This video post asks business owners and advisers two questions: 1) Is your company’s (or your clients’ companies for advisers) dividend policy a good one that is meeting the needs of its owners for current income versus capital appreciation? And 2) If not, do you need to be working on your dividend policy to improve its effectiveness?
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 […]