Why do companies pay fixed dividends instead of fluid ones?

Question

For example, as of time of writing, Microsoft pays a dividend of $2.04 per share per year.

Why would Microsoft (and every company I've looked at) pay a fixed dividend instead of one indexed to their performance? Instead of $2.04 per share per year, Microsoft could say "I'll pay 70% of my operating cash flow as dividends". This means:

• If they go through a bad period, they would be able to pay less dividends without an actual dividend cut (and without going into debt to pay the dividend).
• They can issue shares without actually increasing their dividend payout.
• Sure, if they go through a good period they would have to pay more, but they'd also retain a larger amount to reinvest in their business (e.g. if their cash flow came in at $5 million compared to $4 million in guidance, they retain $1.5 million which is still larger than the expected $1.2 million). If they really don't need the extra cash, they could even have a special dividend of $0.3 million.
• If there is a big opportunity that they want to reach for, they have a bigger war chest available - they can use 100% of their cash flow instead of 100% less however much the dividend costs.

Related: Why do companies use debt to finance business deals instead of cut the dividend? If Altria had a fluid dividend, they could say "sorry guys but my operating cash flow this year is negative, so I can't pay a dividend ... but my cash flows less this debt repayment are very positive, and once I pay off this debt, I'll pay a dividend again."

Answer 1

Share value

Paying dividend is a way to be more attractive to more shareholders. The more fixed it is, the easier it is for a shareholder looking for cash returns to invest. You will attract juicy and passive fund holders, equities and pensioneers which are dream investors because as long as they get their value they don't mix into the business even if they have huge quantities of shares.

It is also easier to budget, plan for taxes, have the right amount of cash equivalents and cash flow, but those are absolutely minor compared to the first paragraph.

Companies that do this usually have fantastic cash flows and return on capital employed so they can easily get capital for bad periods, investments and opportunities just by leveraging their (dividend-inflated) share value.

Answer 2

They DO pay one indexed to their performance.

The dividend is a board decision that is revisited for every dividend paid. You just see the result, and as it is not changed, assume that it is automatic.

Microsoft could say

No. The BOARD could say, but they just do not. Not standard. Plus, what for?

Answer 3

Most companies try to maintain a steady dividend payout, increasing them as profits rise. That's because these companies and are often courting investors who want consistent dividend payments.

Other companies have floating rate dividends where the size of the dividend depends on company earnings. This is more prevalent where earnings are seasonal.

It all comes down to the dividend policy of the company.

Answer 4

When talking about “ordinary” shares it is not helpful to use the word “fixed” because really there is no such thing (preference shares are another discussion). In relation to ordinary shares, every board of directors has a unique dividend policy that they can change at any time.

On Sept. 18 2019 the Microsoft board of directors declared a quarterly dividend of $0.51 per share, and this is probably how you got the notion that they pay a “fixed” dividend of $2.04 per year.

However, the previous quarterly dividend was $0.46. And you can now see that the dividend is certainly not “fixed”.

Actually, Microsoft has an exemplary dividend history (increasing dividends every year since 2004) but there is nothing (other than precedent and good sense) preventing the board of directors from announcing that they will pay a different (or lesser) dividend next quarter.

The rest of your reasoning is spot on.

If you get all your dividend information from a third party (eg. Yahoo, Morningstar etc.) it may appear that dividends are “fixed”, but they are not. Nothing beats a look at the company’s own website or annual report.

Answer 5

Check out Aaron's (AAN), Apple (AAPL), AbbVie (ABBV), AmerisourceBergen (ABC), Abbott Labs (ABT), Accenture (ACN), Agilent (A), Analog Devices (ADI), Automatic Data Processing (ADP), etc.

Most seem to declare dividends which change from time to time but do change, I would suspect based upon earnings, the general economy and other companys' dividend declarations.

For example, here are the last few years of ADP: 2016/03 0.53; 2016/06 0.53; 2016/09 0.53; 2016/12 0.57; 2017/03 0.57; 2017/06 0.57; 2017/09 0.57; 2017/12 0.63; 2018/03 0.63; 2018/06 0.69; 2018/09 0.69; 2018/12 0.79; 2019/03 0.79; 2019/06 0.79; 2019/09 0.79.