Page 213 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes even though there are any variations in its earnings. Thus, when the earnings of a firm go
down, the company does not cut the amount of dividend. But to its presents investors, a
very bright future, and thus, gains confidence of the shareholders.

2. Investors Desire for Current Income: A company may have many investor categories, of
them a few groups of investors depend on dividend income to meet their portion of living
expenses. Investor group may include old and retired persons etc., who require the current
income. Their living expenses are fairly stable from the period to period increase over
time. Therefore, sharp changes in dividend income may create a need to sell shares to get
funds in order to meet current expenses and vice versa. Sale of securities involves
inconvenience and it involves transaction costs. Stable dividend policy avoids sale of
securities, which automatically avoids inconvenience and transaction cost, hence, such
investors may prefer stable dividends.
3. Information about Firms Profitability: There is another reason for adopting a stable
dividend policy that is, investors are thought to use dividends and the fluctuation in
dividends as a source of information about the company's profitability. A growth in
dividends indicates improved earnings prospects, a downward trend in dividends implies
less earnings and stable dividends means unchanged prospects. In other words, the dividend
decision of a firm resolves uncertainty in the minds of investors. Variation in dividend
policy cannot resolve uncertainty in the investor minds. Hence, companies may tries to
change dividend policy in response to a certain long-term changes in future prospects.
4. Institutional Investors Requirements: Companies shares are not only purchased by
individuals but also institutional investors like LIC companies, GIC's, MF's, educational
institutes and social institutes. Normally, companies are very much interested to have
these institutional investors in the list of their investors. Generally, this type of institutional
investors have large size of their ingestible funds, these funds will be invested in the
shares of those companies that have the record of paying stable dividends. So, to attract
institutional investors a firm may prefer to adopt a regular or stable dividend policy.
5. Raising Additional Finances: This is another advantage to the company that is following
a stable dividend policy, in raising external finance. Shares of this type of company appear
as investment rather than a speculation. Investors, who invest in this type of company's
shares hold them for a long period of time and their loyalty and goodwill towards the
firm increase by adoption of stable dividend policy. If the company wants to raise additional
funds by issuing shares to the public, they would be more receptive to that offer. For
example recently in beginning of the year 2004, the public issue of ONGC, ICICI, IPTCL,
GAIL is oversubscribed. Thus, rising of additional funds required by the firm becomes
very easy, even with high premium.

6. Stability in Market Price of Shares: Other things remains unchanged, the market price of
shares varies with the stability in dividend rates. The share price of a firm having stable
dividend policy may not have wide fluctuation on even if the earnings of the firms less
than the past year. Thus, this is good for investors and the company.
7. Easy Availability of Debt Funds: If the company feels raising additional funds by issue of
equity shares, leads to loss of control over the firm, it can easily raise funds from debt
source. Because, the firm has been paying dividends regularly with stability, it becomes
an assurance to the debenture holders, financial institutions and public (to invest in public
deposits).

Task List the various advantages of stable dividend policy.

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