Dividend Decision-Making in Retail Giants

Introduction

The financial decision of the firm tends to be dependent on the disbursement of the profits to investors offering capital to the firm. Dividend implies that part of the profit tends to be dispersed to the shareholders. It can be considered as the reward of shareholders basically for the investments that they make in the share capital of the company. It becomes imperative for the business organization to decide if they are supposed to distribute all the profits, retain some of them in the business or keep some part of the profit in business and distribute the rest to the shareholders. For students who are seeking business dissertation help, understanding all the intricacies of dividend distribution and its impact on firm valuation is said to be very critical. The increasing rates of dividends are likely to increase the market prices of shares and maximize the overall wealth of shareholders. It becomes important for the firm to take into account the dividend stability, cash dividend, and stock dividend (Agarwal, 1978).

J Sainsbury is considered to be one of the biggest food retailers in the UK operating in more than 610 supermarkets, 820 convenience stores along eCommerce offerings. Along with groceries, it has been identified that the company tends to sell apparel, homeware, and cookware along with consumer electronics. Tesco Plc is considered as one of the retail companies that involve itself in the business of retailing as well as associated activities as well as retail banking and insurance services. It tends to operate in different countries of the globe.

The chief objective of the paper has been to consider the rationale for dividend decision during the pandemic in 2020 taking into account the implication of such decision, agency cost, and tax and clientele preferences linked with the firm's ownership structure and additional factors that might have an impact on form's pay-out policy.

Potential Signaling Implications of this Decision

The huge supermarket of British Sainsbury's stated that the impact of the coronavirus over profit in 2020 might be over 500 million pounds. It also revealed the fact that decisions with paying dividends for shareholders might be deferred. Nonetheless, the other group which is considered as the market leader Tesco revealed the fact that under its base case scenario, the hit to profit might be offset through strong sale of food items and near about 450 million pounds in business relief from the government. This implies underlying pre-tax profit for the year 2021 would remain unaltered from 580 million pounds for the period ending 2019-2020. Though the lockdown restriction eased by the end of June 2020, Sainsbury noted the fact that business might be disrupted until mid-September. The company reveals the fact that it is unable to determine the reasons behind reason behind not being able to pay a dividend, provided there is no obvious net cash cost from the pandemic (Davey, 2021). It has been noted that during 2019-2020 no annual cash bonuses were paid to executive directors or senior executives. While on the other hand, it was noted that Tesco estimated a 925 million pounds hit attained from the cost of dealing with pandemics. It also protected its decision to pay the investors near about 635 pounds of dividends (Truong & Heaney, 2007)

It can be revealed that dividend cut might be temporary or permanent. Dividends cut tends to impact the cash outflows of dividend-paying companies along with cash inflows of investors that tend to hold the shares of such companies. It is to be mentioned that a dividend cut has an impact on the cash outflows of the company. When accounting for dividend pay-out takes place, it comprises of minimizing cash and retaining earnings amount in the balance sheet. It is a well-known fact that the retailed earning account of a company tends to accumulate net income minus dividend payments. Hence, there is a rise in retained earnings and cash account balances in dividend cuts. The cash flow arising from financial activities tends to escalate owing to the minimization of dividends that tends to raise net cash flows (Jaggi & Gul, 1999).

It is found that investors tend to purchase the shares in dividend-paying companies to attain regular dividend payments. It can be revealed that retirees along with others over fixed income possess dividend-paying stocks in portfolios since they tend to be dependent on quarterly cash distributions for living. When a dividend cut is made, it has an impact on the cash inflows of such investors. The dividend policy of the firm tends to possess huge implications for the investors, managers, or lenders for the investors, dividends either declared today or are assimilated and offered at later date do not tend to be means of regular income but offer a major input in the valuation of the firm. Through dividend policy, the agency cost of the companies can be easily minimized. The payment made for dividends tends to minimize the discretionary funds present for the managers for prerequisite consumption along with investment opportunities and it also asks managers to look for financing in capital markets (Shabibi & Ramesh, 2011).

Potential agency costs, and any tax and clientele preferences associated with the firm’s ownership structure

The dividend policy of the firm is linked with distinct managerial decisions with the amount, ratio as well as pattern of distribution of the dividends to shareholders of the firm. It has been argued that shareholders tend to prefer cash dividends for scripting issues or capital gains. The theoretical literature that is linked with taxes reveals the fact that investors are not interested in cash dividends in light of the tax disadvantages linked with them. Agency cost tends to arise from the conflict of interest that takes place between the manager of the firm and shareholders and it takes the form of preferences over on-the-job perks, self-interest, and entrenched decisions thereby minimizing the wealth of the shareholder. Agency cost taking place between corporate owners and managers tends to be less in a situation where corporate ownership tends to be separated from control. When the managers of Sainsbury's are unable to provide dividends to the shareholders, conflict of interest is likely to take place in the organization (Navita & Gangil, 2019). On the other hand, Tesco Plc would not face these kinds of issues at all.

Sainsbury's

Factors affecting the dividend payment

Different theoretical models have been created by the academician as well as researchers for assessing the impact of different factors over dividend pay-out ratios in different companies and it has been noted that managers are supposed to make use of this model in deciding with dividend payment. Different factors such as debts, tax, retained earnings, sales growth, size of business, and leverage that impacts the dividend pay-out ratios that need to be taken into account while ascertaining the size of dividend pay-out for shareholders. It can be revealed that a firm's value doesn't tend to get impacted because of the dividend decision and it is said to be irrelevant. However, most of the academicians and practitioners were surprised by the fact owing to generally accepted theory and belief indicating that such factors tend to impact the dividend pay-out of companies (Navita & Gangil, 2019).

Profitability

It can be revealed that the profits of the company tend to be impacted by distinct ways such as buying securities, purchasing shares, distributing to shareholders, or paying debts. In the end, the decision of purchasing shares or distributing cash dividends is dependent on the decision-makers. Such a situation tends to impact a company's dividend pay-out ratio.

Cash flow

It can be revealed that the company decides to pay dividends or not pay it for distinct external and internal reasons. When the company tends to distribute dividends, it demonstrates the financial strength of the company and draws attention for investment. It also assists in managing the price of the stock. It can be revealed that the companies who are not capable of paying dividends tend to be comprehended positively while declaring dividends. Hence, the decision to pay or not to pay might impact the dividend pay-out ratio.

Tax

With the tax liability rise or fall, it tends to possess an impact on the rise or fall in dividends. In case the tax liability tends to rise, dividend pay-out would rise. It can be revealed that there is a positive association taking place between tax and dividend pay-outs.

Sales growth

It can be revealed that developing companies like to pay fewer dividends while the remaining shall be invested in future projects. The growth in sales tends to possess a huge impact on the dividend pay-out ratio. The impact might be positive or it can be negative as well. In case the company is creating or planning to develop then the association between sales and dividend pay-out proves to be negative.

Debt

Debt utilized as the financing capital for a company implies the risks that are linked with the company. It can be revealed that high developing countries require huge debt and demonstrate huge dividends pay-outs. It tends to demonstrate a positive association of debt and dividend pay-outs however sometimes it demonstrates a negative (Grullon & Swaminathan, 2002).

References

Agarwal , V.K., (1978),” Size, profitability and growth in some manufacturing industries”, unpublished FPM thesis IIM, Ahmedabad.

Davey, D., 2021. Sainsbury's warns of $623 million coronavirus hit to profit. Home. [Online] Available at: https://www.reuters.com/article/sainsbury-s-results-idINKBN22C0TG [Accessed october 22, 2021].

Grullon, G. & Swaminathan, B., (2002),” Are dividend changes a sign of firm maturity?”, The Journal of Business, 75(3), pp-387-424.

Jaggi , B. & Gul, F. A., (1999). ” An analysis of joint effects of investment opportunity set, free cash flows and size on corporate debt policy”, Review of Quantitative Finance and Accounting, 12(4), pp- 371-381.

Navita, N. & Gangil, R., (2019)” Determinants of Dividend Policy in Indian Companies: A Panel Data Analysis”, SSRN Electronic Journal.

Shabibi, B.K. Al & Ramesh, G., 2011. ” An Empirical Study on the Determinants of dividend policy in the UK”, International Research Journal of Finance and Economics (80), pp-105-120.

Truong, T. & Heaney, R., (2007),” Largest shareholder and dividend policy around the world”, The Quarterly Review of Economics and Finance, 47(5), pp-667-687.

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