Fellingham plc has 20 million ordinary £1 shares in issue. No shares have been issued during the past four years. The business’s earnings and dividends record taken from the historic accounts showed:

Year 1 Year 2 Year 3 Year 4 (most recent)

Earnings per share 11.00p 12.40p 10.90p 17.20p Dividend per share 10.00p 10.90p 11.88p 12.95p At the annual general meeting for Year 1, the chairman had indicated that it was the intention to consistently increase annual dividends by 9 per cent, anticipating that, on average, this would maintain the spending power of shareholders and provide a modest growth in real income.
In the event, subsequent average annual inflation rates, measured by the general index of prices, have been:
Year 2 11%
Year 3 10%
Year 4 8%
The ordinary shares are currently selling for £3.44, excluding the Year 4 dividend.
Required:
Comment on the declared dividend policy of the business and its possible effects on both Fellingham plc and its shareholders, illustrating your answer with the information provided.