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Modigliani and Miller argued that the level of dividend is irrelevant and that is simply the level of profits that matters. This is quoted from the notes. Isn’t profit also influenced by the level of dividend retained. hence profit growth.?
If all the profits are paid out as dividend, there there is nothing left to invest in expanding the business and therefore there will not be growth in the profits. So there will be high dividends but no growth in dividends (and therefore no growth in the share price).
If some of the profits are retained then there is money left to expand the business which will lead to growth in the profits. So there will be lower dividends but dividends will grow (and so too the share price will grow).
Modigliani and Miller suggest that shareholders are indifferent between high dividends and no growth, and lower dividends with growth. Therefore it makes no difference what a company decides to do regarding their dividend policy. (For example, if the company is paying high dividends (and so no growth), then if a shareholder wants growth they could always invest some of the dividends received themselves.
This is true in theory but not in practice. Partly because shareholders want the company to operate the policy rather than have to go to the trouble of doing it themselves, and partly because of the differences between the taxation of dividends and the taxation of capital gains.
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