13. Dividends

Chapter 13

                             by: josavere


Based on the pronouncement of the Davos Forum in January / 2020, talking about CONSCIOUS CAPITALISM defining the purpose of a company of the fourth industrial revolution: "to involve all stakeholders in the generation of shared and sustained value including local communities and society "and whose manifesto had a single objective: to build a more sustainable and inclusive world.

Respecting the previous guideline, the basic objective of the management and in particular of the financial function: to maximize the value of the share in the market, a statement that forces us to decide also thinking about the much-forgotten small shareholders, as the Good Corporate Governance.

Let us remember the basic objective of management and in the individual of the financial function which is: to maximize the value of the share in the market, a statement that forces us to decide also thinking to us about so forgotten small shareholders.

In fact,   a minority stockholder the only that it has is the dividend, although theoretically, they have many rights. Actually, they barely cancel a value to him with all the contingencies that appear depending on the company in particular (dates, sites of payment, forms, treatment, etc.). The situation of the great shareholders, who take a seat on the board of directors and control the administration of the company, is very different.

The policy of dividends must be oriented to the increase of the value of the share in the market. This is obtained in the way the stock has high bestiality, and its price in the stock market is increased, the consequence of the permanent generation of value.

In the way this objective is accomplished, the payment of the dividend becomes secondary and the shareholder that requires cash can obtain it by selling the share in the market. 



A. GENERAL ASPECTS: the legislation of each country is oriented to avoid decisions that deteriorate the capital, and to protect the creditors. It defines the maximum top of distribution as proportionate to present and accumulated net profits, in cases of insolvency are oriented to avoid excesses, in the accumulation of profits.  the decision on distribution of dividends is taken a base on the majority of the number of shares represented in the general assembly of Shareholders; if that majority is not obtained will have to distribute at least 50% of the liquid profits or the remainder of the dancing, which is generally conditioned of the financial organizations. It is generally easier to obtain financing for a company totally developed that stops:  are preferential agreements of common occurrence that condition the payment of dividends to protectionist commitments towards credit organizations, shareholders, leasing contracts, etc.

B. CONTRACTUAL RESTRICTIONSr external vintage participation. If they are natural or legal people and in this last case, that type of company is whether, if they belong to a group, if they depend on important proportion or no, of the dividends that receive. Also, it must consider as far as possible, the tax aspect of the shareholders, their opportunities for investment, their level of satisfaction, etc.

C. PERSPECTIVE OF GROWTH: if the company, in its perspective of development has an alternative of investment with a yield superior to the rate of cut (expected minimum), it must consider as a high-priority option the retention of profits. The financing plan this decision becomes pre-requirement to fother one in the growth stage. 

D. GENERAL ECONOMIC SITUATION: when the economy is this buoyant, it is easy to go to external capital and vice versa. It is very important for the financial managers and executives to be permanently updated as far as lines of fiscal promotion, stimuli, monetary restrictions, and in general, everything that has to do with the environment of the country and the world, which implies keeping an open the mind to the foreign investment or to investment abroad. 

E. COMPOSITION SHAREHOLDER: it has to do with the group of shareholders and their percentage if they must wipe out losses of previous exercises.



For didactic purposes, it is possible to be spoken of general policies of distribution of dividends but each company must make its own considerations to make its decision about the numbers to distribute. Among the best known there are: 

A. CONSTANT PROPORTION OF PROFITS: a percentage of the period is defined to distribute and capitalize on the rest. 

B. MINIMUM YIELD: one is based on the definition of a fixed dividend that guarantees a yield on the investment of the shareholder. It is possible to follow this policy if the company permanently generates an accumulation of profits that are sufficient to fulfill the commitments corresponding. 

C. COMBINATION OF REGULAR AND EXTRA DIVIDEND:  consists of defining as regulating a periodic number by stock and complementing with additional dividends if the results allow it. 

D. RESIDUAL DIVIDENDS: dividends that are distributed after all the legal, labor commitments, and with third parties, and by difference, the amount is defined to distribute. 

E. ANOTHER ALTERNATIVE: in order to maintain finances healthy and to avoid possible mistakes by ignorance or illegal pressures of some shareholders or proprietors, the distribution of dividends must be completely bound in direct proportion, to the projection of the cash- flow to short as in the long term.

We know that the affluent cash flow of prepared is the arithmetical resultant of a plan of value generation which allows us to calculate .

The is characterized by being a projected indicator considering accountable expenses that have an investment character and which contemplate the plan of long-term development and, therefore, the adjustments to the patrimony and the figure of profit and the cost of capital.

Based on the projection of the cash flow before detecting dividends, the company has sufficient elements of judgment to define the quantity, date of payment, and form of dividends (in cash, stocks, or a combination of both). Knowing the cash flow, a minimum amount is defined to maintain (as a precaution); a figure to cancel as a dividend; dates of payment that allow to cancel it with comfort and without going into indebtedness although it is in the short term.

  • If the plan of value generation is widely positive, but the company does not present/display a cash flow with permanent comfort in the short term is recommended to decree dividends in shares, not forgetting the future commitment that it is acquired with the new stocks which get into circulation.

  • If the company generated value in the previous period; the for the period at issue also is positive and, in addition, the projection of the cash flow for the period presents/displays a situation of permanent comfort monthly dividends can be decreed by calculating the yield that the shareholder will receive having added the dividends to declare and the increase that can be considered for the value of the share.

  • If at the end of the projected comfort period in which cash flow appears but with bumps through the monthly periods, it is recommended to pay dividends in the months which allow to do it without effort.


Let us suppose a company M with the following data:

Nº of shares in circulation: 200.000
Monthly dividend per share: $ 100
Value of market of the shares: $ 5.000
The intrinsic value of the share: 10.000
EVA: 1.45
: 1.85

 1. https://www.supersociedades.gov.co/Noticias/Publicaciones/Revistas/2020/GUIA-GOBIERNO-CORPORATIVO-2020.pdf

(millions of Dollars)

Note: Based on the projected net balance board has evidence to suggest the distribution of dividends to the shareholders.

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