Dividend policy defines how a company allocates its distributable earnings between dividend distributions to shareholders and retained earnings reinvested in the business. It reflects the balance between rewarding current shareholders and funding future growth. In business valuation, dividend policy is relevant for the dividend discount model and for assessing a company's reinvestment rate (g = ROE × retention ratio). In due diligence, the historical dividend policy reveals the capital allocation discipline of management and the actual cash distributed to shareholders — relevant for identifying hidden distributions or related-party payments masked as dividends.

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Example: a Swiss family-owned company has paid CHF 1.2 million in annual dividends over the last 5 years (payout ratio: 80%), leaving minimal retained earnings for reinvestment. Post-acquisition, the buyer plans to reduce dividends to 30% of net income to fund an organic growth programme — a change in dividend policy that must be modelled in the post-acquisition business plan and communicated to any remaining minority shareholders.

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Hectelion analyses dividend policy and payout history as indicators of capital allocation discipline and distributable cash in every acquisition due diligence.