Business: Profit Distribution Among Shareholders

The financial manager must take careful decisions on how the profit should be distributed among shareholders. It is very important and crucial part of the business concern, because these decisions are directly related with the value of the business concern and shareholder’s wealth. Like financing decision and investment decision, dividend decision is also a major part of the financial manager.

Meaning of Dividend

Dividend refers to the business concerns net profits distributed among the shareholders. It may also be termed as the part of the profit of a business concern, which is distributed among its shareholders. This distribution is made out of the profits remained after deducting all expenses, provision for taxation and transferring a reasonable amount to reserves. As such, dividend is part of net profit which is distributed in cash by the company to their shareholders after exclusion of the retained profit.

The amount to be paid as dividend is set aside by a valid act of the company for distribution among their shareholders on record at a fixed date, in proportion to their holdings to be paid on demand or at a fixed time. Thus dividend cannot be declared by a company unless there are sufficient profits in the company, recommendation of the board of directors, an acceptance of shareholders in the annual general meeting.

According toICAI, “dividend is a distribution to shareholders out of profits or reserves available for this purpose.”

Dividend decisions and dividend policy

Dividend decision is the determinants of the percentage of earnings to be paid by the company in cash to their shareholders as dividend and the percentage of earnings to be retained by it for financing its long-term growth. It means developing a dividend ...

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... declare lower dividend so that the company can meet its financial requirements from its retained earnings without issuing new shares to the public.

B. External factors:

1) Economic Condition: The economic and business conditions as they prevail at a particular time may influence the firm’s decision to distribute or retain the profit. For example, in case of uncertain economic or business condition, the management may be motivated to retain a major portion of earnings with it to meet out the possibilities of the situation. Again, in case of times of depression when the liquidity position is likely to worsen, the management will like to retain the whole or a part of the earnings to maintain liquidity position.

2) Firm’s access to capital market: A company can pay dividend, despite of its weak liquidity position, provided it can sell its debentures or shares in the