– The net result of changing a company’s dividend is the substitutability of capital gains (i.e. share value increases) as the dividend is reduced for cash when it is paid.
– Increased dividends = decreased market value, and vise-versa.
– Truly organic for the company: if dividends are changed, and no other action undertaken, the company’s investments will also change. Using above diagram, an increase in dividends would be shown as a widening of the dividend pipe and a narrowing of the retention pipe resulting in a smaller investment amount.
– To isolate the effect of dividend choices, the company’s investment plans must be kept intact as dividends change.
– Increase in dividends = increase in new equity (more shares issued)
– Decrease in dividends = decrease in new equity (less shares issued)
– The company share value in total is unchanged, therefore existing shareholder wealth is the same.
– When the effect of company financial decisions upon shareholders portfolios can be undone by the offsetting actions of shareholders, the company financial decision is irrelevant!
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