Assessed blog 8- A brief analysis of EVS Broadcast Equipment`s dividend policy

In the modern and complex environment, globalization and privatization have brought deep competition in every field of activity. It is very difficult for the companies to compete in the markets of stunning nature. Shareholders’ wealth is shown in the market price of the company’s common stock. Management of a company want to maximize shareholders' wealth. This is possible when the price of the company’s common stock is maximum. Shareholders like cash dividends and they also like the growth in earning per share that result from investing the earning of business back into it. The best dividend policy is the one that maximizes the company's stock price which leads to maximization of shareholders' wealth and also ensures more quick economic growth.

Dividend payment is the distribution of net profit after tax to a company’s shareholders after keeping a specific amount of earnings to reinvest in the business. Dividend policy is a significant concern of both financial managers in shareholding firms and outside investors.

EVS Broadcast Equipment, the leading provider of live video production systems, on 9^th April 2014, the Board of Directors published a dividend proposal, which is the payment of a total gross dividend of EUR 2.16, implying a final gross dividend of EUR 1.00 to be paid on June 2, 2014.The proposal takes into account the 18.5% decrease of net profit in an uneven year 2013 (18.2% lower than 2012). Mainly due higher investments in future-proof equipment, the willingness to keep some financial flexibility if the company needs to accelerate investments for growth and the cautiousness of the EVS management relating to the short term market conditions (as announced in 2013 results press release). The Board has also decided to adapt the dividend policy. As from 2013, the Board of Directors has established a dividend policy which aims at paying a high portion of the net profit, taking into account the cash needed to finance the company growth, and with a maximum pay-out ratio of 100%. This EUR 2.16 dividend represents a pay-out ratio of 85.7% (in line with average of last 10 years) and a dividend yield of 4.4% (gross dividend divided by average share price in 2013).

According to Modigliani & Miller (1961) through the dividend irrelevance theory stated that share value depends on corporate earnings, which reflect the investment policy of the company, the net profit of EVS Broadcast Equipment decreased, because of the high investment in future-proof equipment, therefore, in the following year, the company will not have big investment anymore. It depends only on investment decisions and it is independent of the level of dividend paid. First of all that theory assume that capital markets are perfect, there are no transactions costs associated with converting shares into cash by selling them and firms can issue shares without incurring flotation or transactions costs to raise equity, whenever needed. Continuing with the assumptions Modigliani & Miller stated that in a perfect capital market there are no conflicts of interests between managers and security holders, which is known as the Agency Problem. Shareholders, actually, own a company but managers are the ones who make the business run and decide. Modigliani and Miller argues that rational investors, in other words those who prefer their wealth maximization, do not care whether they receive dividends on their shares or investing retained earnings in new opportunities, they have identical borrowing and lending rates and were apathetic to the timing of dividends. Furthermore shareholders can simply sell some of their shares for cash, if dividend are too small. That is another reason the EVS Broadcast Equipment pay out high dividend. According to Modigliani and Miller a company’s choice of dividend policy is a choice of financing strategy and the investment decision is separate from the dividend decision. They also argued that investors calculate the value of companies based on their future earnings capitalized value and is not affected by the dividends that a company pay and neither how dividend policies are set from company.

The theory is established and argued by famous economists and we cannot challenge them, but under a real market conditions we cannot use the Irrelevance theory and that is because some of the assumptions made by Miller and Modigliani are not realistic.

From the case, it is clear to find out that the determinants of dividend policy of a company are classified into a large number of financial and non-financial determinants Lintner (1956). According to the dividend irrelevance theory, the share value depends on corporate earnings, while gearing and liquidity were found to have a strong relationship with dividend rates of company. While gearing is found to be negatively associated, liquidity was positively related. Dividend distribution is cash payments, and cash expenditure is bound to affect the company's debt paying ability. Therefore, taking into account the cash needed for the company growth, maintaining a strong ability to pay the debt, EVS Broadcast Equipment changed a dividend policy which aims at paying a high portion of the net profit, in order to maintain the company's reputation and borrowing capacity.

The company paying out dividends is obviously generating incomes for an investor, however even if the firm takes some investment opportunity then the incomes of the investors rise at a later stage due to this profitable investment.

Source:

Lintner, J. 1956. Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes. The American Economic Review, May, 46(2): 97 – 113.

Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the valuation of shares. The Journal of Business, 34(4), 411-433.