Dividend wealth is an interesting topic for conversation when it comes to rewarding shareholder investment. My original thoughts on dividends were that such insignificant figures would make little difference regarding fluctuations. This was before I was made to realise the scale of investment made in companies from insurance and pension funds. It’s a crazy concept that the future of our retirement is massively dependent on the dividend policy of these huge companies.
There are arguments, when considering NPV that would recommend company profits would be better investing in ventures with a positive rating. Such ventures would be claimed to raise the value of a company, thus boosting shareholder wealth. Only residual cash left from profitable ventures would be repaid as dividends using this concept.
Modigliani & Miller echo such sentiments, claiming that dividend policy has no effect on company value.
In reality however, it can rarely be seen that dividend policy has no effect on company value. Of course, in a ideal world where humans are rational, the understanding that dividends may be low due to a high level of invest activity which would boost their wealth.
Unfortunately, humans are very irrational and such fluctuations would likely lead to a mass exodus. If several shareholder looked to sell their shares at the same time, the share price would fall. Although M&M’s idea is theoretically true, in the real world dividends play a huge role.
Looking at the BP Gulf of Mexico oil spill, the announcement that BP would be halving their dividend payment resulted in panic from UK pension funds, fearing such a decrease could cost the UK millions in the long run. Although not the only factor, BP’s share price suffered badly as a result of this announcement.
It can therefore be seen that shareholders, being the irrational, over-emotional being that they are crave stability. A constant, un-fluctuating dividend yield is met favourably, thus companies have reacted to this by attempting to maintain a steady dividend payout, regardless of good or poor performance.
Although investors may look on such a decision favourably, I would consider it a bit of a shame that shareholders are so insistent at focussing on their short term gains, that they cannot see the bigger picture- that maybe a company’s surplus cash could be put to better use, which would eventually lead to an increase in their own wealth. To ask shareholder to think long term is quite possibly too much of a revolutionary step I fear.
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