Question

Week 5 DQ #2 CORP FIN (Stock Valuation)

This week's readings introduce a method of valuing a company's stock called the Dividend Growth model, which bases a company's valuation on several factors, starting with a company's expected dividend payout and growth rate. Based on this model, why might a company be hesitant to reduce its dividend growth rate? Certain industries, such as utilities, are known for generally high dividend payout ratios, whereas other industries exhibit generally low or no dividend payout ratios. Why might that be? What does a company's dividend policy say about management's view of the company?

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Answer 1

A firm would be hesitant to reduce the growth rate of its dividend because as by reducing the growth rate the price of the firms stock & dividends would decrease.  

Companies declare dividends to signal financial health ans confidence in future prospects. However dividend signals are strongest after a company repeatedly pays dividends over a period of time.  

While some companies that are still growing rapidly usually won't pay dividends because it wants to invest as much as possible into further growth . Such companies might use the money to start a new project, acquire new assets, repurchase some of their shares or for any other growth purpose .  

The dividend policy say about the management's view that how management determines the use of those dividend resources for the firm to its shareholders.