Literature on Dividends and Dividend Policy

Task 1: Critically evaluate the literature on Dividends and Dividend Policy and, using examples from the financial press, assess the impact of the Covid-19 pandemic on the dividend decision of companies throughout the different phases of the pandemic.
During the Covid-19 pandemic, dividend payouts declined 41.6 percent as most corporations reduced or canceled payouts. Most businesses have reduced spending abruptly to conserve cash and strengthen balance sheets to sustain financial losses caused by the Covid-19 pandemic. As a result, the Covid-19 pandemic influenced major global corporations’ dividend decisions. As the Covid-19 pandemic spread, economic devastation increased as companies worldwide readjusted their financial positions in relation to expected and observed reduction in revenue. Hence, corporations started to enact emergency actions to preserve cash quickly. Apart from the masses impacted by company layoffs, company dividends were reduced or slashed (Reinhart & Reinhart, 2020).
However, not all corporations recognized a decline in dividend payouts. Food retailers and companies such as Unilever and Reckitt Benckiser recorded an increase in dividend payouts through the Covid 19 pandemic. Consumer commodities and food were in high demand even though the Covid period. Hence, corporations operating in these industries still recognized significant revenues and substantial net income through the Covid period. As a result, investors in these industries recognized dividend payouts even through the Covid-19 pandemic.
Though the Covid-19 pandemic impacted income investors, aggregate dividends are expected to grow in the banking, mining, insurance, and media industry. During the pandemic, most corporations that had been excessively distributing dividends reduced them to more sustainable levels. The majority of these companies are now hoping to raise their dividends from a lower base. Others will recover quickly because the effects of the cuts are more transient. Companies are expected to resume payouts and issue higher special dividends on solid earnings, accounting for a large portion of the growth post-Covid. Though the future seems uncertain as vaccine rollouts increase, dividends may resume in most economies, but they may not bounce back to their pre-covid position, limiting growth (Alfaro et al., 2020).
Dividends are returning due to record earnings, sales, and margins, which have enabled companies to return to the business of producing shareholder wealth. In 2021, dividend growth in the S&P 500 was impressive 2021. They are insignificant in comparison to the actions of a few exceptional companies in 2021, which doubled, tripled, and in some cases quadrupled their dividends. The free cash flow of Marathon Oil, for instance, increased to $1.3 billion in the first nine months of 2021, allowing for $1.4 billion in debt repayment, $200 million in share repurchases, and dividend increases for the third quarter in a row, for a total dividend hike of 100 percent since the end of 2020. The company plans to return half of its December quarter cash flow to shareholders in share repurchases and dividends, and a new $2.5 billion share repurchase program was recently authorized. Analysts on Wall Street believe that with $3.6 billion in liquidity and improving free cash flow, the company could repurchase itself in five years (Springer, 2021).
You are to conclude whether dividend policy has a substantive impact on the creation or destruction of shareholder wealth.
Dividends are considered assets because they increase an investor’s net worth by adding value to their portfolio. Dividends and stock splits affect the firm’s share price, but dividends do not affect stockholder equity. Equity capital is the amount of money raised by a company through the sale of stock, and it is an essential component of stockholder equity. Stakeholders place a premium on a guaranteed return and penalize an uncertain return because they are risk-averse. Shareholders are reasonable and rational people who want to avoid risks such as not receiving a return on their venture investment. Hence, while paying dividends to such investors eliminates risk, retaining earnings creates uncertainty, increasing the investment risk. Ali (2020, pg. 97) states that Reasonable investors are willing to pay a higher price for shares that pay current dividends in the bird in hand theory. Dividend payout advocates believe in dividend relevance theories consistent with the bird in hand argument (Priya & Mohanasundari, M., 2016, pp.64). Though current dividend payments may be directly proportional to shareholder wealth creation, profits may have to be reinvested for growth and to maximize shareholders’ wealth; hence, it is preferable to pay dividends only when there is no viable investment.
Task 2: the ability of managers to value companies in the context of the global Covid-19 pandemic
Any business entity’s primary goal is to create value. Creating value for customers aids in selling goods and services, whereas creating value for shareholders ensures investment capital availability to fund future operations. Covid 19 pandemic affected quantitative factors such as operating costs, changes in revenue, net and gross margins, etc., that are likely to affect the company’s value. Qualitative issues in corporate management that may have been affected by Covid 19 are planning, marketing management, and financial and operational management. Panasonic, for instance, changed management post covid with a new chief executive officer expected to oversee its acquisition of Blue Yonder.Covid-19 impacted the ability of managers to create company value as it reduced returns on existing assets, increased non-cash extra working capital, increased barriers to growth, and minimized recurring sources of revenue.
The ability of managers to create shareholder value by engaging in merger and acquisition activity.
The coronavirus (COVID-19) outbreak is having and will continue to have a significant impact on mergers and acquisitions around the world (“M&A”). Businesses have closed as well as reduced their operations on a massive scale in a short period, millions of workers have been laid off or furloughed, supply chains have been disrupted, consumer spending has been drastically reduced, and demand for commodities has plummeted (Tampakoudis et al., 2021). The continuation of merger and acquisition activity post-covid was due to a combination of three factors, some of which had been building up for some time before the pandemic: an abundance of investment capital, the dynamic of opportunistic buyers and eager sellers, and the evolution of merger and acquisition transaction process mechanics.
When a private company acquires a publicly-traded company, the public company’s share price typically rises to the takeover price. When the transaction is completed, existing shareholders will receive cash for their stock (i.e., their shares will be sold to the acquiring company). When a public company buys a private company, the acquirer’s stock price may fall slightly to reflect the transaction’s cost (Silberman,1968, pp.531). In this case, when Panasonic, a publicly-traded entity, acquires Blue Yonder in a contract that highlights the international business environment, the share price of Panasonic is likely to increase to the takeover price.
The widely held belief that mergers fail persists because there is no consensus on measuring failure or success. When a 2014 McKinsey & Company article suggested that large pharmaceutical mergers were value generators, former Pfizer R & R&D head John LaMattina retorted that such mergers promote short-termism in an industry that requires long-term strategic thinking and diverts employees’ attention away from science toward office politics. The cleanest way to settle the debate is to use data on stock returns. Operating income, return on assets, and other measures of operating performance are difficult to quantify because it is nearly impossible to predict what would have happened if the merger had not occurred. It is not surprising that the findings of studies using those measures are ambiguous, and there is no clear evidence that acquisitions result in accounting or productivity improvements.
Another reason the dominant narrative about merger failure has persisted is that financial journalists have a one-dimensional view of value, focusing solely on the effect of mergers on the stock value of the bidding company while ignoring the impact on the acquired company. When a merger agreement is announced, the buying company’s share price frequently falls while the target company’s rises, implying that the purchaser overpaid, a development widely interpreted as meaning that the merger is a bad deal. Many depend on the question (Yost-Bremm & Huang, 2018, pp.299). If we want to know whether the acquiring company’s management should have done the deal, we need to know what happens to the bidder. If we are more concerned with whether the merger is good for the economy or society, we should focus on the combined value created or destroyed. For instance, the Oracle-Cerner acquisition happened post-covid, and the management of Oracle expects that the deal will be accretive to the company’s earnings on non-GAAP principles in the first financial period and a significant increase in profits subsequent years. Oracle’s current revenue growth has been increasing as Cerner is an important revenue growth driver for future economic periods as the company plans to expand in the coming years (Hagland & Raths, 2021).
If Panasonic acquires Blue Yonder, Panasonic will cut a significant expense as a cost of the merger. After the merger is successful, the value of Blue Yonder could increase while the value of Panasonic could slightly decrease. Panasonic’s executives, shareholders, and consultants would view the merger as a wrong decision. However, this could be an excellent investment decision as the combined value of Blue Yonder, and Panasonic will increase from the acquisition.
Nonetheless, the average all-stock transaction is profitable at the announcement. Following that, however, there is a downward trend. Because the value of an all-stock transaction is a combination of how the market values the takeover and the market values the acquiring company, it is impossible to say whether the value loss is due to the deal or because the buyer was initially thought to be overvalued (Lubatkin,1987, pp.49).

Alfaro, L., Chari, A., Greenland, A.N. and Schott, P.K., 2020. Aggregate and firm-level stock returns during pandemics, in real-time (No. w26950). National Bureau of Economic Research.
Ali, M.S., 2020. Evaluating the Effectiveness of the Bird-in-Hand-Dividends Policy in the Stability of Jordanian Listed Banks. International Journal of Financial Research, 11(4), pp.96-110.
Hagland,M., and Raths,D., 2021. Oracles $28.3B Cash Acquisition of Cerner Elicits Mixed Responses. Healthcare Innovation.
Lubatkin, M., 1987. Merger strategies and stockholder value. Strategic management journal, 8(1), pp.39-53.
Priya, P.V. and Mohanasundari, M., 2016. Dividend policy and its impact on firm value: A review of theories and empirical evidence. Journal of Management Sciences and Technology, 3(3), pp.59-69.
Reinhart, C. and Reinhart, V., 2020. The pandemic depression: The global economy will never be the same. Foreign Aff., 99, p.84.
Silberman, I.H., 1968. A note on merger valuation. The Journal of Finance, 23(3), pp.528-534.
Springer, L., 2021. Dividend Increases: 14 Stocks That Have Doubled Their Payouts. Kiplinger.

Tampakoudis, I., Noulas, A., Kiosses, N. and Drogalas, G., 2021. The effect of ESG on value creation from mergers and acquisitions. What changed during the COVID-19 pandemic?. Corporate Governance: The International Journal of Business in Society.
Yost-Bremm, C. and Huang, E., 2018. Merger speculation in financial media: The valuation of investigative reporting. Journal of Behavioral Finance, 19(3), pp.291-307.




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