Dividend policy analysis is a term that is used to identify how well the policies and procedures regarding the calculation and distribution of dividends are working for a particular company. The idea is to determine if the current procedure is providing an equitable return to investors while also allowing the business to retain enough of its net profits to support future growth opportunities. This type of analysis will take into account any dividends paid on any type of stock issue, providing a complete snapshot of how shareholders are being compensated for their continuing support.
The process of dividend policy analysis calls for understanding the specifics of the current dividend policy utilized by a company. This means that any internal or external body attempting to evaluate that policy must have access to every provision that has to do with the calculation and issuance of dividends to stockholders. Without a thorough understanding of the terms and provisions related to the dividend policy, any meaningful analysis is not possible.
Along with access to the actual policy, the process of dividend policy analysis will also require access to historical data that shows how those dividends were determined and distributed in the past. This can be helpful, especially if attention is given to the state of the economy at the time those dividends were issued. In addition to general economic conditions, taking into consideration the personal history of the company and identifying how that policy impacted the ability of the business to remain solvent or to keep growing in certain economic situations will also go a long way in determining if the current policy will remain viable in the future.
It is important to note that dividend policy analysis has the goal of carefully scrutinizing the current process and identifying not only the aspects that have the potential to create stress for company owners as well as shareholders, but also to determine what aspects of the current policy are in the best interests of both investors and the issuing company. This means that the analysis will identify both the benefits and the potential drawbacks of the dividend policy, and project what they could mean to the company in the future. Ideally, the results of a dividend policy analysis will provide owners with some ideas of how to proceed, in terms of whether the current policy is serving the interests of the company while also adequately compensating investors, or if efforts should be taken to make some sort of changes in that policy.