The Development of Company Dividend Policy in Respect of Profit Distribution

Abstract

The selection of optimal dividend policy is one of the main questions in the company’s financial management strategy as well as the indicator of investment attraction increase instruments and financial situation change. Although this subject has been discussed by scientists from various countries for more than 40 years, it has not been surveyed so far what decisions of company profit distribution are the most rational in respect of both the company itself and investors. There is no general opinion if it is worth for the company to pursue strategically formed dividend policy and if it is so, then what dividend policy should be selected by the company seeking its strategic aim – the maximization of the company value and shareholders’ benefit. Scientists from numerous countries usually deal with effective profit distribution problems in respect of distinct interest groups. Their works lack a systemic research on dividend policy development subject to the priorities of profit distribution. Therefore, the research object of this article is the formation of dividend policy in respect of profit distribution priorities. The aim of the research is to develop a model of company dividend policy estimating profit distribution priorities. Dealing with the problem of dividend policy formation in respect of profit distribution priorities, profit distribution and dividend policy alternatives as well as measures company’s profit distribution priorities which influence the selection of dividend policy are analysed in the article. Moreover, according to the investors’ preference given to the current and future consumption, a comparative analysis of company’s dividend policy models is carried out. Having performed the analysis of profit distribution and dividend policy alternatives, it was found that dividend policy is selected on the basis of who – shareholders or company’s managers – have higher influence on the formation of dividend policy. It also depends on what consumption – current or future – is preferred by investors. Companies, having chosen residual dividend policy, re-invest their profit on condition that profitability of re-investment is higher (or equal) than the profitability from alternative investment of similar risk level. The company seeking to implement new investment and to maintain the proper structure of shareholders as well as financing with external capital tends to develop residual dividend policy. Meanwhile the company forming its dividend policy according to the model of stable and constantly growing dividends, prefers to retain the reliability of current dividends, to ensure a small degree of uncertainty in the formation of dividend policy as well as to preserve the stability of dividend growth rate. According to the stable dividend payout ratio model, dividend policy formation is conditioned by priorities, given to the stability of profit, the stability of the payout ratio and high degree of informativeness on the financial state of the company in the market. Low stable dividend and premium payout policy at the end of the year are a compromise dividend policy between stable dividends and their constant payout standard. Although priorities which the company gives to low dividend payout stability, distinctive shareholders’ interest group compatibility, dividend payout flexibility as well as high degree of informativeness of the market highly influence the selection of this policy, the main disadvantage is that dividend instability causes dissatisfaction among the investors.