Dividend policy: BP decided to increase dividend as profit rise

The final stage of maximizing shareholders wealth is how to return benefits to those investors and dividend is one of the ways to return the profits. However, the decision whether company pays dividend or not affect shareholders’ wealth. Miller & Modigliani (M&M) argued that dividend policy and share prices are irrelevant in theory. However, in reality, their argument still work? In reality, divided policy is related to share price.

What make reality different from theory?

Firstly, there is a group of investors concern much about stable and trustful cash flow from dividend. A rapid change of dividend policy, especially cut the amount of dividend (although using as retain earning to invest good future project) cause negative reaction from investors. Why  do investors concern so much about dividend payments? Reality is not perfect. Changing in dividend policy make investors have to change their investment portfolio, suffer tax payment. Both elements create expense which will turn profits of their future investments to dust. Investors will suffer lose due to minimize shareholders’ wealth. Second, the level of future risk acceptations of investors is different. Do you prefer receive dividend today or keep it for future investments which are consider as increase benefits? How many percentages do future projects success? So you would like to receive dividend or reinvest? Moreover, as mention about, reality is not perfect. Investors have to face a lot of expense such as: transactions costs, tax and agency costs.       

Thus, what company should do is keep a stable dividend policy and avoiding suddenly change if does not carefully consider its long-term effects. However, the stable dividend policy often makes investors think about its growth. Does company not develop much which related to unchanged dividend policy? Moreover, if company makes a lot profits while does not have any or have few positive projects, the result is company will keep to much cash due to waste money. All of those affect negative to share price due to shareholders’ wealth.       
        
As a example of dividend policies, according to BBC News (2012), BP has increased its dividend to shareholders by 14% because of increasing in profit. It seems to be a good news to investors. However, in reality, share prices of BP still suffer some lose because the legal liabilities because of the 2010 Gulf of Mexico oil spill continue to affect the company's shares. Thus, does the dividend policy relate to share prices? Or I wonder that because of the legal liability badly affect share price so BP has rise dividend payments in order to attract investors to increase share price which got negative suffer from the liabilities.     

In my opinion, the dividend policy does not solely affect market share price. There are other factors along to dividend policy affects share price.    

Source:   

http://www.bbc.co.uk/news/business-16915491