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While conducting the analysis of EMI group’s dividend policy, one factor that stood out to us was the clientele effect. The clientele effect shows us who holds most of our outstanding shares. High tax-bracket individuals would prefer zero-to-low dividend payout to save on taxes. Low tax-bracket individuals would prefer a low-to-medium dividend payout, which gives them additional income while helping them save on taxes. An investing corporation would prefer a higher dividend payout because if they own a significant amount of shares, say 1 million, the income stream from that dividend would provide the company with more monetary resources while benefitting from tax exemptions. So before setting a dividend policy for EMI group, we must first determine who holds that majority of our shares and how many shares they hold. We found that 83% of EMI’s investor base is occupied by groups or institutions that own 1,000,000 shares or more. All of the significant shareholders are large corporations, who not only prefer, but demand a high dividend yield or payout. Only 0.2% of EMI’s shareholders are individual investors who own 500 shares or less. The payment of an 8p per share dividend is a significant amount for those larger investors who own 1 million+ shares. While to the smaller investors, who own less than 500 shares, a dividend of 8p per share doesn’t seem like much. So, not paying the scheduled dividend would significantly affect those larger investors who were expecting to see a high additional income figure from the dividend payment. Therefore, these large investors would begin to unload the EMI stock from their portfolios, which would be reflected in the decline of EMI’s stock price.

The clientele effect plays a significantly large role in the process of determining EMI’s dividend policy, as does the company’s future outlook—depending on the success of the restructuring plan. Although the restructuring plan will reduce costs, there is no sign to show us what affect it will have on future revenues. As we assume future growth in digital sales, EMI should be able to cuts its costs and increase its earnings. Over the past few years, digital revenue has grown 59%. EMI has also decided to make a joint announcement with Apple (AAPL) that it will be the first major music company to offer a free digital catalog and improve sounds quality. This could possibly drive digital sales even higher. This restructuring plan gives us a positive outlook on the future of the company. With that said, keeping the dividend at 8p per share would not fool investors into thinking that the company is doing fine when it is not. Management does, in fact, believe that the future of the company is looking up.

Another big issue brought to our attention is the hypothesis of dividend signaling. What kind of message are we sending to our investors through our dividend policy? According to, dividend signaling suggests company announcements of an increase in dividend payouts act as an indicator of the firm possessing strong future prospects. A manager who has good investment opportunities is more likely to "signal" than one who doesn't because it is in his or her best interest to do so. In EMI’s case, decreasing or omitting a dividend would send out a message of defeat to investors. If investors do not think that EMI’s management has high confidence about the future, they will begin to sell their shares in the company and EMI’s stock price will further decline. So, the dividend signaling hypothesis tell us that cutting the dividend is BAD for the company as it will lose shareholders after doing so.

EMI’s current income is negative, so this poses the question: Where would the money for this dividend come from? Since the company has future near term growth with the projections of the restructuring plan, net income will (if all goes well) go up in the coming years. The best way for EMI to continue on with paying the dividend would be to take on more long-term debt in order to make these payments. Although it may not seem like a good idea to increase the company’s debt while its income is negative, it is a necessary evil because 83% (majority) of EMI’s shares are owned by corporations who prefer and demand the same scheduled dividend or they take their money and invest it elsewhere. So, with net income projected to increase in the near future through restructuring, EMI will be able to service its debt obligations while satisfying its shareholders.


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