In my opinion, there is a great challenge for company managers: it is the creation of value for

shareholders this means that they should not only think about the search for short-term value
but also in designing long-term strategies that generate sustainable growth of value over time.

The creation of value for the shareholder is very important because it is the main indicator to
measure the profitability of a company. By understanding investor motivation and maintaining
relationships within the investment community, companies are strategically positioned to
address operational financing issues proactively and thus can exercise greater control over the
investment process capital formation. Shareholders need them to make informed decisions
about their equity investments, especially when it comes time to vote on corporate matters.

The market value of the company: it is equal to the current value of the stream of future
dividends, "dividend" is understood as all the cash distributions that the company makes to its
shareholders. The value of the company depends on future dividends, this tells us that it does
not imply that the company has to pay dividends in the present. The cash dividend could take
place at the time you end your activities. It will be enough if there is an expectation that
someday dividends will be paid. If we assume that the acquirer of a stock is buying an
expectation of dividends, it is being said that the dividend policy is essential to increase the
value of the company.

Dividend Policy
The dividend policy of a company is an action plan that should be followed whenever deciding
on the distribution of dividends. According to what the author says (G. Scott, 2020) "dividends
will be set by the company, and this must be approved by the general meeting of shareholders."
This means that companies should propose the dividend policy as part of their corporate
strategy.
 
The dividend policy is part of the financing decisions of the company since any money paid as
dividends must be financed in some way, either with new debt or with a new capital increase.
This means that if the level of indebtedness and investment disbursements remain constant,
possible dividends must come from new share issues. For this reason, some authors define the
dividend policy as the relationship between the retained earnings, on the one hand, and the
distribution of liquid dividends and the issuance of new shares.

Theory of the irrelevance of dividends

According to what the authors propose (M. Miller, and M. Modigliani, 1961) they tell us that “in
an efficient capital market, the company's dividend policy is irrelevant in terms of its effect on
the value of its shares, since this is determined by its profit-generating power and by its type of
risk”; This means that it will depend on the investment policy of the company and not on how
many benefits are distributed or retained. The authors also maintain that if the company pays
higher dividends, it must issue a greater number of new shares to meet said payment, when the
company decides to distribute the dividends to the new shareholders, the value to be paid must
be identical to the dividends paid to the old shareholders.
For all of the above to be true, the authors' Miller and Modigliani propose the following
hypotheses:
a. Transaction costs are ignored.
b. The investment policy of the company remains constant.
c. Capital gains and dividends are taxed at the same tax rate.
d. Dividends do not transmit any information to the market.
e. Stock markets are efficient.
 f. Investors act rationally.

If the foregoing is true, it can be shown that an increase in the dividend per share leads to an
identical reduction in the price per share, leaving the shareholder's wealth unmovable. So the
current wealth of the shareholders will not change even if the dividend policy is altered.
Therefore the value of the company will only depend on its investment policy. This explains to
us that the money paid in the form of dividends can be replaced by the issuance of new shares.
And that the investment policy, not the financing policy, determines the value of the company.
In other words, if a company's dividend policy changes, this implies a change in the distribution
of total returns between dividends and capital gains. Another situation occurs when the
company issues new shares to pay dividends to old shareholders, this means a transfer of wealth
since what they receive from dividends they lose in the value of their shares.

Dividend relevance
For (M. Gordon, 1959) the dividend policy affects the value of the company's shares (traditional
position). Thus, they give the dividend an essential role in determining the value of the
company, since investors prefer certain profitability and at present to the eventuality of
obtaining higher dividends in the future.
The rate of return on stocks increases as the profit-sharing rate decreases because, from the
investor's point of view, payments via dividends are safer than those from capital gains. That is,
from the shareholder's point of view, the value of a dollar of dividends is greater than that of one
of the capital gains because the yield on dividends is more certain than the growth rate of the
same. We are faced with the derivation of the so-called "Gordon Model" according to which the
current market price of a share is equal to dividing the expected value of the next dividend by
the difference between the required rate of return of ordinary shareholders and the rate of the
expected growth of the company's dividends. Gordon's model suggests that companies that pay
lower dividends tend to have riskier investments; or that there is greater uncertainty about how
such investment decisions will be made in the future. In other words, investors discount future
benefits according to the financial and economic risks they perceive in the company, and not
concerning the company's profit-sharing rate.

Return capital to shareholders?

The authors (R. Litzenberger, and K. Ramaswamy, 1979) mention that factors such as new
investments, high level of leverage, and higher economic risk affect dividend policy in a
restrictive way. However, there are also "positive" reasons to pay higher dividends:
a. When the company is only able to invest in projects that have a lower rate of return than
the shareholders could obtain elsewhere, then the funds should be distributed among the
latter.
b. When the company has paid dividends in the past and an alteration of that policy could
harm investors.
c. Shareholders deserve a reward for the use of their capital and giving them liquid
dividends saves them from having to incur certain costs related to the sale of their
shares.
d. The finance departments of many companies invest in stocks that have a history of
paying dividends. For this reason, it would be recommended that the shares of the
company have this characteristic in order not to limit the possible sources of financial
resources of the company.
e. It is advisable to distribute dividends to shareholders if they are tax-exempt.
According to these proposed positive reasons, we can say that the irrelevance of the dividend
policy applies in an efficient market when the capital markets are perfect when there is no
asymmetric information and when the investment policy of the company is fixed, which in my
opinion, In reality, a competitive market does not exist in practice, however, it appears that the
payment policy follows systematic patterns and that the value of the company responds to
changes in the payment policy in predictable ways. It can also be concluded that the dividend
policy is important, however in my opinion the most important thing is the benefits "expected"
by investors and their associated risk, with which dividends are a means of communicating
information to investors. The author (R.M. Stogdill, 1961) mentions that if the theory of investor
expectations is fulfilled, it will allow the management of the company to avoid surprising
shareholders when the decision on dividends occurs. This means that the dividend policy can be
treated as a long-term residual after management estimates long-term investment needs.
Allowing in this way to establish a "framework" profit-sharing rate on which to be guided.

References:

1. Scott, G. (2020). Dividend Policy. Investopedia.

2. Miller, M. and Modigliani, M. (1961): "Dividend Policy, Growth and the Valuation of
Shares". Journal of Business, nº34. October.
3. Gordon, M. (1959): "Dividends, Earnings and Stock Prices". Review of Economics and
Statistics, nº 41. May.
4. Litzenberger, R. and Ramaswamy, K (1979). “The Effects of Personal Taxes and
Dividends on Capital Assets Prices: Theory and Empirical Evidence”. Journal of
Financial Economics.
5. Stogdill, R. M. (1961). What should be Expected of Expectation Theory? (n.p.): (n.p.).