Question

Does increasing dividend payout ratio boost stock price? Does increasing plowback ratio boost stock price? What is the best dividend policy for the company and what factors will decide?

Answer 1

Does increasing dividend payout ratio boost stock price?

Yes, increasing dividend payout ratio boost stock price because the dividend is directly proportional to the stock price. Higher the dividend payout ratio, higher will be the stock price.

Does increasing plowback ratio boost stock price?

No, increasing the plowback ratio doesn't boost the stock price. Increasing the plowback ratio decreases the growth in dividends and as such the stock price decreases.

The best dividend policy for the company is to payout a dividend that grows each year. The factors that will decide the policy is whether there is an attractive opportunity for the company to invest the free cash flows instead of distributing the dividends. If the company can generate above average risk-adjusted return, then it may make sense to reinvest the cash flows instead of giving dividends.