Impacts of Dividend Payments on Performance

Abstract

The purpose of this dissertation shall be to evaluate the impacts of dividends on a company’s performance. The undertaking shall focus on both domestic and foreign entities which have invested in the various stock markets across the globe and analyze the extent to which these shares and their dividends are applicable and effective in relation to safeguarding the development, performance and survival of the business against the unpredictable market trends and financial instability and competition brought about by the different variables that exist in any business environment. The evaluation shall be done through the use of interviews and questionnaires where various workers, financial managers and stockholders from different companies shall be encouraged to participate in a bid to find the disadvantages and advantages that can be accrued by offering a particular rate of dividends and how that decision may affect the overall performance of the company. Thereafter suitable recommendations shall be made as to how best an organization can manage the dynamics that are associated with the payment of dividends while maintaining a healthy and beneficial financial decision structure for both the organization and the various stakeholders as well. Suitable solutions shall also be addressed as pertaining to the disadvantages and limitations that may arise as a result of the payment of dividends.

The study shall utilize the descriptive correlation method of research to effectively provide answers to the following question: To what extent does the payment of dividends affect the overall performance of any given organization? SWOT analysis shall be used to analyze the strengths, weaknesses, opportunities and threats that are present in the various stock markets and at the same time to pinpoint the major concerns raised by the participants regarding the capital structures in use, payments of dividends and the risk factors that may ensue as a result of the dividend payment structure employed by their organization. Data collected shall at the end help in establishing the extent to which the decision to pay a certain amount of dividends is beneficial or not to the overall performance welfare of any organization that partakes this external source of capital structure to finance its growth, development and survival in both the global and local context.

Introduction

Background of the Study

There has been an increase in the number of companies participating in the stock markets globally. This has been a result of increased competition, rapid technological advancement and the need to expand both output and the market base by various organizations (Pratt &Niculita, p.47). Consequently, these organizations result in borrowing funds from the public through the floating of company shares and bonds in the stock market in order to increase their capital base and finance these pivotal aspects. Over the years, the issues raised in relation to issuing dividends have always evolved around the percentage of the profits that should be set aside to cater for the dividends, the duration through which the dividends are to be paid, and how to balance the dividends without interfering with the set missions, visions and objectives of the firm. In addition to this, the stock market is often affected by different issues such as current prices, the economic environment in terms of recession periods and boom periods, inflation and also population. These factors will affect the performance of the stocks and consequently reflect on the overall performance of the organization. Ross et al (p. 97) acclaim that the capital structure of any given firm to a large extent affects the performance and financial remunerations gained from the organizations day to day operations. Consequently, a building interest has been developed by policymakers towards the transformation of the rules and regulations that govern the payment of dividends and their contribution or lack thereof towards the sustenance and protection of the organizations’ investments and financial soundness (Blalock, p.86).

Statement of the Problem

Over the past decades, investments in the stock market have skyrocketed throughout the various sectors, public and business entities willing to participate in the same. According to Ross et al (420) most of the people who invest in shares often have little knowledge as to how they work. In addition to this, they often do not understand the role they play in relation to their contribution to the business and how their returns are calculated. On the other hand, there have been issues raised as to how the dividends to profit ratios are analyzed and calculated as well as the policies that are implemented to monitor the same. On the same note, scholars and business managers have over the years developed theories that indicate the lack of a substantial relationship between the dividends awarded to shareholders and the overall performance of an organization.

Baker (170) asserts that the dividend policies employed by an organization have a greater impact on performance than the dividends themselves. This he insists because the policies are formulated using the assessment of the future financial needs of the organization rather than those of the stakeholders. However, such policies are often fixed but the dividends themselves are subjected to change depending on the profits made and or the organizational decision to plow back or retain the same. As a result, the firm may record-high profits but give out very little in terms of dividends. In this case, the dividends offered do not reflect on the organization’s performance.

Chen and Yao (116) claim that there is relationship between dividends and earnings/ performance. However, there is a general problem in most organizations when it comes to balancing the two in order to cater to the interests of both the stakeholders and the organization as well. In the recent past, there have been incidences whereby organizations prioritize paying out of high dividends instead of accomplishing the immediate organizational needs. In as much as this would please the investors, it does great damage to the performance and growth of the firm. Such poor decisions could be attributed to the lack of efficient financial management skills as well as poor planning. Additionally, Chen and Yao (117) reiterate that the higher the dividend payout, the higher the profits realized and vice versa. This study will therefore set out to show the extent to which this statement is true in regards to the performance of an organization.

Brief overview about shares, dividends and the capital structure

Ross et al (96) acclaim that all Stockholders want the value of the firm to increase exponentially. This is because, the higher the value of the firm, the higher the share prices and naturally the earnings received in terms of dividends and sales of shares. As a result, many new investors opt to invest in already established firms rather than the new ones because the risks are fewer and the earnings higher. Financial managers should therefore choose a capital structure that will boost the firm’s value in order to attract more shareholders. The more the shareholders, the higher the capital base for the organization which means that the firm will be able to do more research on product improvement, competitiveness and technological advancement factors which in turn boost the performance of the organization.

According to Ross et al (75), a company or organization may adopt the Pecking Order Theory as a helpful set of rules to guide capital structuring. According to the Pecking order theory, a company should use internal sources of financing first, then follow up by issuing safe securities such as bonds and then finally move to float stock. The theory is very applicable in the business world and it makes sense. It states that an organization should use the least expensive capital structure first and the most expensive structure as a last resort. Internal financing such as plow-back profits or profit maximization strategies is the least expensive and minimum risk capital. It requires no obligations to any outside party. The second viable alternative is to issue bonds. These are more expensive than internal financing but have some risk since non-payment of the bonds may force the company into bankruptcy. Finally, equity capital is the most expensive since it bears the most risk to the investor and therefore the company must provide a higher return to the investor.

Additionally, the calculation of the share prices and the dividends accrued is calculated after the taxation of the profits. The net profit is thereafter divided in priority according to the immediate needs of the organization and the remaining difference is what is distributed among the shareholders as dividends. This is done in order to ensure that the firm’s goals and objectives are met before sharing the profits with the investors. On the same note, the use of equity as an external source of finance may at times be risky because the investors expect to be rewarded at the end of the stipulated period irrespective of whether the organization has made profits or not. Also, the market price of the shares in the stock market does not depend on the financial status or performance of the organization but mainly on the trading patterns of the shares. The share prices are also dictated by the laws of demand and supply as is with all other products. This means that the share value does not directly reflect on the company’s performance but rather on the effective demand of the various shareholders.

Aim of the Dissertation

The study shall in detail evaluate the extent to which payments of dividends influence the performance of an organization. This shall be achieved through the incorporation of financial theories and real-world experiences which may in one way or the other explain the relationship that exists between dividends and the overall performance of the organization.

Objective (that achieve the aim)

• Discuss with the various participants their overall expectations and views about the relationship between dividends and performance.
• Discuss with the financial managers of selected organizations how dividends can be used to reflect on their organizational performance.
• Interview the various implementers and policymakers about how the benefits of such a relationship can be measured or analyzed.
• Prepare a report about the findings collected relating to the above objectives.

Outcome

• What are the benefits of dividends payments to the stakeholders and to the organization?
• What factors within the organization are most influenced by the rate of dividends in terms of optimum performance the influence of the new system on the HR department performance?
• How the added value from the dividend payouts will improve the performance?
• What are the additional benefits accrued from increased firm value through the capital structure employed?

Benefits to the organization: Schreiber and Stroik (pp7-32) (how will the payment of dividends add value)

• improve the organizations’ reputation in the global context
• increase the capital base thus enhancing performance
• attract more investors
• Institute clear standards to measure the level of performance and how to improve it benefits to stakeholders (Ross et al, pp512-519)
• tool to monitor the performance of their organization
• Stable source of extra income

Related Literature Review

According to Ross et al (512) the number of dividends paid out to the shareholders plays a very important role to both the firm and the investors. In their book on corporate finance, the authors have in detail discussed the benefits that can be acquired from the payment of dividends. To the organization, they state that high dividend payments indicate high performance thereby attracting more investors and improve on the reputation of the organization. On the other hand, the stakeholders can be able to monitor the performance of their investments through the number of dividends issued. As mentioned earlier the higher the number of dividends awarded, the higher the earnings received by the organization. This book gives insight into how the dividends affect performance on the basis of value-added and capital structure. These two aspects will also be important during my research especially when it comes to formulating solutions and recommendations.

In his book on performance appraisal, Ellis (108) theorizes the concept of SWOT analysis as one of the best tools to evaluate the performance of an organization. He acclaims that with the knowledge collected from the analysis, the financial managers can be able to make crucial decisions with a zero margin for error. This means that they can find ways to ensure the organizational goals are met all the while maintaining confidence and good relations with the investors in their respective capacities. The book will be most helpful especially during the methodology section where the SWOT analysis shall be carried out to evaluate whether the payment of dividends by various firms may influence the performance and growth of the same.

Blalock (24) says that dividends have immense positive impacts on the social welfare of the host country when it comes to foreign investments. The cost to establish a new organization is always high and in order to attract more investors, the organization may promise high dividends to the shareholders to keep them interested in the venture. This may give the organization time to develop its own foundation in the new territory enabling it to perform equally to the rivals if not better.

Westerfield et al (250) also shed some light on corporate financing and organizational value. In chapter 14 the authors provide the reader with an introduction on how financing decisions can create company value. The chapter presents the foundation of market efficiency and the different types of efficiency. For example, they used this scenario to show how efficiency can affect the markets and thereafter the financial structure of an organization. They say that when teaching surgical asepsis in the classroom, efficiency is an important aspect that needs to be covered. One of the “rules” of asepsis is that once you touch a sterile item and places it in a spot on your sterile set-up, you need to leave the sterile item in the spot and not keep moving the item. This is an efficiency issue and a sterility issue too. This is one basic principle of an efficient sterile setup. Once a scrub person enters the sterile field, their movements, and actions should be very controlled to produce a set-up in the least amount of time. I found that this reading connected my research topic regarding the change of policies and tactics rather than the capital structure.

Methodology

The Research Method

According to McGuire (30), the most suitable tool to use while evaluating situations is analyzing the correlations that exist between the aspects presented. As such, the study shall use the descriptive correlation research method. This is because it seeks to identify the relationship between two variables which in this case are the dividends and performance in the various organizations. The data collected will consist of testimonials from some selected shareholders and financial managers. It shall also include reports from various sources related to the financial policies governing dividends and share investments in the given organizations. The data collected shall then be compared to data generated by other related studies to evaluate the efficacy of performance regarding the payment of dividends in other organizations. To answer the questions designed for this study, the key concerns shall be established to provide guidelines for the interviews and the criteria to be used in data collection.

Data Gathering Procedure

Data collection shall be carried out through the following techniques:

Primary sources of data will include questionnaires and face-to-face interviews conducted in various organizations across the country. This is the best method of acquiring accurate data due to the credibility of the sources and the minimum costs incurred through these techniques. In addition to this, I shall organize appointments with at least six financial managers from whom I expect to get a brief overview of the implemented dividend policies and the reasons as to why they are most suitable for their organization.

On the same note, I shall also conduct interviews with various stakeholders (at least 20 shareholders) from different organizations in order to gain insight on the points of strength & weakness of the current system as well as recommendations suggested to better the process.

Additionally, I shall also interview various policymakers in order to understand the areas of difficulties and advantages of implementing the various investment and dividend policies they formulate for different organizations as well as their opinions as to how such policies affect the performance of those organizations.

Secondary data shall include peer-reviewed articles related to this topic as well as books used in class and other online sources. These sources shall be used to further support the findings from the primary sources. In addition to this, I shall use the various financial theories formulated by various scholars that try to explain the relationship between these two aspects. A SWOT analysis for at least two organizations shall also be carried out to gauge the various strengths, weaknesses, opportunities and threats that may arise from using their financial decision structure as pertaining to the payment of dividends as well as the applicability of their capital structure to the same.

As per demographics, flow charts, and other graphical representations shall be used to further explain the relationship between the two variables under different circumstances such as boom and recession periods, inflation and market segmentation. Finally, a cost-benefit analysis shall be done to evaluate the efficiency presented by the various strategies and policies relating to the performance, development and financial stability of the selected organizations. The cost-benefit analysis will help in determining the best course of action as well as the establishment of recommendations related to this topic.

I shall also make use of the pecking order theory which in such situations offers a solution and a variety of recommendations as to the procedures an organization should follow to select the best capital structure to be used by that organization. This theory shall be helpful in this study as it will provide important answers to the questions surrounding the efficiency and applicability of the capital structure to the organizational and stakeholder’s needs.

Resources

The whole project will cost me an estimated $1,500. This amount is expected to cater for all the stationery, travel, books, browsing and phone call expenses up to the end of the project.

Time is always of the essence. With this in mind, I have taken it into account and have estimated that the whole project will consume 75 hours of my time and an average of 15 hours to those that I will be associating with throughout the project.

As per data access, I shall rely mostly on the internet to get the latest news on this topic as well as e-mail messaging as a means of communication and data retrieval from the different participants.

I intend to use my laptop for the compilation of data. I shall also require meeting rooms, printers, flash disks and photocopiers to complete this project.

Other resources used shall include my car and mobile phone.

Problems

The first problem that I foresee will be getting the financial information about the selected organizations. This especially refers to access points such as libraries, stores and even the internet. Secondly, the people concept might prove o be tricky. By this I mean that it may be difficult to get an appointment with the managers and shareholders or even have them keep to the agreed schedule. In addition to this, the organizations may not give me the support I expect especially in relation to the amount of time I have to carry out the interviews. I may have to schedule the interviews to take place during breaks or after working hours to fit in their schedules.

Also the time I have very limited free time and as a result, most of my research will be carried out during the holidays, weekends work breaks and leaves. This will be very challenging because I have to make those opportunities count in a bid to provide a well-organized and informative research paper. Other foreseeable problems may include changes in the research parameters or even the absence of some key participants in the project.

Limitations

The timeframe offered to cover the whole study might be little due to the shortness of the semester but I will make do with that and produce a well-researched and informative dissertation. In addition to this, there may be a risk of inaccurate information during the interviews and in answering the questionnaires since their answers may be influenced by their personal opinions and feelings.

Delimitations

I intend to get liaisons from the selected organizations that shall help me gather all the required information with a considerable amount of ease. Also I shall be communicating with them through e-mail messaging and telephone on a regular basis to get daily updates. The rest of the data shall be collected from credible sources over the internet and this shall save me time and produce valuable data which shall be beneficial to this study.

Timetable

Due to the time constraints and the possibility of interruptions to the project, I have organized all the activities to take a total duration of ten weeks which shall be distributed as follows.

• Week 1 Browsing the web for general information about the topic
• Week 2 Searching for books related to the topic
• Week 3 Distribute the questionnaire to the targeted shareholders
• Week 4 Distribute questionnaire to the financial management staff
• Week 5 Open discussion with shareholders
• Week 6 Meeting the specified financial managers
• Week 7 Meeting the policy system implementers of the targeted organizations
• Week 8 Review the implementation flow & system handouts
• Week 9 Organizing the contents, references and project items
• Week 10 Finalize and Review the whole project

Works cited

Aitken, B., et al. “wages and Foreign Ownership: A Comparative Study of Mexico, Venezuela, and the United States”. Journal of International Economics, 1996,Vol. 40, No. 3/4, pp. 345-371

Alon, I & McIntyre, J. R. “Globalization of Chinese enterprises”. Palgrave Macmillan, 2008

Allison, M, J & Kaye, J. “Strategic planning for nonprofit organizations: a practical guide and workbook”. John Wiley and Sons, 2005.

Baker, H, K. “Dividends and Dividend Policy”. John Wiley and Sons, 2009

Blalock, G., and Gertler, P. J. “Welfare Gains from Foreign Direct Investment through Technology Transfer to Local Suppliers”. Journal of International Economics, 2008

Chen, J et al. “Globalization, competition and growth in China”. Routledge, 2006

Ellis, C, D. “Winning the loser’s game: timeless strategies for successful investing”. McGraw-Hill Professional, 2002.

McGuire, C. K & Ikpa, V. W. “Policy, leadership, and student achievement: implications for urban communities: Achievement gap, research, practice, and policy”. IAP, 2008

Pratt, S, P & Niculita, A, V. “Valuing a business: the analysis and appraisal of closely held companies”. McGraw-Hill Professional, 2007.

Ross, S, A & Westerfield, R, W. “Corporate Finance with S&P Card”. McGraw-Hill, 2009

Schreiber, D et al. “All about dividend investing: the easy way to get started”. McGraw-Hill Professional, 2004

Temple, P. “First steps in bonds: successful strategies without the rocket science”. Financial Times Prentice Hall, 2002