Emirates Dividend Policy - Term Paper Example

Dividend Policy Table of Contents Introduction 3 Dividend Policy 3 Forming a Favour Dividend Policy for a Company 4 Dividend Relevant Theory 7 The Relationship between Dividend Policy and the Raising Money for Emirates 9 Problems Which Facing on the Dividend Policy 11 Conclusion 15 References 16 Introduction Dividend refers to that portion of profit, which is required to be distributed among shareholders of a firm. Dividend portion not distributed among shareholders is termed as retained earnings. Therefore, dividend decisions are important in corporate financial policy as well as for cost of capital. Every multinationals have used dividend policy for meeting the needs of the shareholders. Notably, dividends are the shares of profits of a company, which is received by shareholders. As per the financial regulations, a company and its shareholders are considered as an important part of a dividend decision. In this regard, shareholders are identified to be offered with a certain rate of dividend as agreed. The directors of a company are entrusted with the responsibility of making decisions related to the dividend policy. Accordingly, investors can sell their portion of equities in bad financial situations (Kim & Burnie, 2005). In this respect, the essay highlights Emirates dividend policy and analyse its relationship between raising money and different relevant theory. In addition, problems of dividend policy are also discussed (Kim & Burnie, 2005). Dividend Policy Dividend policy is one of the most important areas in financial management in the present competitive business scenario. Contextually, dividend policy is a set of guidelines, which are used by companies to decide how much earnings will be paid out to shareholders. In general, dividend is defined as the distribution of earning among shareholders of a firm in proportion to their ownership. Dividend policy is one of the widely addressed topics in financial management. Dividend policy is one of the companies’ decisions made in the corporate ownership structure (Hamdouni, 2012). Forming a Favour Dividend Policy for a Company Dividend policy is one of the significant sources of financing for a company in terms of increasing funds. Through dividend policy, firms are able to retain a portion of the earning and distribute the remaining amount to its shareholder. The stability of dividend is divided under three theories which includes constant dividend per share, constant percentage of net earnings and small constant dividend per share plus extra dividend. For this study, the renowned airline based company “Emirates” has been chosen to form an appropriate dividend policy (Emirates, 2014). Emirates is a well-known airline service based in Dubai. It is the one of the largest airline companies in the Middle East, which operates nearly 3,400 flights per week from Dubai International airport. The company also operates four other world’s longest non-stop commercial flights from Dubai to Houston, Los Angeles, Fort Worth and San Francisco. In the present decade, Emirates with the assistance of quality products and/or services has been able to develop a strong brand name in the aviation industry. Emirates provides excellent quality service to its prospective customers. Dividend policy is a very important with aspect to financial decision for Emirates. Stability of dividends is considered as a desirable policy by the management of the company. Shareholders of the company have favoured this policy for its stable growth. Economic pitfall has created awareness among shareholders and they are more inclined towards having a secured investment through stable dividend than fluctuating ones (Emirate, 2014). Stable dividend has been identified to generate a positive impact on the market share prices of companies. Moreover, stable dividend signifies regularity in paying dividends annually. In general, dividend rates have been fluctuating from year to year. Emirates forming a stable dividend would help the company to hold maximum shareholders for the upcoming year. Renowned companies’ shares are always recognised to produce an external impact on market segments and stakeholders. To attain more customers and achieve a high level of market shares, renowned companies always want to maintain a stable growth rate (Kapil, 2013). Likewise, Emirates has planned to adopt stable dividend policy for better financial growth. Stable dividend has three distinct forms, which are discussed hereunder. Constant dividend per share is a policy that has been followed by multiple companies. The dividend policy implies that the dividend per share will not increase in future. In general, when a company reaches to a higher level of earning, at that time annual dividend per share may increase. As per the constant dividend policy, shareholders never get an opportunity to enjoy higher profit (Chand, 2014). The constant dividend policy is preferable for employees of institutes whose total living expense depends on the increase and decrease of share prices. Moreover, constant dividend share helps to stabilize the share value for a long run (Fischer, 1995). Constant percentage of net earnings is another form of stable dividend policy. With the help of this policy, the amount of the dividend will fluctuate in direct proportion to earning. For instance, if any company adopts 30 per cent pay-out ratio, than this 30 per cent earning will be recognised as paid-out (Kim & Burnie, 2005). In a small constant dividend per share plus extra dividend, the company pays a constant amount of dividend regularly without a default and it allows a great deal of flexibility for additional income to shareholders at that time when the company earned higher than usual time (Hamdouni, 2012). Based on the three forms of dividend policies, Emirates would have various advantages which include resolution of investors’ uncertainty, investor’s desire for current income, institutional investors’ requirements and raising additional finances. Stability of dividends has some disadvantages relating to the fact that when the company adopts a policy it cannot be changed unless it adversely affects the investors’ approach and the financial standing. A cut in dividend is also a cut in salary of employees. Adverse economic conditions are identified to have an effect on dividends is identified to create a negative effect on the dividend. On the safe side, the dividend rate should be fixed at a traditional figure, so that it may be possible to maintain dividend even in a period of depression. It can be considered that when the company fails to deliver extra benefits in form of extra dividend, it does not create a depressing effect on the investors’ rate (Hamdouni, 2012). In future, Emirates should use constant dividend per share policy for better opportunity. With the help of this dividend policy, Emirates would be able to maintain a stable growth (Chand, 2014). Subsequently, the company with the assistance of stability of dividend will be facilitated in building loyalty amid stakeholders. Stakeholders’ loyalty is an important aspect, which would aid the company in building a better position in the market segments. Emirates loyalty and good will help in the future to gain more stakeholders and investor. With the help of stable dividend policy, Emirates is facilitated in building a stable investment opportunity for its shareholders, which also increases high amount of income per share (Kim & Burnie, 2005). Dividend Relevant Theory Dividend relevant theory is another form of calculating dividend in a positive manner. Financial theorists have provided multiple observation procedures on dividend distribution. The dividend policy affects the value of a firm. If the dividend is relevant, there must be an optimum pay-out ratio (Hamdouni, 2012). Therefore, optimum pay-out is a ratio, which offers highest market value per share. Walter’s theory is based on scholarly studies signifying the relationship between the internal rate of return and cost of capital, which determines optimum dividend policy and increases the capital of shareholders. Walter’s model analyses the relevance of a dividend policy and its share value (Fischer, 1995). Walter’s model of dividend relevant theory is based on some assumptions, which are provided hereunder. Dividends and earnings of firm will never change A firm finances its total investment by means of retained earning only The earnings of a firm have either distributed as dividend or reinvested internally Internal rate of return (R) and cost of capital (K) of a firm remains constant always A firm has a very long or infinite life Walter has presented a formula to determine the price per share. P = market price per share D = Dividend per share E = Earnings per share R = Internal rate of return K = Cost of capital Source: (Baker, 2009) As per Walter’s theory, the optimum dividend policy depends on the cost of capital (K) and the internal rate of return (R) of Emirates. If the internal rate of return is greater than the cost of capital, then the company should retain the entire earning. Therefore, the entire earning should be distributed to the shareholders. The rationale of R>K is that the company is able to produce more return than the shareholders are able to obtain from retained earnings (Baker, 2009). Walter’s observation on the optimum dividend pay-out ratio can be summarised under three type firms such as growth firm, normal firm and declining firm. Growth Firm (R>K) R>K signifies that the company is identified to be in a position of growth and development, which is identified as the growth firm. In this situation, the company is expected to have huge profitable investment opportunities. In addition, the situation also implies that the shareholders of the company are able to have better earnings or dividend. In this situation, the company is able to perform business operations with growth prospects (Baker, 2009). Normal Firms (R=K) When the internal rate of return (R) and Cost of Capital (K) of Emirates remain equal, the situation is referred as a normal firm. In this situation, the company earns a rate of return, which is equal to shareholders’ earning (Hamdouni, 2012). In this case, dividend policy will not influence the price per share. Subsequently, in normal situation, the company’s pay-out ratios are optimum (Baker, 2009). Declining Firm (R Read More