Sometimes the board of directors may choose not to declare any dividends. There may be financial conditions in the corporation that make the payment impractical.
Consideration 1: There may not be adequate cash
Corporations regularly reinvest their earnings in assets in order to make more profits. In this way, growth occurs and reliance on creditor financing can be minimized. As a result, there may not be enough cash on hand to declare and pay a cash dividend. The assets of the corporation may be tied up in property, plant, and equipment, for instance.
Consideration 2: A policy of the corporation may precludedividend payments
Some corporations pay no dividends. Instead, they reinvest their earnings in the business. Shareholders generally benefit because the market price for the corporation’s shares should rise. A statement to this effect can alert investors. This type of dividend policy is often found in growth-oriented corporations.
Consideration 3: No legal requirement that dividends have to bepaid
The board of directors may decide that no dividends should be paid. Legally, there is no requirement to do so. If shareholders are dissatisfied, they can elect a new board of directors or sell their shares.
Consideration 4: Dividends may be issued in shares of thecorporation rather than in cash
Share dividends may be issued to conserve cash or to increase the number of shares to be traded on the stock market. Share dividends are discussed in Appendix 1 of this chapter.
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