Factors That Influence the Dividend Policies for UK Companies - Essay Example

Arriva is one of the biggest names in the transport service business in the European market. Arriva’s balance sheet for the last 5 years (from 2004-2008) is densely populated with debt financing and it is obvious because Arriva is a servicing business. Its debt financing of the last 5 years lies between (65% to 76%) and its equity financing lies between (24% to 35%). The summary of Arriva’s last 5-year dividend policy is summarized below:

DIVIDEND INFORMATION OF ARRIVAL

(FROM 2008 - 2004)

YEARS

2008

2007

2006

2005

2004

Final (GBp per share)

24.06

22.65

20.83

19.84

18.90

(Annual Report, 2008-2004)

KEY FACTORS INFLUENCING ARRIVA’S DIVIDEND POLICY: (From 2008 - 2004)

• It is an evident fact that Arriva’s dividend policy is in stable condition and grows steadily in response to revenue generation. From the investor’s standpoint, Arriva’s dividend growth rate is predictable and the investors show a positive response towards the company’s policies.
• Arriva’s dividend policy is desirable for investors. Investors do pay attention to those stocks which pay more dividends than the predictable ones. In addition, Arriva’s cost of equity is minimized in the whole 5-year tenure this move not only maximizes the stock price but also stabilizes the dividends to quite an extent and is a healthy indication for the future (Annual Report, 2008).
• In the current scenario of 2008, Arriva’s share outlook is positive although in that financial period oil prices rising and it might not only bring some implications on the stock price but also on the dividend structure (Annual Report, 2008). The management of Arriva is beneficiary because its management hedges the oil prices which in the end does not bring the curse on the stock prices as well as on dividends. In 2008, Arriva’s dividend is 24.06 (GBP per share). (Annual Report, 2008)
• Arriva’s management designed its dividend policy in a manner that utilizes the maximum portion of retained earnings to meet its equity requirement.

After reviewing the whole 5 years dividend policy and dividend structure, it is quite evident that Arriva maintains a progressive dividend policy and also utilizes its capital structure at the utmost level.

FACTORS THAT INFLUENCE THE DIVIDEND POLICIES FOR UK COMPANIES:

According to the survey conducted by Dr. Stuart Archbold which emphasis that most UK companies pay attention to the following elements while formulating their dividend policy:

• Dividend payout and also on future earnings. (Archbold 2007, p. 10-11)
• Most companies adopted the conservative approach toward dividends.
• Companies do pay full consideration towards marinating a smooth pattern of dividends. (Archbold 2007, p. 10-11)
• Most of the companies are reluctant towards the cut down in the dividends and also they are hesitant to make changes in the dividend policy for future operations. (Archbold 2007, p. 10-11)

Some factors influenced dividend policy. The factors are:

• A firm that is in growing condition may suffer from a liquidity problem and they are not in a position to pay the nominal dividends in contrast with those firms which generate more consistent cash flows.
• Due to the factor of bond indenture that enforces management to redefine its dividend policies.
• Sometimes the stockholder whose investment is large in the company enforces management to design a dividend policy that suited the most.
• The difference in payout ratios also brings some implications on the future growth of the company’s stock so the UK companies should adopt the strategy where no volatility occurs in a payout when designing the dividend policy.
• The UK companies also suffer from the tax factor that is imposed on dividends which would discourage the management when formulating the dividend policy. Due to the tax factor which is less on capital gains most of the investors prefer capital gains rather than dividends (Tax on UK Dividends).
• Companies operating in Italy, Japan, and USA utilize more debt in comparison to firms operating in the UK which are less dependent on debt. So UK firms also need to consider this point when designing the dividend policy.

CONCLUSION:

In conclusion of dividend policy suggests that there are three schools of thought regarding the dividend policy. The first is that dividends are neutral, and they neither increase nor decrease value.

 The second view is that the taxation on dividends which are higher than the capital gains demolishes the value of stockholders. The third school of thought makes the argument that dividends are valuable for some organizations. It is a fact that in all of these arguments, there are some valid points that exist and it is the prime responsibility of the firm to make a consensus among them.