1. A high dividend payout ratio may not always be good for investors.
2. Companies
could deploy that cash into existing growth opportunities to remain competitive
and in the game.
3. A
company can utilize its cash in four ways:-
a) Re-invest the proceeds back into the business,
b) Go in for an acquisition,
c) Re-purchase shares, and
d) Pay out dividends.
4. The
test on dividends is, ‘can you create more than one dollar of value with the
one you retain?’
5. It would be a mistake for a company to retain money because they have no ability
to use the cash they make to generate a high return internally.
6. The
rationale for this decision is that a business can create more value with the
money retained compared to what it could if it had distributed it as dividend.
7. The
only reason for a company to keep money is to make it worth more by keeping it
than it would be worth if it gave it out as dividend.
8. That’s
the test - if it comes to the conclusion that it can’t do that, it should
distribute it.