The lecture for this week is mainly focus on the dividend policy. Since the dividend is always as an important tool for investor to evaluate the financial performance, it should be very important for the organisation. However, Madigliani & Millar (1961) argued that assume in the prefect world without any transaction fee or taxation, it is irrelevant for the dividend. Since if the company did not announce the dividend, the manager will invest their money in some more worth project, which was more worth for the organization. However, based on the Pecking Ording Hypothesis, it has suggested that it is not irrelevant for the organization to announce the dividend or not, this is because, the reason for the organization need extra money, it is because of the organization have no ability to finance through the organization’s ability, which means the organization was in a down condition. In this moment, the investor should avoid to invest in this company. According this view, it was suggest that the organization need to issue dividend to prove that the organization was in a good operation.
From the two different arguments, it could be found that from the theory, it should be irrelevant for an organization to issue the dividend or not. Since the aim of the organization is creating the shareholder wealth and if the dividend not issued the share price will increase as the good performance; there is no different if the organization issue or not. However, in the practical world, it was not like what we believed. In the reality, the most of investor are assume that the manager are greed, they only focus on their own profit, in this way, the dividend are needed to show the organization has a great ability on profit. This could be proved by the resolution of uncertainty, which is impressive counter-attacks on as ‘bird-in-the-hand’ to express that investor prefer the cash than intangible value.
Moreover, it could also being argued from two ways. Firstly, if the organization was profitability, it could issue dividend, if they need money, they should go for bank. Since the loan was cheap than the equity. Another one is it could be much better for investor to monitor the organization. Since the organization need money, they need go for issue share and convenience the shareholder the good project, which could make the investor have more choice. However, since the information was not competing equal, it had for the investor to making choice based fully understand. Therefore, it was a kind of useless to making the complicated process for the dividend.
However, after we analyze the dividend policy of apple, it might found that the dividend policy is irrelevant. Apple as an unique company, which operating and creating the product based on innovation. It is now a world famously brand. Wile reading its dividend history it could be found apple has not issue any cash dividend after the 1995 since it was found in 1987. Moreover, from the annual report, it could be found that the organization announced the reason for apple not going to pay any cash dividends was because of continue invest in the operation of its business. This was just based on the argument of Madigliani & Millar (1961) suggests that it is irrelevant that the organization pay dividend or not. Additionally, from the share price also prove that it is irrelevant for the investor to pay dividend. Since the share price are depends on the investor’s evaluation on Apple, this indicates that without dividend the investor still willing to invest on apple. This is not the only case, it could be found that the berkshire hathaway also did not distributing any cash to data.
(Google finance, 2012)
From the case of apple, it could be found that the argument of Madigliani & Millar (1961) was right. However, since this was a unique example, from the most company, it might believe that the dividend was relevant. Why the world is like this? Although from the tax and transaction fees view, the dividend has advantage of low tax for the shareholder (10% dividend tax paid compare with 18% of capital gain tax). It is much costly for the organization to using the profit on dividend instead of continue invest, which sometime might loss the invest chance and it is more complicate and expensive to finance by issue shares. The reason will be the loss confident of investor in the company, the shareholder more prefer to believe that the manager was not so efficient. Therefore, it could be found that the dividend policy could be a way of destroy the shareholder wealth to control more on the company. Why the investor do not using their judgement to evaluate whether to invest on that company instead of evaluate from dividend.
FT, corporate finance management
