Final answer:
The correct answer is option 2. Company managers typically support dividend consistency and avoid decreasing dividends once increased, aligning with traditional corporate practices and shareholder preferences for predictability.
Step-by-step explanation:
When addressing the question of how company managers feel about dividend policies, it is important to understand that dividends are a portion of profits paid out to shareholders. Companies with stable earnings, like Coca-Cola and utilities, often provide dividends to their shareholders, signifying a reliable income stream for investors. The preferences of company managers concerning dividend policies can vary widely, but one traditional perspective is that once a dividend is increased, it should generally not be decreased. This belief speaks to the concept of dividend consistency which shareholders favor as it provides them with predictability in their income.
However, it is not typically believed that dividends should be increased annually regardless of circumstances. A more prudent approach that some firms adopt is known as dividend smoothing, which involves making gradual changes to the dividend in accordance with long-term earnings expectations, rather than abruptly changing dividends in response to short-term earnings fluctuations. This helps in managing shareholder expectations and avoiding potential negative reactions from the market.
Additionally, the decisions on whether to issue stock, pay dividends, or reinvest profits are made by the board of directors, particularly in public companies, after considering the strategic needs of the company and sometimes the tax implications for shareholders. The philosophy here tends to prioritize corporate strategy, including reinvestment opportunities, over making regular dividend increases or responding primarily to the personal tax concerns of shareholders. Therefore, the assertion that dividends should be flexible and adjusted annually in response to changes in the firm's earnings seems to be more in line with the practical realities of corporate finance.
Taking all into consideration, the most accurate reflection of common dividend policy among company managers would be option 2: once a dividend is increased, it should not be decreased as this option aligns with the principles of dividend consistency and stability that are favored in actual practice.