When maximising shareholder wealth, one way to measure
success is to increase the share price. This method means when the shareholder
sells their shares, they receive back more money than they paid, making a
profit. However, there is another way for shareholders to maximise their wealth
and this is through the company paying their shareholders a dividend.
Apple is one company who has recently announced their first
dividend payment since 1995 (BBC, 2012), the company announced a dividend of
$2.65 per share from July. They are also going to buy back $10bn in shares.
This dividend announcement came after the news that they had $97bn in cash and
therefore planned to spend $45bn in the next four years (BBC, 2012). This is
clearly a case of shareholder wealth maximisation as their shareholders are not
only getting a dividend but there will be fewer shares on the market making their
value increase. However it’s been 17 years since Apple paid a dividend, so what
does this mean for shareholder wealth maximisation and dividend policy?
If Apple, albeit a successful company, can go without paying
a dividend to its shareholders for 17 years, does this mean that a dividend
payment isn’t significant to shareholders?
Although Apple never paid a dividend for this period of
time, their share price continued to increase, giving shareholders another form
of wealth maximisation. However, although a dividend wasn’t paid, Apple was
still continuing operations and innovating in new ways to create value in the
company and increase shareholder wealth. Therefore, a dividend is still
significant because Apple was still working forward to a future which allowed
them to have huge cash reserves and a profitable future, which gave them the
security to not only pay a dividend to shareholders but also buy back shares. To
come to the conclusion that a dividend is not significant is possible
especially when looking at a company such as Apple and the fact that they haven’t
paid a dividend in 17 years. However, if it was so insignificant they wouldn’t
be paying a dividend out of their cash reserves, they would invest that money
elsewhere, wouldn’t they?
The clear conclusion to come to, especially when considering
the Apple case is that dividends are significant to shareholders the timing
however, is not. As long as a company is working towards a future which will
allow them to pay out a dividend and the company is remaining profitable and
maximising wealth through increase in share price, the timing of the dividend
payment is not significant, as long as it is inevitable.
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