Final answer:
Boards of directors raise dividends when they can reasonably expect to maintain or increase such payouts, balancing shareholder rewards with the company's future growth needs. Executives influence board decisions, which can affect dividend policies. Increasing dividends signals stability but requires careful planning to meet future expectations.
Step-by-step explanation:
The statement that boards of directors tend to increase dividend per share when such an increase is reasonably expected to be maintained in the future is indeed true. Dividends are a portion of the company's profits distributed to shareholders, and they play a significant role in a company's financial strategy. A board would not raise dividends unless they believed the company's growth and profit would sustain such increases. Doing so would harm the company's credibility and may lead to a volatile stock price should dividends decrease later.
When considering dividend payouts, boards must balance immediate shareholder rewards against the long-term benefits of reinvestment. Opting for dividends transmits positive signals about the firm’s stability and the reliability of its cash flows. Furthermore, consistent and possibly growing dividends can attract a particular type of investor seeking regular income. However, firms that constantly increase dividends must be cautious, ensuring such decisions align with future earnings projections.
Moreover, top executives have considerable influence in shaping the board of directors, which, in turn, can affect dividend policies. While a firm’s success can lead to profitability and the potential for dividends, care must be taken to comply with regulations and to ensure the growth strategies are not compromised. In summary, increasing dividends is generally seen as a commitment that should not be taken lightly by the board, as investors will expect the company to maintain or increase its dividend payouts going forward. It is a financial decision that requires a thorough analysis of the company’s current and anticipated future financial health.