Profits and Dumps Dividend Policy

Question: Discuss about the Profits and Dumps Dividend Policy. Answer: Introduction: Rio Tinto changed its dividend policy from a progressive one to the one based on payout from the earnings (Gilroy, 2016). The step was taken as a result of the unstable market conditions which resulted in low profits of the company in 2015-16. The companys profit was the lowest in the last 5 years. The price for most of the products of the company fell like iron ore, aluminium, copper resulting in low revenue. Also the company wanted to ease its balance sheet as it wanted to make an acquisition at low asset prices (Ker, 2016) The dividend relevance theory states that a dividend policy has an impact on the share price of the company (Hasan, Asaduzzaman, Karim, 2013). Dividends and share price have a direct relationship where with an increase in dividends the share price also increase and vice versa as can be seen from the above example also. This is because some investors are interested in cash income which comes through dividends. A reduction in dividends will have negative effect, thus bringing down the share price. Reference Gilroy, A., (2016), Rio Tinto Surprised the Markets with Dividend Policy Change, Market Realistic, accessed online on 18th January, 2016, available at https://marketrealist.com/2016/02/rio-tinto-surprised-markets-dividend-policy-change-results-line/ Ker, P., (2016), Rio Tinto reveals full year profits and dumps dividend policy for 2016, The Sydney Morning Herald, accessed online on 18th January, 2016, available at, https://www.smh.com.au/business/mining-and-resources/rio-tinto-reveals-full-year-profits-and-dumps-dividend-policy-for-2015-20160210-gmr2p1.html Yahoo Finance, (2016), Rio Tinto Ltd. (RIO.AX), Historical Prices, accessed online on 18th January, 2017, available at https://au.finance.yahoo.com/q/hp?s=RIO.AXa=06b=31c=2012d=10e=30f=2016g=v Hasan, A.A., Asaduzzaman, M., Karim, R.A., (2013), The Effect of Dividend Policy on Share Price: An Evaluative Study, IOSR Journal of Economics and Finance, Vol.1, No. 4