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Change in Dividend Policy - Essay Example

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The paper "Change in Dividend Policy" explores the issue of dividend policy in the context of Apple Inc. The corporation has elaborate plans underway to initiate a share repurchase program. The paper overviews the company putting into perspective the eminent change in the firm's dividend policy…
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Change in Dividend Policy
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CHANGE IN DIVIDEND POLICY By Location Introduction The paper puts into perspective the issue of dividend policy in the context of apple Inc. The corporation has elaborate plans underway to initiate a share repurchase program. The paper gives a brief overview of the company besides putting into perspective the eminent change in divided policy that has been lined up by the company. Corporations have registered drastic changes in the distribution policies over the years. The mix of stock repurchases and dividends have changed drastically. The company recently announced that it would be launching a $10 billion share repurchase program, which was slated to begin in the beginning of the financial year, which is September 30, 2012. The program will be executed in the next 3 years. This current program is a pointer to the drastic changes that has taken place in the company over the years. Overview of Apple Inc. Corporation Apple Inc. Corporation is one of the leading electronics manufacture in the globe. Steve Jobs was the force behind the success of Apple Inc. Company; he takes credit for transforming the company from a small insignificant company to one of the most successful company worldwide. Apple Inc. was established much later in 1997 as compared to its competitors such as Microsoft yet it performs at par or even better than they do. Apple exists in an intensely competitive environment with aggressive rivals in all its spheres of business operations. The market is characterized by frequent product innovation, and technological advancements. Despite the environment, Apple boasts of posting favorable financial statements, as well as having the capacity to develop and offer new innovative products and services. Under the leadership of Steve Jobs Apple Inc. Company was able to diversify and expand the scope of its products. It is no longer a computer manufacturer but rather one of the leading producers of world most popular media gadget. Dividend Policy Trend in the Technology Industry Distribution policy refers to corporation policies put in place to govern issues of dividend payout in line with the company’s dividend policy. For instance, a company can have either high or low dividend distribution policy to its both preference and ordinary shareholders. Distribution policy can be either in cash or in through share buyback. The players in the technology industry have been making a steady shift in several of their distributions policies. Apple Inc. is the latest player in the industry to join other players in conducting share repurchase. The companies in the technology industry such as Google, Microsoft, and Siemens have a myriad share buyback, dividends, and share repurchases. Take a case of the IBM Corporation; it took a record-breaking move regarding share payback in 1980. Moreover, in 2012, IBM Corporation just like many conglomerates, announced a major share buyback program as well as raised its dividends. Google has not been left behind as the players in the technology sector realign their shares to the current industry practice. In a bid to remain relevant and attractive to their investors, Google resorted to rolling out a one for two-share stock split to its current shareholders. IBM has been consistent with its share buyback progamme to an extent that it has exceeded its dividend payout program. Despite the apparent concentration of IBM on buybacks the share prices in the market has remained lackluster. This scenario begs the need for the company to come up strongly with other distribution policies such as stock split and stock repurchases. In conclusion the general trend in the technology sector is that the companies are steadily shifting from dividend payouts to other distribution options such as share split, share buybacks, and share repurchase. Stock repurchases refers to a scenario through which a firm pays out cash to stakeholders to effect repurchase of its own share as an alternative to dividend payout. The major advantages of such a move include it gives the stockholders the option of tendering their cash for shares or otherwise. The other notable advantage is that the repurchased stock is strategic as the firm can use it to facilitate mergers in future expansion plans. Bardhan (2007) asserts that the major disadvantage of repurchase stock is that it is lower in value as compared to the actual market rate resulting to loss to stockholders. It usually results to inconvenience to stock holders who in many instances resort to legal battles with the firms. Stock splits refer to alternative to cash dividend where firm awards a stockholder additional stock at given percentage (Black, 2006). For instance, a stockholder with 100 stocks gets five additional stocks. On the other hand, stock split refers increase in the number of outstanding shares. The main advantage of stock split and stock dividend is that the firm does not incur any cash expenditure hence they are able to maintain a superb working capital. On the other hand, the main undoing of this move is that the stockholders do not enjoy any cash benefit in the short run. The table below illuminates the impact of buybacks and dividend payout to annual return. Table 1: Dollar value buybacks in millions (the values are from the last financial quarter) Company Quarterly buy backs($) Percentage change in shareholding Annual return Apple Inc. 16000 (3.4%) (31.5%) IBM Corp. 3501 (1.2%) (6.1%) AT &T Inc. 3307 (1.6%) (5.0%) Oracle 2827 (1.5%) (6.5%) Table 2: Dollar value dividend in millions (the values are from the last financial quarter) Company Quarterly dividend payouts($) Payout ratio Annual return Apple Inc. 10569 22.5% (30.3%) AT&T 9954 141.6% 5.5% Microsft Corp. 7745 34.5% 10.11% Internal factors affecting change in Policy It is worth noting that there exists a myriad of issues, which affects dividend policy at Apple Inc. One such critical factor that influences the dividend policy of Apple Inc. is the issue of the competing needs for extra cash. Apple Inc. is a global leader in electronics and as such, it must always remain commitment to offering unique and state of the art gadgets. In order to maintain this standard it must always continue to investment in market research as well as penetrate the global market. Such moves are quite costly and as such, the company would rather offer other incentives other than dividend payout as a way to reward shareholders. Empirical studies of the dividend theory policies do not show consistent results. Hence, it is not possible to give general direction to managers as regards whether the investors prefer dividends or capital gain. Brigham (2010) asserts that it is the prerogative of the management to decide the dividend policy based on industry trends and the long-term objectives of the organization. The management should not rely on specific theory in determination of dividend policy for the corporations they head. Irrelevance theory is neutral with regard to preference of either capital gain or dividend payout. On the other hand, Bird in hand seems to favor dividend payout over capital gain. Finally, tax effect prefers option with less tax rate. In order to understand internal factors that affect changes in dividend policy it is critical that the various dividend policy theories are put into perspective. Miller and Modigliani developed irrelevance theory; it asserts if the firm is realizing its expected returns in the market then it is completely irrelevant whether the shareholders are paid dividends from the net income or the net income is reinvested in business to generate capital gains. It suggests that the shareholders have the option of creating their own dividend through sell of their shares whenever they need cash. On the other hand, Bird in Hand Theory suggests that shareholders prefer dividends to capital gains (Booth & Maksimovic, 2001). The justification is that capital gains are riskier than dividend payouts and for them to consider this option; they must be enticed through sufficient discounts. Finally, Tax Preference Theory asserts that the old tax system was marred by ambiguity to an extent that the required rate on payout of dividends used to be higher hence, shareholders preferred dividend payouts to capital gains. However, today both the capital gain and dividend have the same tax rate. The other internal factor that affects the distribution policy at Apple Inc. Corporation is the issue of the need to maintain control. More than often, the more shareholders the company has the harder it becomes to make decision. It is due to this factor that Apple Inc. has embarked on an aggressive share repurchase program in order to reduce the number of shareholders through the share repurchase program. The program is expected to be rolled out in the beginning of the current financial year at cost of $10 billion. The program is expected to last for three years. The program targets to address the imminent dilution of the current shareholding in the company. It is worth noting that this is an elaborate and deliberate step that will ensure that the shareholders have total control and ease in decision-making. The management of Apple Inc. under the leadership of CEO Tim Cook has reiterated that despite the hefty amount they are going to spend on the repurchase program and other distribution obligations such as dividend payout the company is still committed to making great investment in the industry. Cook gave an assurance that more market research programs, new acquisitions, and development of infrastructure is on the way. This sentiment are clear indication that the company intends to maintain control and are therefore keen to avoid issues that might dilute the control and make the strategic decision making process more easier. The company intends to revolutionize music through IPod. This mainly targets music lovers who prefer to listen and enjoy music anywhere and anytime. IPod is very trendy, portable and with a large music storage capacity. Over the years, Sony dominated the market with its Walkman gadget that allowed users an interrupted music due to its portability. Apple introduction of IPod eclipsed the gains made by Walkman as virtually everyone shifted to IPod. The introduction of IPod led to the resurgence of the music industry, as more and more people embraced IPod they listen to music more, consequently; this led to more people buying music. Since its Introduction, 10 million IPods have been sold and a record 10 billion songs downloaded (O’grady, 2008). The company has plans in place to roll out IPhone with better android capabilities. This cellphone has integrated several applications such as music, email capability, calendar, and contacts among others. This is every phone user’s dream due to its numerous applications. IPhone was introduced in the market in 2007 and since then Apple Inc. has registered a whopping 100 million sales. Several other companies make IPhones but despite that, Apple has outsmarted them since it has built a better device as compared to its competitors. IPhones are cheaper compared to other smartphones besides having features that are more attractive. Most smartphones unlike IPhone are complicated and owns unnecessary hardware requirements, application support and various maintenance expenses. External Factors affecting Changes in Dividend Policy There are several external factors that affects dividend policy at Apple Inc. Costs such as brokerage fees and tax could make shareholders to shift from one stock to another in pursuit of cost friendly taxes. All the clienteles are important to the Apple Inc. and therefore there is no point of the firm increasing their cost of equity to appeal any one particular class of stockholders. In case the company wishers to change its dividend policy, such a change should be effected gradually to allow stockholders time to adjust accordingly (Brigham, 2010). The management has the duty to announce dividend increase or dividend cut. Such a move has effect on the stock price; announcement of increase in dividend payout results to increase in stock price and the reverse is true. If the management “signals” increase in dividend payout then this implies that future prospects of the company is brighter. On the other hand, if the management “signals” reduction in dividend payout it shows that the future of the firm is bleak. In case the Apple Inc. wishers to change its dividend policy, such a change should be effected gradually to allow stockholders time to adjust accordingly (Brigham, 2010). The management has the duty to announce dividend increase or dividend cut. Such a move has effect on the stock price; announcement of increase in dividend payout results to increase in stock price and the reverse is true. If the management “signals” increase in dividend payout then this implies that future prospects of the company is brighter. On the other hand, if the management “signals” reduction in dividend payout it shows that the future of the firm is bleak. Impact of change in Dividend Policy to Share Price It is worth noting that the increase in payouts from net income for stock repurchases has not risen proportionally with the decline in payouts from net income for dividends. While the rise in percentage of stock repurchases is 16% the decline in percentage of dividend payout is 20%. The explanation to this trend is that the companies are willing to enhance the value of their respective stock through pursuing capital gain. When fewer dividends are paid out the value of shares are expected to rise and this good for both the company and investors. The management has the option of dividend payout or capital gain. With regard to dividend payout, the management decides of given percentage of net income to be distributed to shareholders as reward for their capital contribution. On the other hand, capital gain requires that the management reinvest the income so that the share price appreciates in value to the advantage of shareholders who can now sell their shares at a higher price than what they used to acquire them. Apple Inc. Corporation plans to also adopt dividend reinvestment plan in order to encourage investors to reinvest their excess cash into more stock in the company. Dividend reinvestment plan is a situation in which the shareholders have the option of automatically reinvesting their dividends in the firm’s stock. It helps in reduction of brokerage cost besides providing investors with a convenient option to reinvest excess cash. Table 3: Earning per share and dividend payout changes over the years 2012 2011 2010 2009 2008 EPS: Basic 44.64 28.05 15.41 9.22 6.94 EPS: Diluted 44.15 27.68 15.15 9.08 6.78 Cash Dividend 2.65 0 0 0 0 The repurchase program together with other distribution policies that the company has lined up will definitely results to higher yield to the investors. The results in table 3 above shows that the repurchase order and the dividend payout strategy that has been unveiled by Apple Inc. in 2012 will result to increase in share price as well as earnings per share to the shareholders. Stockholders and potential investors usually consider distribution policies of various corporations before deciding on whether to invest in Apple Inc. The distribution policy of the company can also be used to rate the economic performance of various industries within a country and by extension a critical pointer to economic ability of a country. If the corporations in a country pursue capital gain as opposed to dividend pay-out, then it means that the country is economically stable. Stakeholders would prefer capital gain to dividend pay-out if they have high income hence enough money at their disposal to carry out daily household transactions. Apple Inc. should consider these issues when delving on the various distribution policies. Reaction of shareholders to the Impending change of Dividend Policy at Apple Inc. Corporation Apple Inc. Corporation intends to roll out its stock repurchase programme in the 2013 financial period. The company has rolled out a massive $ 10 billion that will be used to effect this ambitious stock repurchase programme. The programme is expected to be executed over the three years. The primary goal that has inspired such a move at the electronic conglomerate is the need to neutralize the impact of dilution of shares, which might compromise decision-making process ain the organization. In order to lure the investors into the idea the rolled out dividend of $ 2.64 per share in 2012 so that the shareholders do not feel left out. In 2013, the company has planned to roll out a dividend pay-out of $3 per share so as to attract more investment and give present shareholders confidence that the company has their interest at heart. The company has assured various stakeholders that the company is still committed to quality and will continue to invest in market research to come up with technologically superior products. Conclusion The corporation has elaborate plans underway to initiate a share repurchase program. The major advantages of such a move include it gives the stockholders the option of tendering their cash for shares or otherwise. The other notable advantage is that the repurchased stock is strategic as the firm can use it to facilitate mergers in future expansion plans. Corporations have registered drastic changes in the distribution policies over the years. The mix of stock repurchases and dividends have changed drastically. Apple exists in an intensely competitive environment with aggressive rivals in all its spheres of business operations. The market is characterized by frequent product innovation, and technological advancements. Despite the environment, Apple boasts of posting favorable financial statements, as well as having the capacity to develop and offer new innovative products and services. References Auerbach, A., & Hassett, K. 2008. On the Marginal Source of Investment Funds. Working Paper,University of California, Berkeley. Barclay, M., & Smith, C. 2005. The Determinants of Corporate leverage and DividendPolicies. Journal of Applied Corporate Finance, 83(2), p. 33-37. Bardhan, P. 2007. Corruption and Development: A Review of Issues, Journal of Economic Literature, 12(3), 1320-1346. Black, F. 2006. The Dividend Puzzle. Journal of Portfolio Management 89(2) 104-112 Booth, L., & Maksimovic, V. 2001, Capital Structure in Developing Countries. Journal of Finance, 87-131. Brennan, J. 2010. Taxes, market valuation and corporate financial policy, National Tax Journal, 23,417-427. Brigham, E. 2010. Financial Management: Theory & Practice. Cengage Learning, Boston, Masachessets Buckley P. 2003. The Changing Global Context of International Business. New York: Palgrave Macmillan. Campbell D. & Stonehouse G. 2004. Global and Transnational Business: Strategy and Management. New Jersey: John Wiley & Sons. Christie A. and Nanda, V. 2007. Free Cash Flow, Shareholder Value and the Undistributed Profits tax of 1936 and 1937, Journal of Finance 89(2), p. 104-112 Demirguc K. and Levine, R. 2009, Bank Based and Market-Based Financial Systems: Cross-Country Comparisons. World Bank working paper. Diamond, R. 2011, Monitoring and Reputation: the Choice Between Bank Loans and Directly Placed Debt. Journal of Political Economy, 99(3), p. 94-110 Easterbrooke, B. 2004. Two Agency-Cost Explanation of Dividends. American Economic Review, 74(4) P.105-115 Fama, E and K. French, 2007. Dividends, Debt, Investment and Earnings, Working paper. Glen J and B. Pinto, 2004, Debt and Equity? How Firms in Developing Countries Choose. International Finance Corporation, Discussion Paper #22. Hirschey H. 2008. Fundamentals of Managerial Economics. Boston MA: Cengage Learning. Kerzner H. 2009. Project Management: A Systems Approach to Planning, Scheduling, and Controlling. New Jersey: John Wiley & Sons. Petersen V. 2008. Financing Constraints and Corporate Investment. John Willey and Sons, New Jersey. Sekhar G. 2009. Business Policy And Strategic Management. I. K. International Pvt Ltd. Read More
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