Dividend
Policy Monitoring Tools
Dividend
policy of organization can be monitored or analyzed in three ways i.e. Dividend
to EPS ratio, Dividend growth and divined in relation to free cash flows. These
monitoring tools have been explained below;
1. Dividend to EPS
Divident
to Eearning per share ratio gives us critical information about the dividend
policy. A high ratio indicates that company is retaining low earning and paying
most of its earning to shareholder, while a low ratio show that entity is
retaining high earning and paying low amount.
a.
Payment & Retention Information
Dividend
to EPS ratio provides critical information about the payment and retention
proportion of the earning. A Dividend /EPS ratio of 40% mean that 40% of
dividend has been paid, while 60% retained for future growth.
Example
Tow
companies A and B limited has paid a dividend of $ 2 and $3 for year 2001,
respectively. EPS for both companies were $ 20.
Company
A
|
Company
B
|
|
Divided
|
$ 2
|
$
3
|
EPS
|
$ 20
|
$
20
|
Dividend/EPS
|
$ 2/20 = 10%
|
$
3/20 = 15%
|
Above
example shows that company a is paying 10% of its earning, while company B is
paying 15% of its earning.
b.
Dividend
Policy
Dividend
to EPS ration may be used as policy for dividend payment i.e. a company may
decide that each year 20% of earning will be paid as dividend. dividend to EPS
may be used as dividend policy tool.
Example
Profit
of A company was $ 20, $ 18, $ 15, $ 22 for last four year. Company has a
policy to pay 20% of its earning as dividend.
Year
|
EPS
|
Dividend
i.e 20% x EPS
|
Dividend/EPS
|
1
|
20
|
4
|
4/20 =20%
|
2
|
18
|
3.6
|
3.6/18 =20%
|
3
|
15
|
2
|
2/15 =20%
|
4
|
22
|
4.4
|
4.4/22 =20%
|
2. Dividend Growth
Dividend
growth is another effective tool to monitor the dividend policy. There is
different option available to entity for dividend policy i.e. no growth,
consistent growth, random growth.
a.
Divided
Constant Growth
Company may adopt a policy, where dividend is growing
at constant rate. This has been explained with an example; A company has
announced divided $ 10, 12, 14.5, 17.5 for last four year. Its Dividend Growth
can be calculated as follow
Year
|
Dividend
for Year
|
Dividend
Growth
|
1
|
10
|
|
2
|
12
|
12/10 = 20%
|
3
|
14.5
|
14.5/12 = 20%
|
4
|
17.5
|
17.5/14.5 = 20%
|
b.
Constant
Dividend
Company
may have policy to pay a constant dividend, it means there is no growth of
divided over the period of time.
Dividend
For Year
|
Dividend
Growth
|
|
1
|
10
|
0
|
2
|
10
|
(10/10)
-1 = 0%
|
3
|
10
|
(10/10)-
= 0%
|
3. Dividend to Free Cash flow
Dividend
policy can also measure or monitored in term of free cash flows. Some
organization pay divided on the bases of free cash available.
