Dividends Policy of Vodafone - Assignment Example

Dividend Policy Dividends commonly relates to the investment earnings distribution amongst a firm’s shareholders. Dividends decisions are influenced to some extent by investment and financing decisions.Nevertheless, there are three parts of dividends definition. Firstly, dividends can only remain distributed from income and not from any other equity source. Secondly, dividends must be in form of real asset meaning dividend are most of the time paid in cash. Thirdly, shareholders receive the corporation dividends proportional to what they own in the corporation, thus the least desirable characteristics of dividends (Baker 2009).

In addition, Dr. David Grundy aimed at introducing the main issues surrounding dividends, understanding the main concepts of dividend irrelevance and also evaluating the criticisms of M&M proposals. Corporate managers always consider the choice of dividend policy. They believe that firm value and the shareholders wealth may remain affected by decisions made on dividend policies (Baker 2009). Dividend policy is indispensable to investors because it supplies cash to firms with anticipation of eventually receiving money in return.

An argument before Miller and Modigliani says that dividends are preferable to capital gains because of future gain uncertainty. Thus investors would rather have the money now than leave it tied up in uncertain investment. However, Miller and Modigliani concluded by saying that dividends are irrelevant in determining the firm value but most of the managers act as if their dividend policy is relevant (Baker, 2009).In spite of dividend policy decisions being concluded to be irrelevant, they play a big role in achieving firm value maximization.

It’s true that dividends affect the value of firm shares. Nevertheless, investors prefer dividends since the dividend policy influence the MV of the company. For example, if the company pays low dividends, most probably the investors will sell those shares and buy in a company that will pay more dividends. Thus the share price would go down for the company that did not pay dividends. In short, high dividends may indicate a lack of attractive investments, and thus lower future investments returns.

Likewise low dividends may indicate many attractive investments and thus better future prospects. Although market tends to be short-sighted.However, certain investors have preferences based on their income tax position. Income tax is at 10 percent, 23 percent and 40 percent while capital gains are taxed at 35 percent. This leads investors at a marginal rate of 10 or 23 percent to prefer dividends while those on a higher 40% rate to prefer capital gains. Thus investors will prefer company’s which best suits their needs.

Consequently, if a company changes its existing dividend policy shareholders may sell shares and seek shares that fulfill their requirements. Thus a decrease to share value.For instance the table below shows the dividends per share over the years. It remains apparent from the aforementioned table that dividend per share has been increasing annually thus setting a better deal for the investors of the company.Another example relates to the long-term dividend yield history of Vodafone group whereby in 2009 there was the largest yield while in 1999 the lowest yield.

It is evident that the Vodafone shares have bounced back thus attracting more investors in their company. The table below shows a good dividend payout in Vodafone.In conclusion, dividend decision forces promoting a high payout when there the corporation is clientless and uncertain. Dividend decision can also force a corporation to promote a low payout. For instance, when there exists high growth potential of the firm or management desire to avoid the risk of a future dividend cut. Moreover, other examples may include cases of instability relating to underlying earnings.

Lastly, Dividend decision can lead to promotion of stable dividend when management desire to avoid the risk of a forecasted dividend cut. ReferenceBaker, Kent. (2009). Dividend policy theory and practice. New York: John Wiley & Sons