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Finance and Growth Strategies - Essay Example

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Ans: Paying periodic dividend to its shareholders, financers of a company is generally considered a way to pay back for the confidence shown by them in the company and its management. Bhattacharyya (2007) states that it was Lintner in 1956 who is credited to have undertaken one of the earliest researches surveying the corporate managers for understanding how they arrived at a dividend policy…
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Finance and Growth Strategies
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Download file to see previous pages In fact, more mature companies tend to have better payout ratio, with regular increases in the rates. The firm's dividend policy is generally affected by a number of factors like;
1. Future Expansion Plans and Capital Requirements: If the company has expansion plans, diversification plans etc. then it will prefer to have a large reserve of its resources and funds readily available for the new venture. The requirement could be in the form of capital for setting up a new production facility or liquid funds to launch a marketing blitz for a new range of products or tapping a new market.
2. Competitive Environment: Today we are living in an era of globalization and liberalization. This has led to intense competition in many sectors and industries. This is particularly the case for companies in consumer goods and retail industry. Beckett-Camarata et al. (1998) present a conceptual overview of relationship management in a rapidly changing global environment:
"In a global economy, all system members are interdependent and are customers. Companies are restructuring (i.e. downsizing) to fund only those core competencies that are key to their profitability and long-term survival. Managing relationships with their customers - especially with employees, channel partners, and strategic alliance partners - is critical to the firm's long-term success" (p71)
Therefore companies try to reach all stakeholders in equal measure. For the customers it tries to rationalize the prices in order to attract them towards the product while it is equally crucial that the company tries to keep all its stakeholders in good humor, by paying out good returns on their respective holdings.
3. The overall business scene in the sector/s: Dividend payout decisions are also influenced by the number of companies and the kind of requirements that the business sector has. For example the diamond exploring companies in some of the South African countries do not generally find intense competition and the sector itself is a specialized one, with labor intensive inputs in the industry. In such a scenario, the company will have a committed number of investors and financers who understand the sector well and realize its potential benefits and drawbacks. On the other hand, a telecom services company will have intense competition not only from with the regional telecom companies but from other companies as well. Therefore, in such a scenario the company will be hard pressed for remaining in good books of the investors, coming from a wider spectrum of society.
4. Profit earned during the financial year: Dividend is certainly dependent upon the revenues and profits earned during the year. If the company can keep apart a sufficient amount, in addition to reserves and other liabilities, then the investors can expect better payouts.
5. Political scenario prevailing in the country/ region: The dividend policy is indeed impacted to a great extent by the political environment prevailing in the country or the region. If the political class is supportive of firms' business activities and the firm can chart out a future course of action, the firm can be quite liberal in its payout policy as well. But, ...Download file to see next pagesRead More
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