CIMA Strategic Level Case Study - Role of Dividend Policy

A typical Report for CIMA Strategic Case Study on Dividend Policy or Dividend payment decision!

I would not presume a tech company or a social networking business (if the strategic case study discusses such a business) to be ever paying dividends to its shareholders. At the same time, I do not expect a FMCG company not afford to not pay dividends on the shares it has sold. The idea of a dividend payout is linked with shareholders' expectations of returns from the company in which they have made their investment. While an IT company needs to invest into riskier investments, or that they would be keen to acquire other businesses for which they need cash, the expectations of shareholders fall in the same line of higher returns with higher risks.

An FMCG core business, on the other hand, is a slow growth business with a considerable market share, from which it would expect to generate huge cash, without taking considerable risk. Therefore, to satisfy the shareholder's requirements, such businesses would prefer to share a proportion of their profits in form of cash dividends. The idea of a dividend policy is carried on the basis of the shareholder's expectations, and the CIMA examination also requires us to consider the same while working on a specific case.

This is one relevant strategic decision where the management needs to decide if there is a requirement to change its dividend policy, especially, when the company has been paying dividends in the past, and might not wish to continue or probably reduce the dividend payment in future or temporarily.

This is a catchy situation since the Board or the top management may discontinue paying dividends if it is certain that it requires cash for some strategic acquisition or requires cash for investing into a big project. The communication from the Board must flow rightly so that the shareholders accept the decision happily and that the management is able to bring its visibility on the table to the shareholders confirming the non-payment of dividend also as at attempt to maximize shareholder's wealth.