Payout policy: income and profit influence

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Trans-Baikal State University

Payout policy: income and profit influence

Elizaveta S. Baranova

PhD in Economics, Associate Professor, Department of Economics and Accounting

Chita, Russia

Abstract

The dividend policy of companies is directly related to the policy of using profits. The paper presents the results of the study of the influence of income and profit factors, as well as other factors related to them on the choice of dividend policy by Russian joint-stock companies in comparison with the policy of dividend payment by US corporations, since the authors believe that such a comparison will help to understand and evaluate some features and problems dividend policy of Russian societies. As a result, it was revealed that the factors of income and profits, industry characteristics, size and age of a company can have different effects in different economic condition. The main reasons for such differences are identified.

The study was conducted on Russian and American companies from different industries, existing on the market for quite a long time, having a dividend history. The analysis of these companies showed that income as the main indicator that determines the size of the company, the size of which largely depends on the characteristics of the industry, thereby influencing the formation of dividend policy. Large companies pursue a more stable policy and may pay a larger dividend, which may also depend to a large extent on profit margins (Russia), or to a small extent (US). Therefore, a moderate dividend policy is more characteristic of Russian companies, while American companies take a more aggressive approach. Here, the interests of shareholders, business risk, and competitiveness are more taken into account.

In Russia, the amount of net profit largely determines the size of dividend payments in most companies. US corporations pursue a more stable dividend policy, regardless of the size of profits and income, which is largely due to the level of development of the financial market, the intensity of competition on it. Therefore, Russian corporations can afford to bind the size of dividends to the level of income and profits in conditions of weak competition and underdeveloped stock market in Russia. As it develops, they will have to change the principles of their dividend policy.

Keywords: dividend policy, dividend size, share, factor, income, profit, industry peculiarities, financial market, company growth, stock market.

Аннотация

ПОЛИТИКА ВЫПЛАТ: ВЛИЯНИЕ ДОХОДА И ПРИБЫЛИ

Елизавета Сергеевна Баранова кандидат экономических наук, доцент, кафедра экономики и бухгалтерского учета, Забайкальский государственнчый университет, Чита, Россия

Дивидендная политика компаний напрямую связана с политикой использования прибыли. В статье представлены результаты исследования влияния факторов дохода и прибыли, а также других связанных с ними факторов на выбор дивидендной политики российскими акционерными обществами в сравнении с политикой выплаты дивидендов американскими корпорациями, поскольку авторы считают, что такое сравнение поможет понять и оценить некоторые особенности и проблемы дивидендной политики российских обществ. В результате было выявлено, что факторы дохода и прибыли, отраслевые характеристики, размер и возраст компании могут оказывать различное влияние в различных экономических условиях. Выявлены основные причины таких различий.

Исследование проводилось на российских и американских компаниях из разных отраслей, достаточно давно работающих на рынке, имеющих дивидендную историю. Анализ данных компаний показал, что прибыль как основной показатель, определяющий размер компании, размер которой во многом зависит от особенностей отрасли, оказывает влияние на формирование дивидендной политики. Крупные компании проводят более стабильную политику и могут выплачивать более крупные дивиденды, которые также могут в значительной степени зависеть от нормы прибыли (Россия) или в небольшой степени (США). Поэтому умеренная дивидендная политика более характерна для российских компаний, в то время как американские компании занимают более агрессивную позицию. Здесь в большей степени учитываются интересы акционеров, бизнес-риски и конкурентоспособность.

В России размер чистой прибыли во многом определяет размер дивидендных выплат в большинстве компаний. Американские корпорации проводят более стабильную дивидендную политику вне зависимости от размера прибыли и дохода, что во многом обусловлено уровнем развития финансового рынка, интенсивностью конкуренции на нем. Поэтому российские корпорации могут позволить себе привязать размер дивидендов к уровню дохода и прибыли в условиях слабой конкуренции и неразвитости фондового рынка в России. По мере развития им придется менять принципы дивидендной политики.

Ключевые слова: дивидендная политика, размер дивидендов, акция, фактор, доход, прибыль, отраслевые особенности, финансовый рынок, рост компании, фондовый рынок.

Introduction and background

Russian financial markets are developing, and joint-stock companies of the Russia have never acted in conditions of intense competition, their payout policy does not fully take into account the balance of stockholders' interests and is not sufficiently adapted to the increasing volatility of the stock market. Payout policy of the enterprise is an integral part of efficient and rational distribution of companies' profits. The payout policy is the sphere of a company's management system, which allows to optimize the proportions between the consumed and reinvested profits and maximize the company's market value.

Researchers around the world are studying this phenomenon, considering various approaches to the policy of dividend payment. The theoretical foundations of payout policy have been investigated by many researchers, primarily from developed countries, due to the needs of developed financial markets. The problems of dividend policy were studied by R. Lease, C. John, A. Kaley [11], issues related to the size of dividends and their change in conditions of stock market volatility - by J. Linter [12], T. Marsh, R. Merton [13], Russian researchers looked at finding a balance of interests between shareholders, members of the board of directors, managers and employees of the company - Abalakin T. V., Abalakin A.A. [1]. Studies of the factors affecting a company's payout policy were conducted by A. Agraval, N. Jayaraman [2], R. Bhat, A. Pandey [3], G. Grabowski, D. Muller [7], J. Britain [5]. These factors include legal issues concerning dividend payments; income and age of the company; interests of shareholders; industry; tax policy; management; liquidity; business risks and others.

There is no unanimous opinion among researchers about the payout policy. Thus, R. Brealey and S. Myers in the book «Principles of Corporate Finance» consider various positions on this issue of left and right radicals, centrists [4]. Representatives of the right radical direction justify high dividend payments, supporters of the left radical direction - low dividends, representatives of the centrist direction believe that company's value and the payout policy do not depend on each other.

The most famous dividend theories are: residual theory (the development of a company is the main goal, dividends should be paid on a residual basis) [7]; the irrelevance theory by M. Miller and F. Modigliani (the value of the corporation does not depend on the dividend policy) [14]; the bird-in-hand theory by J. Linter and M. Gordon (dividend policy affects the value of shares, the shareholders choose the option that is currently available) [12, 6]; tax differential theory by B. Graham and D.L. Dodd (corporations better keep low dividends due to high tax costs) [8]; A. Rubner's interest payment scheme for dividends (shareholders will receive large dividend payments if they offer large investments) [15]; the theory of rate retention (if dividends are retained and profits are reinvested in new projects, this can bring a good return to shareholders) [10]; M. Jensen's agency theory (it is more profitable for a company to give free cash as dividends to shareholders) [9].

We can sum up payout approaches as follows:

Approaches to paying dividends*

Table 1

*Drafted by the author

Data andfindings

The dividend policy of companies is directly related to the policy of using profits. In order to understand and evaluate some features and problems of dividend policy in Russian joint-stock companies, an influence of income and profit factors, as well as other factors related to them should be evaluated. The factors of income and profits, industry characteristics, size and age of a company can have different effects in different economic conditions. The main reasons for such differences can be identified through the comparison between dividend policies of Russian and American companies. The key goal of a dividend policy is to establish optimal proportions between the current consumption of profits by owners and a company's growth and its ability to achieve strategic development goals. On the other side, the amount of a company's income and profits are the determining factors of the company's dividend policy. Also we can argue that this mutual dependence of this connection on the conditions of the socio-economic system requires further study. Here we examine some factors that affect dividend payments of enterprises in Russia and in the United States.

We took 30 Russian companies working in various sectors of the economy as an object of study. The enterprises of the petrochemical, metallurgical (ferrous and non-ferrous) industries, agriculture, trade, banking and stock exchange were reviewed. To compare with, 30 US companies operating in the oil and gas industry, finance and insurance, trade, engineering, electronics, fast food and entertainment were taken. The selected companies have a long dividend history, which makes it possible to compare general trends and reveal the specifics of their payout policies.

Thus, the companies chosen, both Russian and American, operate in various fields and all of them exist on the market for quite a long time. On the official websites of the companies one can find their dividend history and the basic principles of their payout policy, including the general availability of information, its transparency, intention to balance all shareholders' interests.

Russia and the United States are countries with different economic realities. Sectors of economy develop unequally and, consequently, the development of certain corporations is different, too. Thus, in Russia the most economically developed are the fields of petrochemical and metallurgical industries, and in the USA those are the spheres of banking and services.

The availability of official data makes it possible to analyze the influence of income and profits, as well as related factors such as company size, industry characteristics on the payout policy. Theoretical studies also determine those factors as the main ones for making dividend payments decisions.

The survey of income and net profit influence on dividends showed that it is not the same at Russian and American corporations. In general, the size of a company's net profit determines whether it can pay dividends to their shareholders. Thus, legal restrictions both in Russia and in the United States prohibit managers to declare dividend payments in case of insolvency or bankruptcy of a company.

Table one contains some financial indicators of companies from different industries that allow to assess the characteristics of industries and size of companies, which, in turn, predetermine some features of their payout policy.

Some Financial Indicators of Russian Companies for 2017 (thousand roubles)*

Table 2

*Source - annual financial reports provided on the companies' official websites and MOEX website [16].

The data shows that the most profitable companies of 2017 are operating in petrochemical industry and in metallurgy. Note that there is a difference in profit size depending on the size of organizations. Companies with the larger assets value generate larger profits. According to the data corporations with a smaller value of income, profits and assets include those operating in the agro-industrial complex, trade and telecommunications. The analysis shows that the factor of income is largely dependent on other factors, namely, the characteristics of the industry in which the company operates and its size.

Similar data for thirty US companies are shown in Table 2.

Table 3

*Source - annual financial reports provided on the companies' official websites and Nasdaq website [16].

Here the leading positions are occupied by the companies operating in the spheres of machinery production, banking, software and electronics and oil and gas industry. These are the most developed sectors of the country's economy. Fast-food companies are not inferior in their revenue size to the largest oil and gas US corporations. Those companies were originated in the United States as the industry itself, therefore it is obvious that the effect of such a factor as the age of the company is manifested here. The difference in income of companies engaged in one and the same industry, for example in oil and gas industry or in trade, reveals the influence of a company's size on it.

The analysis of the dynamics of net profit and dividend size per ordinary share, presented in table 4, was made for the period from 2010 to 2017.

Dynamics of the total net pprofit (million rubles) and size of dividend per share for Russian companies (rubles)*

Table 4

*Source - annual financial reports provided on the companies' official websites and MOEX website [16].

Analyzing the data, we note the correlation between the size of dividends and the volume of net profit in companies from oil and gas and chemical industries. In some cases companies cease to pay dividends, like PJSC «Uralkali» did when experiencing an increase in their debt load.

In oil and gas industry the companies' income is relatively stable, although there are sharp drops associated with external factors like the fall in oil prices in 2015 or imposition of sanctions on the Russia in 2014. Dividend payments of companies operating in the industry are prone to instant response to external changes, their dividend policy is not consistent. However, there are exceptions to this general trend. Thus, PJSC «Kazan Orgsintez» and PJSC «Tatneft» demonstrate a gradual increase of dividend payments regardless of changes in their net profit.

Enterprises engaged in the field of metallurgy, in general, adhere to a more stable dividend policy, increasing the size of dividends, regardless of the profit dynamics.

For companies working in the agro-industrial complex, the same trend is observed as for the oil and gas and chemical corporations: an increase in profits entails an increase in the amount of dividend payments, and vice versa.

In general, we can infer about the instability of a payout policy in Russian companies. The net profit of organizations as a whole affects the amount of dividend payments. In some cases dividends just «copy» the fluctuations of net profit a mounts. There is another trend revealed for Russian corporations: a decrease in net profit may lead to non-payment of dividends.

The dynamics of net profit and the size of dividends per ordinary share for US companies is presented in Table 5.

Dynamics of the total net profit (million dollars) and size of dividend per share for US companies (dollars)*

Table 5

*Source - annual financial reports provided on the companies' official websites and Nasdaq SE website [16].

Analysis of the data leads to the conclusion that the profits of American companies are not always stable, which is associated with the economic situation in the world and in the country. However, it is worth noting that this does not affect the amount of dividends paid. Despite the fact that profits may decrease, in most cases dividends retain a tendency to gradually increase. However, for some companies, this trend is not maintained. If a company takes a loss instead of profit, as in the case of ConocoPhillips, Murphy Oil Co. and Marathon Oil Co., dividend payments are shrinking. income profit dividend payment

The results of the study can be taken into account when developing a payout policy. The experience, trends and patterns of payout policy in American companies operating in developed financial markets with a high level of competition should be taken into account. In Russia, the amount of net profit largely determines the size of dividend payments in most companies. US corporations pursue a more stable dividend policy, regardless of the size of profits and income, which is largely due to the level of development of the financial market, the intensity of competition on it. Therefore, in conditions of weak competition and underdeveloped stock market, Russian corporations can afford to bind the size of dividends to the level of income and profits. But as the market develops, they most likely have to change the principles of their payout policy.

Conclusion and discussion

The factors of income and profit, as well as the related factors, the characteristics of the industry and the size of the company can have different effects in different economic conditions.

The study, conducted on Russian and American companies with a dividend history from different industries, existing on the market for quite a long time, showed that income as the main indicator that determines the size of the company, which in its turn largely depends on the characteristics of the industry, thereby influencing the formation of dividend policy. Large companies pursue a more stable policy and may pay a larger dividend, which may also depend to a large extent on profit margins (Russia), or to a small extent (US). Therefore, a moderate dividend policy is more prevalent in Russian companies, while American companies take a more aggressive approach, when the interests of shareholders, business risk, and competitiveness are more taken into account.

Payout policy depends not only on the factors considered in our study. It has many other internal and external factors mentioned in the review of previous studies. They require separate study, as well as their interaction and interdependence. To identify the influence of macroeconomic factors, it is necessary to study the specifics of the dividend policy of corporations in different countries.

References

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16. Official websites of companies.

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