In Millar and Modigliani irrelevance theory, they believed that dividend policies were irrelevant to share value as long as the company had plenty of net present value. If a company had lots of positive net present value and paid out all its profits, it would not be destroying wealth as it could issue shares to cover the cost.
In contrast Linter believed that companies liked to bench mark their dividend payout policies as it attracted investors that wanted regular and consistent dividend, they know where they stand and are perfect for retirement or pension funds. Sometimes companies would signal by giving higher dividends, investors would believe this to mean that the managers know that future cash flows will be higher. But sometimes this is not the case. Managers can manipulate investors into thinking things are good, this is very short sited as funds will run out and they will have to reduce dividend payout and with it destroy share value.
Recently air lingus, the Irish airline, issued its first dividends since floatation six years ago, aiming to payout dividends every year it makes a profit, one of it main investors Ryanair is not happy with the 3 cent a share payout and share prices fell slightly to 98 cent a share. This is a problem with new companies, most new companies pay zero or very small dividends in the first few years, investors wait as they hope to see good returns, if the policy changes and investors do not get what they want then they will look else where for greater returns
Another example is Apple , who after 17 years has decided to pay dividends of $2.65 a quarter to its shareholders starting this July. It has also announced that it plans to spend $10 billion buying back some of its shares over the next three years as it deals with a cash mountain of $100 billion. So why has it taken apple so long to pay a dividend if they have so much retained earnings? They could be a tad prudent but they definitely have shareholder trust, share prices have increased for $10 ten years ago to $600 today. I think the figures speak for them self and the icing on top of the cake is the quarterly dividend they are about to receive. This communicates confidence of the brand and future estimated cash flows, they can pay their dividends, but still have plenty of retained earning for future investments. Apple time and time again come up trumps and soon I'm sure they will start to increase their dividends but they are firmly in the driving seat and what they say goes.
Source: Arnold, G. (2008) 'Corporate Financial management'
Nuttall, C. (2012), 'Apples dividend and buyback - how it happened'. FT.com
Moore, E. (2012), 'Tech sector backed for value and growth'. FT.com
jacobs, R. (201), 'Aer Lingus to issue first dividend since floatation'. FT.com
