Page 195 - 5.2 i. Manac Finance ITC Summarised Notes

THE DIVIDEND DECISION

Practical factors affecting the dividend decision

The availability of cash (liquidity) and gearing levels

• A dividend will either reduce cash balances or increase debt. Excessive dividend
payments could increase gearing levels to an intolerable level. Scheduled repayment of
borrowings may make dividend payments difficult.
• Companies with excess cash or no immediate investment opportunities will tend to have
a high payout ratio.

Stability of profit and growth rate

• Profits with stable growth each year will allow companies to pay higher dividends.

Statutory requirements

• Compliance with the Companies Act of 2008 and the Memorandum of Incorporation.

• Compliance with the Income Tax Act 58 (dividend tax at 15% payable by the recipient of
the dividend).

• Some companies may have a legal restriction on the amount they can pay (e.g. loan
covenants or a statutory requirement to only pay out dividends that are covered by
earnings).

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