Earnings and Dividends

 Some of you will be starting a new business course soon, and looking at the concept of a limited company.

 Stated simply, a company is a type of business in which ownership is split between shareholders. The more shares you own, the larger your cut of the profits the company makes. When a company makes profits, managers have to decide: should those earnings be retained (ploughed back into the business) or paid out to the shareholders as a dividend?

I came across this Telegraph article that shows how the largest companies decide the split between retained profit and dividends. I wonder why companies (as a whole) paid out almost all of their profits as dividends in 2003, whereas in 2007 and 2011 it looks to be rather less than half.

It’s an interesting question to consider. Perhaps you could discuss your views: should firms hold onto the earnings they make (to grow the business) or pay them out to the company’s owners as soon as possible?

The answer, as with most interesting questions is “it depends”, I suppose. The issue came up earlier this year in relation to Apple’s huge mountain of earnings.