Why is it called a ‘variable’ dividend policy?

It is known as a variable dividend policy because it keeps on changing year after year. Progressive Corporation has made it; its goal to ensure that the dividend policy increases in the future. Furthermore, The Corporation is now paying dividends on quarterly basis moving from the annual payments it used to make. As the managers discover new things that will help improve the price of shares, they incorporate them into the system and in so doing the previous system has to adjust itself in order to incorporate the new ways.

The policies in place can be modified to suite the corporations working conditions. Therefore, the above scenarios show that the dividend policy is variable. Will the dividends paid by Progressive Corporation increase or decrease? Why? Dividends paid by Progressive Corporation can increase when the returns of the company are high or in general, when the company is growing/expanding thus attracting more investors. An increase in dividends reflects a firm’s expectation that it can easily afford to pay dividends while a decrease reflects the firm’s expectation that it will not have sufficient cash flow.

As more people buy the companies shares, the company has enough to spend plus a surplus therefore it can account for its operations and pay its shareholders better dividends. In the book, (Financial Institutions and Markets p. 272), Madura states that, “The movement in stock prices may be partially attributed to the investor’s reliance on other investors for stock market evaluation rather than making their own assessment of a firms value.

” Such actions can result in irrational excitement, whereby stock prices increase without reason. Technical analysis can also be used to anticipate future momentum of stock prices. By observing the trends, one can tell if the trends are repetitive so that when similar situations arise, investors will cease the opportunities. This is mostly used to check short-term movements. The macroeconomic and market conditions will cause the increase or decrease in dividends but also some firm-specific factors cause such changes.

“This may be a result of the industry’s sales forecast, entry of competition or price movements of the industry’s products (Madura 2008). ” Let’s take a situation when the sales of the company are low, the prices of commodities are high, the interest rates have increased and the stock market conditions are not favorable, then there will be a decline in the corporation’s dividend as it will work to adjust itself in relation to the prevailing economic conditions.

On the other hand, when the general economic conditions are good, the firm has met its’ expected cash flows, the company has wider market and more investors, then with all this positive factors working in favor of the company, it will yield better returns hence, it will be able to offer better dividends to its shareholders.