Hey guys, I am glad that you guys are still spending your time to visit and read my blog. For this week’s blog, I am going to talk about dividend relevance theory and dividend irrelevance theory.
The ideas of these 2 theories have come to a conflict regarding the impact of dividend paid on firm’s value. Dividend relevance theory suggested by Linter and Gorden argue that dividends are preferable to capital gains because of uncertainty in future gain. They believed that investors would rather to have the money in their hand than leaving it tied up in uncertain investment that might be risky and affect the share price. On the other hand, Modigliani-Miller came up with dividend irrelevance theory and claimed that the dividend policy of a firm does not affect the shareholders wealth and value of the firm. Which one of these is more applicable in the real world? Is it the irrelevance theory or relevance theory?
What I think is, both of the theories can be true. What matters is how you look at it in your perception. Large companies like Google and Amazon do not pay dividend to their shareholder. They chose to invest in future activities aggressively. Google has sufficient money to pay dividends due to the nice grow in earning per share and high free cash flow per share. Why are they not paying it?
The ideas of these 2 theories have come to a conflict regarding the impact of dividend paid on firm’s value. Dividend relevance theory suggested by Linter and Gorden argue that dividends are preferable to capital gains because of uncertainty in future gain. They believed that investors would rather to have the money in their hand than leaving it tied up in uncertain investment that might be risky and affect the share price. On the other hand, Modigliani-Miller came up with dividend irrelevance theory and claimed that the dividend policy of a firm does not affect the shareholders wealth and value of the firm. Which one of these is more applicable in the real world? Is it the irrelevance theory or relevance theory?
What I think is, both of the theories can be true. What matters is how you look at it in your perception. Large companies like Google and Amazon do not pay dividend to their shareholder. They chose to invest in future activities aggressively. Google has sufficient money to pay dividends due to the nice grow in earning per share and high free cash flow per share. Why are they not paying it?
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| Table above shows the result of free cash flow per share over the years and months |
Source from :
http://www.gurufocus.com/term/per%20share_freecashflow/GOOG/Free%252BCashflow%252Bper%252BShare/Alphabet%2BInc
We can see that Google’s cash flow per share for the three months ended in Sep. 2015 was $4.89. During the past 12 months the average Free Cash Flow per Share Growth Rate of Google was 26.20% per year. Should they pay the dividend? Maybe they should.
If I have a chance to invest in companies, I will not invest in company which don’t pay dividend because dividends give me a signal to judge the performance of the company. Although dividend relevance theory assume that high dividend is equivalent to good news and low dividend means bad news, but it may be false in reality. I am a ‘short-sighted’ investor who hopes to receive my return without ‘creating’ my own dividend by selling my shares. Although some prefer to leave their funds in the company to buy more shares, but I am more preferable to receive money now than receiving capital gain by reinvesting and selling the share in the future which may be a long term process. Therefore, I think company with high dividend is performing well in the market and it is important to pay dividends to shareholders. What do you think? Tell me what is your point of view :) .
i think regular payments of dividends will convince me that the company is doing good
ReplyDeleteI would prefer regular dividend payment however, greater risk leads to greater return
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