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A reduction in dividend might be seen by the financial markets as a sign of company weakness. So can management still choose to change dividend policy? Why less dividend and more reinvestment be seen as a company weakness, pls?
A reduction in dividend will not necessarily be seen as a sign of weakness.
However there are two potential problems.
The first is that not all shareholders are educated and their first reaction to a lower dividend might be that they think the company has problems.The second problem is that people often invest because of the dividend policy. For example, an old person might choose a company that has a policy of paying high dividends – they are more interested in the cash than in capital growth.
If the company decides to pay a lower dividend (even if it means more growth in the future) then they are going to be upset. Ultimately the company is there for the benefit of the shareholders!
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