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systems. Despite a weak economy, GE was able to increase net profits 9 percent during the fourth
quarter of 2001 to meet analysts’ expectations. The company also told analysts that it expected to
achieve double-digit growth and meet its financial targets for 2002.
Because the size and pattern of dividends provide information about the firm’s current and
future performance, the dividend increase sent strong signals to investors that GE is confident of
its future financial health. Management believes that the company has enough cash to invest in
its growth, pay even higher dividends, and buy back its stock. Over time, GE—like other companies with long histories of dividend increases—has maintained the steady earnings growth to
support higher payouts.
This chapter addresses the issue of whether dividends matter to stockholders. Some stockholders want and expect to receive dividends, whereas others would rather see those funds
invested in the company to increase its stock price. We’ll also describe the key factors involved in
setting a firm’s dividend policy, the different types of dividend policies (constant-payout-ratio, regular, and low-regular-and-extra), and other forms of dividends such as stock dividends and stock
repurchases. G 559 560 PART 4 LG1 Long-Term Financial Decisions 13.1 Dividend Fundamentals retained earnings
Earnings not distributed to
owners as dividends; a form of
internal financing. Expected cash dividends are the key return variable from which owners and
investors determine share value. They represent a source of cash flow to stockholders and provide information about the firm’s current and future performance.
Because retained earnings, earnings not distributed to owners as dividends, are a
form of internal financing, the dividend decision can significantly affect the firm’s
external financing requirements. In other words, if the firm needs financing, the
larger the cash dividend paid, the greater the amount of financing that must be
raised externally through borrowing or through the sale of common or preferred
stock. (Remember that although dividends are charged to retained earnings, they
are actually paid out of cash.) The first thing to know about cash dividends is the
procedures for paying them. Cash Dividend Payment Procedures
Whether and in what amount to pay cash dividends to corporate stockholders is
decided by the firm’s board of directors at quarterly or semiannual meetings. The
past period’s financial performance and future outlook, as well as recent dividends paid, are key inputs to the dividend decision. The payment date of the cash
dividend, if one is declared, must also be established. Amount of Dividends
Whether dividends should be paid, and if so, in what amount, are important
decisions that depend primarily on the firm’s dividend policy. Most firms have a
set policy with respect to the periodic dividend, but the firm’s directors can
change this amount, largely on the basis of si...
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