Introduction of Dividend Choice Approaches for Agribusiness
Dividend choice approaches for agribusiness followed by different agro firms. The dividend is the sum of income paid by the company to its shareholders. The dividend policies of an organization split its net earnings into two parts: retained earnings and dividends. Dividends refer to the part of the net profits of a company that the shareholders are paid out to. On the other hand, the retained earnings provide funds to finance the company’s long-term growth. That is why the dividend decision is a significant financial management decision in the sense that the company has to choose between distributing the earnings to the shareholders and ploughing them back into the company.
The after-tax net profit of a corporation can therefore be divided into two groups:
Funds to finance long-term growth: A large portion of a company’s net earnings are to be retained for long-term funding. Such revenues can be treated as a source of long-term funding. The dividend can only be paid if the company lacks productive investment opportunities. When the company embraces highly profitable investment projects, it expands at a quicker speed.
Funds to be allocated to shareholders: These are reflected by the cash dividend declared by the board of directors and paid to the shareholders in common. There is a kind of reciprocal relationship between long-term funding retained earnings and cash dividends: greater retention, lower dividends; lower retention, larger dividends.
Dividend Choices Approaches
Long-term funding and the return allocated to shareholders are influenced by dividend policies. So, the dividend choice approaches for agribusiness can not be avoided by agro firms. Therefore, the decisions of a corporation to pay dividends can be influenced by two potential perspectives described as below:
a) As a decision on long term funding
If a decision on a dividend is considered a decision on long-term funding, the company’s net earnings can be regarded as a long-term source of financing. The cash dividend declaration decreases the number of funds available to finance growth and either limits growth or requires the organization to pursue other sources of funding. Thus, as long as one of two conditions remains, the company must adopt a guideline to maintain earnings:
- There are ample profitable projects available: for most businesses, the adoption of highly profitable projects represents a worthwhile growth objective. The firm will retain earnings to fund them as long as such ventures are accessible.
- The capital structure includes equity funds: The Company has a number of long-term funding sources. The company must have a balance of debt and equity funding to avoid the high risk associated with excessive debt. Retained earnings are favored as equity funding due to the expense of floating common stock. A part of the long-term funding decision relating to the management of the capital structure can therefore be held as earnings. Any of these guidelines would accept cash dividends as a remainder.
b) As a decision on the maximizing of capital
With this strategy, the company agrees that dividend payment has a significant impact on the common stock market price. Higher dividends are raising stock value for many investors. Similarly, low dividends minimize the stock’s perceived value.
The firm announces adequate dividends to fulfill the needs of investors and shareholders in a sense of wealth maximization. A company’s management, when establishing a dividend policy, must strike a proper balance between the two methods described above. If the corporation raises the retained portion of net profits, dividends decline and the share price will be adversely affected as a result and vice-versa. But dividends do not impact stock rates, according to Merton H. Miller and Franco Modigliani. In comparison, dividend programs have significant effects on a firm’s role in the stock market, according to James E. Walter. For the reason that we have no proof yet as to whether the dividend decision is correctly dealt with by a wealth maximization strategy.
Why are investors seeking dividends?
Two forms of return on their capital investments are what most investors want. Such are:
- Capital gains: capital gains can be described as the benefit from capital investment sales. Even the appreciation of capital can be considered capital gains. The investors foresee an improvement in the market value of the common stock over time, like common stockholders. The increased value of the inventory is known as a capital gain. So, investors still want a return from their investments as a capital gain.
- Dividends: A payout of the company’s profits is often expected by investors. Many investors expect regular dividends to be announced and paid to common stockholders by mature and stable companies. This expectation takes priority over a desire to hold earnings to fund growth and development.
Why the Dividend?
In describing the investor’s expectation of dividends over capital gains, multiple considerations can be considered and analyzed. In this respect, the following are the major variables.
Reduction of uncertainty:
More uncertainty than the distribution of current earnings entails the promise of potential capital gains or a potential distribution of earnings. A current dividend reflects a cash inflow of present value to the investor that cannot be lost if the company subsequently faces problems in operating or financing. This reduction in volatility is only a consideration that explains the preference of investors for current dividends.
The statement and payment of cash dividends provide details that the company is relatively strong and safe. As cash is required to make the dividend payment, the dividend declaration indicates liquidity and this cash must be withdrawn from the operation of the company. The declaration shows profitability and, more importantly, the anticipation of future profitability, because if the management were planning for future difficulties, the company would probably retain its cash.
Need for current income:
In order to pay for their current living expenses, many shareholders want an income from their investment. Such investors may be hesitant to sell their shares for cash gain. Cash dividends provide these investors with current profits, without impacting their capital and principal.