What factors do firms consider before dividends are declared?

Answer 1

A corporations responsibility is to increase shareholder value. Dividends can play an important roll in this regard. A company has to decide what to do with excess cash on its books but there are several options. They could reinvest that money into the company. This could be purchasing new equipment, hiring on new employees, expanding into new regions, etc etc. They could use the money to aquire another company. They could pay off debt. They could buyback their own shares. Last but not least they could pay out a dividend or increase existing dividends. It all comes down to what is the best way to return value to shareholders. Most new companies do not pay dividends because their best use for cash is to grow their business. On the other hand many utility companies pay nice dividends due to the fact that it would be difficult to use that money to expand in that type of business. Therefor giving it back to the shareholders so that they may invest it however they may choose to makes more sense. When increasing a dividend a corporation may look at trying to set it at a sustainable level. Decreasing a dividend is usually considered a bad sign and shares tend to decrease in value. One last thing to consider is the tax environment. The lower the capital gains taxes are the more important a dividend becomes to the individual shareholders.