When speaking to business owners in management interviews, I always ask a couple of question: What has been your dividend policy in the past? And, what do you expect it to be going forward? Interestingly, many business owners reply that they don’t have a dividend policy. At that point, I reply that they have had a dividend policy historically, and that they will have a dividend policy prospectively. Considering this, we seek to answer what is a dividend payout ratio and what are the types of dividends?
Corporate finance can be confusing if you are a private company. Much of what we think about comes, directly or indirectly, from corporate finance ideas and concepts developed around the public markets. This post looks at what is called the Modigliani-Miller theorem, makes a few observations, and then, attempts to relate them to closely held and family businesses, i.e., the private company world. We cannot blindly assume that all of the assumptions of the M-M theorem hold in the real world of private company finance. Capital structure influences the level of shareholder returns to equity over time. Dividend policy determines the current returns to owners over time. The combination of a reasonable capital structure, a reasonable dividend policy, and paying attention to the needs of various owners make real differences in the long-term success of many private companies.
This post will focus on seven critical things you need to know about your company’s dividend policy. In summary: 1) Every company has a dividend policy; 2) Dividend policy influences return on business investment; 3) Dividend policy is a starting point for portfolio diversification; 4) Special dividends enhance personal liquidity and diversification; 5) Dividend policy does matter for private companies; 6) Dividend policy focuses management attention on financial performance; and 7) Boards of directors need to establish thoughtful dividend policies
Two standard questions business appraisers ask clients in the management interview process include: What has been your dividend (or distribution) policy leading to the present? Now this is something of a trick question, because we can infer what the dividend policy has been in the past based on examining financial statements. What do you expect […]
Leveraged dividend recapitalizations and leveraged share repurchases are two corporate finance tools that are available to owners of private companies. These tools can be used to create liquidity outside the ownership of private businesses. Interestingly, as we will see, leveraged dividends and leveraged repurchases have very similar impacts on companies (assuming similar companies and same-sized transactions), and quite different impacts on the owners of the companies. In this post, we will illustrate the impact of a leveraged share repurchase and a leveraged dividend on the same company. This analysis will enable us to see the impact leverage has on the company and also, the different impacts the transactions have on owners.
This post focuses on the earnings retention rate and its impact on growth. In many previous posts, we have discussed the concept of dividends and dividend policy. Dividends represent the portion of earnings that is available for distribution after the payment of all taxes and accounting for all net reinvestment in the business.
The idea for business owners is to get both sides of this balancing act right. It is good to reinvest for future growth. It is not good to reinvest in unproductive assets. This lowers expected returns and postpones current returns in the form of dividends.
If a business has productive reinvestment opportunities, it is good to try to grow through reinvestment. Reinvestment, as we see, lowers the potential for current returns in favor of future returns gained through growth.
Take your pick. Current returns or future returns or both. Your results will be determined by your earnings retention policy and the mirror dividend policy.
The issue of whether private companies should pay dividends is an important one. Many private company business owners (and boards) resist paying dividends because they desire to retain flexibility at their companies and do not desire to incur risk from leverage (or slower ability to repay debt). The interesting thing about this position is that it creates polar opposite effects on private companies and their shareholders. What follows are ten good reasons to consider paying private company dividends and five things that some folks say represent the downside.