Financial Times Handbook of Corporate Finance, 2nd Edition

14

WHAT PAY-OUTS SHOULD WE MAKE TO SHAREHOLDERS?

IntroductionDefining the problemTheorists in their hypothetical worldThe other extreme – dividends as a residualWhat about the world in which we live?Some muddying factorsScrip dividendsShare buy-backs and special dividendsA round-up of the argumentsConclusionNotes

 

Dividend policy is often reported to shareholders, but seldom explained. A company will say something like, ‘Our goal is to pay out 40% to 50% of earnings and to increase dividends at a rate at least equal to the rise in the CPI.’¹ And that’s it – no analysis will be supplied as to why that particular policy is best for the owners of the business. Yet, allocation of capital is crucial to businesses and investment management. Because ...