Dividend: Significant or not to shareholders??

When it comes to maximising shareholder wealth, many consider the achievement of this to be paying out a dividend as well as increasing share price. However, some argue that the payment of a dividend is insignificant to shareholders...but how can that be, when it’s such an integral part of maximising their wealth?

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.

http://www.bbc.co.uk/news/business-17434328

Capital structures and the potential for a company to gain competitive advantage!

When considering how a company should finance itself, lots of factors need to be considered! The first of which is equity or debt? 

Should a company opt to fund itself through equity such as listing on the stock exchange? Well it has its benefits…the company can raise a lot of money but at a huge cost to itself and a highly complex process. However, massive funds can be raised and the reputation of the company is usually enhanced dramatically. Yet, those costs as well as the loss of ownership and the responsibility to the shareholders is a daunting factor, even though the company doesn’t necessarily have to pay the money back through dividends! Though when looking at this option of equity finance…the negatives do seem to outweigh the positives. So debt finance is the left over option. What is so great about debt finance?

Well it’s simple, less risky and as a result much lower cost. So why don’t all companies just finance through debt? One answer is because it doesn’t look great…the more debt you accumulate as a company the higher risk you are and therefore the costs start to rise in conjunction with that. Another consideration is that companies use their capital structure as a competitive advantage, but how?

If debt is much cheaper than equity, it’s obviously going to be first choice for companies! They want the cheaper option because it looks better to their investors. However, as mentioned above the more debt they get the higher the costs! So once the debt becomes too expensive, what can companies do? They can aim to find the perfect capital structure, the point where debt is equal to or less than the costs of equity, and then they stop funding through debt and switch to equity finance! How is this gaining competitive advantage though? 

If a company finds the perfect equilibrium then they will essentially become a magnet for investors, they will have enough finance to improve, grow and innovate within the company. This compared to a competitor who is riddled with mass amounts of debt, or who has no debt but massive costs in terms of equity finance, is brilliant! They have the upper hand because their capital structure provides them with enough money which isn’t too expensive for the business to reach its potential. 

One company who has seen the effects of a bad capital structure is peacocks. The well known high street store has entered administration and the reason behind the companies collapse was an unsustainable capital structure as well as a surplus of stores (BBC, 2012). Thomas Cook is also a high street holiday provider who is suffering due to massive amounts of debt, which have led to a poor capital structure. Although not in the same position as Peacocks, it is still struggling- ‘The Company’s board is also taking steps, including a strategic review, to reduce the group's debt "and reach a more appropriate capital structure over time".’ (BBC, 2012)

This emphasises the problems have a bad capital structure can cause, yet many companies have good capital structure in place. These are the companies who have found the balance between debt and equity finance, and they are the companies who will gain and take advantage of their competitive position.

http://www.bbc.co.uk/news/business-15896503