method of dividends transfer.
The company has a high free cash flow that’s the reason can afford to pay dividends in the form of cash.
The company pays low dividends due to the government policy of high taxation of dividends other than that of long-term capital gains.
QUESTION 3
Dividend payout ratio analysis of Saudi Airlines Catering, (Saudi Airlines Catering Co.)
Analysis using the attached power point presentation
Dividend payout fraction or ratio is a means of obtaining of the proportion of a company's earning with expenses excluded that is paid as divided to shareholders and investor in dividend payouts. The importance of this ratio is approximation or estimation of company’s stability in dividends payouts, hence satisfying and maintaining its investors. The constancy of the ratio is the most crucial factor of the ratio but not either of the two extremes. Since potential shareholders are interested in Saudi Airlines Catering constant, reliable flow and payment of dividends regularly, the dividend payout ratio outline is crucial. If the mode of the ratio is consistent, it is usually better for the company than any of the two extremes.
Since it is the company responsibility to put out there the dividends and their growth especially in their ratios for a single fiscal period or a short term this one peak is not very significant. The potential shareholders are majorly interested in constancy and consistency. Taking the example of Saudi Airlines Catering, the potential shareholder or investors can be tricked to presume since the company that has a payout ratio of for instance 20 percent for the last four years will continue giving 20 percent of its income and profits to the investors. This assumption, if ever used should be in well-established older companies.
On the same note, a company that has deteriorating dividend-payouts over time ratios is a turn off to interested capitalists and also potential shareholders. For instance,if the company's ratio falls a single percentage per each year for the next ten years. This is a red flag on the company’s ability to pay dividends consistently and regularly. This is a proof of poor management or administration of operations. This also shuns all the investors and potential shareholders off. Even the present shareholders may opt to sell off their shares to avoid further depreciation in value.
Generally, the older well established and stable companies usually possess or are likely to have higher Dividend payout ratio than the younger entry companies. This is due to the inconsistency and the irregular changes in dividends in the first several years of operations
Payout Ratios Formula
The dividend payout ratio is calculated as
Total Annual Dividends in every Share / Diluted income in every Share
Dilute Earnings in every share are means of estimating profits they are calculated using the formulae (Gill Biger & Tibrewal, (2010).
(total earnings – chosen dividend payments)
(Weighted mean of shares outstanding + diluted shares)
Another trait of Saudi Airlines Catering, (Saudi Airlines Catering Co) that can be analyzed is the stock value. This can be done by numerous approaches but the most commonly used are the
The Discounted dividend formulae
The worth of any monetary entity is equivalent to the current worth of future flows of funds provided by the asset or the financial entity. When a shareholder purchases shares or stock, he or she does so with high expectations to receive payouts in cash, eventually, after selling their investment in the later and to gain profit from the deal, (Lin et al.et 2003). Moreover, the cost of dividends any investor or shareholder receives is determined by the dividends the next shareholder anticipates to get as income, and so on for the different batches of investors. Thus, the stock's value ultimately is derived from the dividend the company project it will pay in cash and the exceptions rate which was used to generate the value of the stock at the moment and the actual value of those dividends.
Accounting for equity with non-constant growth
For many companies to assume that it increases throughout with time is not reasonable, hence estimating the worth and value of these companies becomes a bit complex. The ways around this is predicting the short period of steady growth over that a particular time span, and try to obtain the actual value of dividend in the future. From this value, we can work backward to achieve the steady or constant long period growth which helps in the estimation of the growth rate the company is expected to take. The hill climbing task here is mathematically obtaining the estimates of short-term growth rates. In these formulae, they take into consideration that after a company has run for some time, it gets to where the growth rate is constant.
QUESTION 4
Arab National Bank case study
1. The company uses Constant dividend policy; in the policy, the annual income is divided quarterly hence in each three months period equal amounts of dividends are paid out. This gives the shareholders certainty and reduces the fluctuations of the dividends. This type of policy also depends on payouts to the shareholders hence building shareholders confidence. This kind of dividend payment policy is preferred by financially stable companies, which want to maintain their good trading name in the market. The constant system of dividend payout, besides using the percentage of total earning to calculate dividends payouts, it can also use a constant amount payable per share and the constant amount payable per share plus the surplus. The company should have free cash flow hence the...