Dividend Policy Mullin Plc - Essay Example

? Introduction: Mullin plc is a company that has not paid dividends to its shareholders for the last five years, that is between the periods of 2008 to 2012. However, for the periods of 2003-2007, the company paid some constant dividends which stood at a rate of 5% per each share an individual had with the company. We can denote that either the company lacked money to pay dividends between the periods of 2008 to 2012, or it did not have a sufficient dividend policy. A dividend policy is a method in which the directors and the management of the company will use to reward the investments that investors have made within the company. Dividend policy mainly concerns itself with the payment of cash dividends, at the present time, or in a near future (Barnett, 2012). It is important to denote that there are other types of dividends, such as stock dividends, and stock repurchases dividends. Stock dividends involves issuing out dividends in the form of the company’s stock, while stock repurchases dividend involves the buying of the company’s shares from willing investors by the company. This paper mainly concerns itself with cash dividend. The cash dividend policy refers to the actual amount of money that a company pays to investors. According to this policy, a company is supposed to state how much money it pays as dividends to investors, and the frequency of paying this amount of money (Garcia and Moore, 2012). The decision to pay a certain amount of dividends, and the frequency in which to pay this amount of dividends is based on the profitability of the company, and the excess cash it accumulates at the end of each trading period. When there is a surplus in cash, the company can either decide to pay dividends, or it can decide to expand its operations. Developing a dividend policy is a very challenging initiative for the directors of a company. This is because investors of the company have differing views on the current cash dividends, and also on the future expectations of the capital gain (Ross and Westerfield, 2013). Another confusion that emerges in developing a dividend policy is the effect of the policy on the share prices of the company. It is important to denote that a favorable dividend policy will always lead to an increase in the share prices of a company. On the other hand, a dividend policy that is not favorable will on most occasion lead to the reduction of the share prices of the business entity. This is an aspect that managers of a business organization will always thrive to avoid. This paper identifies, and analyzes the various dividend policies that Mullin plc has, and their advantages or disadvantages. It examines if the policy under consideration will be beneficial to the company. This paper identifies four different types of dividend policies, namely (Shukla, 2012); i. Stable dividend policy ii. Irregular dividend policy iii. No immediate policy on dividend. iv. Regular dividend policy This paper has a conclusion, which provides a clear recommendation on the appropriate policy that the company should enact, and the justifications on why that policy is the best. Regular Dividend Policy: Regular dividend policy involves a situation where investors of a company are able to receive dividends at their usual rates, and on a constant period of time. The main investors in a company that provides such kind of a dividend are usually retired individuals, or weaker members of the society. This includes people with low wages or no income sources at all. The company can maintain this type of a dividend policy only if its revenue from its business operation is stable and regular. This type of dividend policy manages to create a sense of confidence amongst the shareholders of a company (Stout, 2012). This is because they are guaranteed of a certain percentage of dividends at the end of the business financial years. It is also a sign that the operations of the business organization are stable and thus the company is making profits. This policy also stabilizes the share prices of the business organization, and helps to maintain the good will of the business under consideration. This is because investors will be happy at the regular amount of dividends they are paid, and hence will speak positively of the company (Fitzgerald, 2012). This might even attract other investors. Regular dividend also helps in giving the investors of a company some sources of income. As noted earlier, a company that pays regular dividend usually attracts retired peoples who depend on pensions. As such, these dividends will be a supplement to their pension earnings. For instance the company Mullin plc paid regular dividends between the periods of 2003 to 2007, which amounted to 5% per share. One major disadvantage of this type of policy is that it may act against the long term interests of the company (Kang and Halifix, 2013). This is because the company will not be able to achieve growth, as a result, it its market share will remain constant or even reduce because of the emergence of other companies within the market. On this note, the company might fail to meet its financial obligations. Irregular Dividend Policy: This type of policy involves circumstances where the company is not issuing out dividends on a regular basis. This type of policy is very unpopular with the share holders, and it negatively impact on the brand name of the business organization. It is associated with companies that do not have stable operations, and whose market share and growth is on a downward trend (Binsbergen,, Graham and Yang, 2010). The companies that issue this types dividend policy are not sure if the company will make some revenues or not. Another reason as to why a company can initiate an irregular dividend policy is because of its lack of liquid resources, i.e. it does not have money to run its operations. However, some critics argue that a company can issue an irregular dividend policy for purposes of studying how its share prices might respond, and the behavior of investors in regard to this policy (Bulkowski, 2013). By studying such reactions, then the company can develop a better dividend policy that will carter for its needs, and the needs of its shareholders. Stable Dividend Policy: Under this policy, the company pays a fixed amount of money for a period of time, and maintains it, even if the profits of the organization fluctuate. There are three main types of stable dividend policy, namely constant pay out ration, constant dividend per share, and extra dividend+ stable rupee dividend policy. Under constant dividend per share, there is a reserve fund created by the company for purposes of paying a certain fixed amount of money in a year that the company feels it profitability are low, and hence it might fail to raise enough money to pay the share holders (Weltman, 2012). This type of policy is suitable for companies whose market performances are stable. Constant payout ratio on the hand involves initiating a fixed percentage of dividend income for every year. Extra Dividend + Stable rupee dividend on the other hand involves paying little amount of dividends in a year when the company is performing poorly in the market, and an extra amount of dividends in a year that the company is experiencing growth in its profitability. This type of policy is advantageous because it creates confidence amongst the shareholders. It also stabilizes the price value of the shares under consideration (Song and Halifix, 2012). This policy also helps in maintaining the goodwill of the company, and hence leading to the creation of a strong brand name. No Immediate Dividend Policy: Under this policy, the company decides not to pay any amount of dividend, only after a period of time. This always occurs when the company has just begun its operations; as a result, it might need credit for expansion and growth (Brigham and Houston, 2013). This usually occurs when the outside methods of acquiring credit are very expensive for the company, and hence the best method of raising the capital is to desist from paying dividends to shareholders. This normally occurs in the short run, and this is because share holders will always demand for dividends (Riggs and Bonk, 2008). Conclusion: In conclusion, Mullin plc should adopt the stable dividend policy, and particularly stable rupee dividend+ extra dividend. Initially, Mullin plc used to pay a stable amount of dividends to its share holders. The amount stood at 5% per share, however, during the periods of 2008 to 2012, the company has been unable to pay dividends to its shareholders. This might be because of poor performance in market, or the need to acquire capital for purposes of growth. This will make shareholders angry, as a result, negatively affecting the share prices of the company. These shareholders will also lose some sources of income, in the short run of course. The stable dividend policy will protect the company from the emergence of these kinds of circumstances. This is because the company will manage to pay its dividends, preventing the fall of its prices, as well as protecting its brand image. In case the company is not performing adequately within its market, this policy enables the company to negotiate with the share holders on a reduced dividend, to be increased later, when the performance of the company improves. Bibliography: Barnett, G. (2012). Advanced swaps & other derivatives 2012. 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