Dividend Policy

This week is about dividend policy. Dividend policy is decision of the proportion of profit share to shareholders-generally periodically. There are some theories analyzing dividend policy. One of them is Miller and Modigliani’s dividend irrelevancy proposition. It claims that dividend policy is not relevant to shareholder wealth, basing on rigid assumptions such as no taxes, no transaction costs, all investors knowing all relevant information, all investors can borrow and lend at the same interest rate etc. Another is dividends as a residual. It assumes that it is so expensive to raise external finance. Earnings are the sole source to invest. Basing on this, dividend policy can influence on shareholder wealth deeply. However, in the real world, it is not simple as the two theories. In the real world, dividend policy is influenced by many factors and designing dividend policy is complicated. There are some elements which influence on the dividend policy, such as clientele effects, taxation, dividend as conveyors of information, agency theory, uncertainty, potential of firm etc.

Royal Dutch Shell plc, generally called as Shell, is an Anglo-Dutch multinational oil and gas company and is one of the six oil and gas companies. According to Yahoo Finance (2013), since 2011, the board of Royal Dutch Shell plc decided increased their dividend slightly. From 2011 to 2012, interim dividend increased to $ 0.43 per ordinary share and it increased by about 2.3% than the previous year. In 2013 the board expects that the first quarter interim dividend will be improved to $ 0.45 per ordinary share and it improves by over 4.7% than the same quarter in the previous year. In addition, Royal Dutch Shell plc offers dividends in cash and scrip dividends for shareholders. (Source from Yahoo Finance)

In the case, in my opinion, there are some reasons why the manager decided a slightly and stable increase of dividend policy. First of all, the company creates a large number of free cash flow. According to CEO of the company, Peter Voser, from 2009 to 2012, he said that their company achieved the aim which increased by 80% of cash flow. (Yahoo Finance, 2013) this makes more capability to return for shareholders. In addition, According to dividends as conveyors of information, dividends appear to act as a significant conveyor of information about companies. Shell plc utilizes the stable and slightly increase dividend policy to express that directors view the earning of company and the future of the company with optimistic. I think it is benefit to attractive for shareholders’ investment. And during the good earnings of Shell time, the company avoids paying high return for shareholders. This can avoid losing effects of predictability and stability cherished by shareholders when the company falls into bad earnings time. Meanwhile, according to clientele effects, different shareholders prefer different a dividend pattern. Basing on Arnold (2005), pension funds, trust funds and insurance companies prefer to invest the company which has a stable dividend policy. Thus Shell’s dividend policy will attract to institutional investor. On the other hand, Shell adopts dividend in cash and scrip dividend. This can decrease the number of cash leaving company and make the company keep more cash flow. Thus Shell chooses this dividend policy.