Dividends are the main focus from this weeks lecture, I missed the previous weeks lecture, But reading the notes from powerpoint i know the two lectures are understanding the core concepts of dividends. The theory from Modigilani and Millar argue that dividends are irrelevant because investors do not really care what they get whether it is a capital gain or dividends they just want the overall thing. After attending the lecture and reading the concepts, I disagree with their theory because dividends are relevant, Because why would they spend so much money paying dividends?.
Their view is questionable, M&M'S take on it would work if everything in the financial world is ok eg- no risk and no problems. Dividends are important because it gives an insight into a companys performance. The traditional view is high dividends equals good news, low dividends equals bad news but that might not always be the case as markets especially in the UK work on short term. Investors would prefer to have a stable payout at one level so they have security in dividends, not one year high, one year low as this creates uncertainty.
M&M'S theory promotes a fluctuating dividend because it isnt considering going bad. M&S is a good example of promoting a stable dividend and it proved M&M'S theory wrong that dividends dont show a signal to their customers, As M&S kept reserves so that they could pay out a stable return in bad years so people did not know any different, as no payment one year may show risk. They would not want this as M&S's message they send out to customers is a reputable one and that it is reliable for as long as people want to invest and stay with them.
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