DEVIDENT POLICY

Dividends are profits the company earns to be distributed to shareholders. While dividend policy is a decision made by a company to divide or not divide profits in the form of dividends. The purpose of dividend policy itself is to balance current dividends with future growth and will increase share growth. Factors affecting the practice of dividend policy include investment opportunities, alternative sources of funds, and choice of shareholders regarding current or future income.

The following are three basic assumptions for dividend policy:

1.     Dividend irrelevance theory

This theory states that the stock dividend policy does not affect stock prices. This theory assumes that:

1.     There are no transaction fees for the issuance of shares

2.     There is no tax for companies or individuals

3.     Complete information about the company already exists

4.     There is no conflict of interests between management and shareholders

5.     Financial difficulties and bankruptcy do not exist

This assumption can be stated that there is no dividend policy and stock price. In aggregate investors only care about total investment, they don't care whether the return is from capital again or from dividend income.

2.     Bird in the Hand Theory

This theory says that dividend income is higher for investors than capital again because it is considered more definite dividend than capital again. This theory is in line with the principle of time value of money which states that the money received today is more valuable than the money received in the future. Seeing this principle in the Bird in the Hand theory considers cash dividends received today from company payment policies to be more certain (less risky) than possible capital again.

3.     Tax preference theory

This theory holds that the effect of dividends on stock prices states that dividends are actually detrimental to investors. This is based on differences in tax treatment of dividends and capital again which has changed. The aim of the investor is to maximize the after-tax return on investment (minimize payment of tax on income and delay tax payment as much as possible). The advantages of capital again compared to dividend advantage are: dividend tax is paid at the time of receipt of the capital again tax is paid when the shares have been resold or (postponed until the sale of the shares). So when it comes to tax considerations most investors prefer to withhold company revenue compared to cash dividend payments. If profits are held in the company, the share price rises, but the increase is not taxed until the shares are sold. In conclusion, when it comes to taxes we want to maximize returns after taxes and before taxes.

Example of income calculation:

Dividend receipt = Rp. 60 million x 8%              = Rp. 4,800,000

Payment of interest = Rp. 40 million x 12%       = Rp. 4,800,000

Net income of                                                              Rp. 0

Expected capital again = 60% x 60 million        = Rp. 3,600,000