Dividend Policy and Share Prices
Introduction
In this paper the impact of dividend policy of the companies on the firm’s share prices is analysed and different views in the context of the semi-strong form of the efficient market hypothesis are contrasted. The overview of the traditional and most recent empirical investigations of the stock market reaction to the dividend announcements is provided and different findings are discussed and compared.
Three companies have been selected from the FTSE All share price index. These companies are Tesco, Burberry and Vodafone. These firms belong to different sectors of the economy. Tesco is the largest retailer in the UK, Burberry is a fashion firm and Vodafone is the telecommunication services company. The dividends and accounts have been retrieved from annual reports of the companies (Tesco, 2011; Burberry, 2011; Vodafone, 2011). The share prices were sourced from Yahoo Finance (2012). The copies of the company accounts are provided in the appendices.
Dividend Policies of Companies
These three companies were chosen for the following reasons. Firstly, it was intended to choose large companies that have an established dividend policy and revenue of more than £1 billion a year. Secondly, the companies from different industries had to be analysed. Thirdly, both services sector and goods sector were intended to be analysed. Finally, it was interesting to compare both pro-cyclical firms (e.g. Burberry) and counter-cyclical firms (e.g. Vodafone). The former are very sensitive to the effects of the economic recession whereas the latter are less sensitive because consumers would still have to use mobile phones and services regardless of their financial position.
The dividend payout ratio has been calculated for these companies for the period from 2007 to 2011. The following formula was used:
Dividend payout ratio = dividends per share / earnings per share
The results are summarised in the following figure.
Figure 1 Dividend Payout Ratios
In this paper the impact of dividend policy of the companies on the firm’s share prices is analysed and different views in the context of the semi-strong form of the efficient market hypothesis are contrasted. The overview of the traditional and most recent empirical investigations of the stock market reaction to the dividend announcements is provided and different findings are discussed and compared.
Three companies have been selected from the FTSE All share price index. These companies are Tesco, Burberry and Vodafone. These firms belong to different sectors of the economy. Tesco is the largest retailer in the UK, Burberry is a fashion firm and Vodafone is the telecommunication services company. The dividends and accounts have been retrieved from annual reports of the companies (Tesco, 2011; Burberry, 2011; Vodafone, 2011). The share prices were sourced from Yahoo Finance (2012). The copies of the company accounts are provided in the appendices.
Dividend Policies of Companies
These three companies were chosen for the following reasons. Firstly, it was intended to choose large companies that have an established dividend policy and revenue of more than £1 billion a year. Secondly, the companies from different industries had to be analysed. Thirdly, both services sector and goods sector were intended to be analysed. Finally, it was interesting to compare both pro-cyclical firms (e.g. Burberry) and counter-cyclical firms (e.g. Vodafone). The former are very sensitive to the effects of the economic recession whereas the latter are less sensitive because consumers would still have to use mobile phones and services regardless of their financial position.
The dividend payout ratio has been calculated for these companies for the period from 2007 to 2011. The following formula was used:
Dividend payout ratio = dividends per share / earnings per share
The results are summarised in the following figure.
Figure 1 Dividend Payout Ratios
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