Corporate Finance of the Schindler Holding AG - Case Study Example

I. The Company Summary Schindler Holding AG is a 130-year company that has started as a local manufacturer of machines (Schindler Holding Ltd 2009).Over the century, the company has grown from a local machine manufacturer to a second largest global manufacturer of escalators and elevators, next to Otis Elevator (Yahoo Finance 2009). The company has two major divisions-the Elevators and Escalators division, as well as ALSO (Google Finance 2009). The company's product range includes escalators and elevators and moving walkways for use in offices, commercial properties, cruise ships, train and subway stations, airports, and other public and government buildings (Yahoo Finance 2009). The company's other division, ALSO, provides 'information and communications technology and consumer electronics in the wholesale and logistics sectors (Google Finance 2009).' Schindler operates in 125 countries, with its 45,063 employees around the world, while most of its ALSO operations cater to European customers (Yahoo Finance). II. Company Strengths and Weaknesses A. Ratio analysis i. Firm liquidity A firm's liquidity is measured by certain financial ratios which include the current ratio, quick ratio, and average collection period. Schindler Holding's current ratio is 1.45 in 2004, 1.3 in 2005, 1.31 in 2006, 1.29 in 2007, and 1.33 in 2008 (see Table 1 in the Appendices). The company's quick ratio is 1.06 in 2004, 0.92 in 2005, 0.87 in 2006, 0.84 in 2007, and 0.95 in 2008 (see Table 1 in the Appendices). As for the company's average collection period, the company collects its accounts receivable in 53.81 days in 2004, 58.29 days in 2005, 59.73 days in 2006, 52.13 days in 2007 and 47.45 days in 2008 (see Table 1 in the Appendices). Exhibit 1 in the Appendices shows the trend of Schindler Holding's current ratio and quick ratio. The company's current ratio has declined from 2004 to 2005, increased from 2005 to 2006 then declined again to 2007. From 2007 to 2008, this ratio is increasing. The company's quick ratio on the other hand has faced a constant decline from 2004 up to 2007. In 2008, the company's quick ratio has increased from 2007. The difference in the trend between the two ratios tells one thing-while the company has increased its current assets in 2006, the increase is mainly attributed to assets aside from cash, short-term marketable securities and accounts receivable. Exhibit 3 in the Appendices shows an lengthening collection period from 2004 to 2006. From 2006 to 2008, however, the trend goes downward. This means the company has cut down on its collection period. The shorter the collection period, the shorter the operating cycle is and cash comes back to the company from its operations more quickly. ii. Operating efficiency The company's operating efficiency is measured by ratios such as the company's inventory turnover, fixed asset turnover, and total asset turnover. Schindler Holding's inventory turnover in 2004 is 22.53 times, 21 times in 2005, 17,87 times in 2006, 16.13 times in 2007, and 18.71 times in 2008 (see Table 1 in Appendices). Exhibit 2 shows the trend for this ratio; from 2004 up to 2007, Schindler Holding's inventory turnover ratio is in a downward trend before it goes up in 2008. Since inventory turnover ratio determines how fast a company disposes inventories and turn into cost of goods sold to the company. The company has become less efficient in converting its inventories into sales from 2004 to 2007, until it has improved its efficiency in 2008. The company's fixed asset turnover ratio measures how hard the company's fixed assets are employed in terms of contributing to the company's revenues. In 2004, this figure amounts to 15.42 times, 20.34 times in 2005, 22.97 in 2006, 27.29 times in 2007 and 28.83 times in 2008 (see Table 1 in the Appendices). This ratio has an upward trend from 2004 to 2008 (Exhibit 2), which means the company increases the efficiency of its fixed assets, in relation to revenue generation. The company's total asset turnover in 2004 is 1.57, 1.56 in 2005, 1.67 in 2006, 1.92 in 2007, and 2.01 in 2008 (Table 1). The downward trend from 2004 to 2005 has been reversed from 2005 up to 2008 (Exhibit 2). Since 2005, this ratio is increasing over the years. Schindler Holding has made its total assets work harder in order to generate revenue, as apparent in the upward trend of the ratio. iii. Financing decision Schindler Holding utilises both equity and debt in financing its operations. The company uses 72% of debt in financing its operations in 2004, 69% in 2005, 70% in 2006, 71% in 2007 and 70% in 2008 (Table 1). This debt policy is relatively stable for the company over the years, which is illustrated by the relatively flat trend for the company's debt ratio. iv. Profitability In order to measure the company's profitability, four ratios are used for the analysis-the operating profit margin on sales, the net profit margin on sales, the return on total assets, and the return on equity. In 2004, the company's operating profit margin is 6% of sales, 7% in 2005, 7% in 2006, 6% in 2007 and 6% in 2008 (Table 1). The trend for this ratio has been relatively flat over the years (Exhibit 4). This signifies that the company has managed to maintain its cost of sales as a relative percentage over the years. Schindler Holding net profit is 4% of its revenues in 2004, 5% in 2005, 5% in 2006, 2% in 2007, and 5% in 2008 (Table 1). The company's net profit is in a flat upward trend until 2006, until it goes down in 2007, but increases in 2008 (Exhibit 4). According to the company's 2007 financial statements (Schindler Holding Ltd 2007), this huge decrease in the company's net income is attributable to a high anti-trust fine. The company's return on assets is 6% in 2004, 7% in 2005, 8% in 2006, 4% in 2007, and 9% in 2008 (Table 1). This profitability measure of the company has the same trend as its net profit margin on sales (Exhibit 4). Because profits are decreased by the anti-trust fines, the return on assets has also decreased in 2007 before it goes up in 2008 (Schindler Holding 2007). Schindler Holding's return on equity is 24% in 2004, 24% in 2005, 25% in 2006, 13% in 2007, and 31% in 2008. The difference between the company's ROA versus its ROE is determined by the company's use of financial leverage. In relation to the company's debt ratio which is earlier discussed, the company usually employs 70% of debt in its capital structure which provides leverage, and increased the returns to shareholders. B. Dividend policies i. Basic Literature Many academics have dedicated some time and effort to the topic of dividend policy in finance. The relationship between the company's stock values and dividends have long been argued between academicians and the practitioners (Baker & Powell 1999). There are prevalent views as regards dividend policy decisions-the dividend irrelevance theory of Modigliani and Miller (Baker & Powell 1999), the bird-in-the-hand theory which is popularised by Myer Gordon (Bar-Yosef & Kolodny 1976), and the low dividend or tax preference theory (Baker & Powell 1999). The irrelevance theory of Modigliani and Miller argues that there is no significant relationship between a company's stock price and its dividend policy (Sadka 2007). However, this only works in a perfect market where there are no distortions and inefficiencies, i.e. taxes, transaction costs such as brokerage commissions, perfect information, no agency costs as well as no costs of financial distress (Hakansson 1982). Because the real world is not the same as the perfect markets of Modigliani and Miller, dividend policy is relevant. According to the bird in the hand theory, on the other hand, dividend policy is significant. This theory suggests that high dividends increase a company's stock value (Leeds 1990). This is because of the apparent increases in stock prices when announcement of dividends are made. Because the company pays dividends for every outstanding stock, the assumption is that the risks to investors have been minimised (Hakansson 1982). The cash flow from the dividends has been treated like the cash flow from bonds and preferred shares of a company, under this theory assumes the relationship to the company's increase in stock price (Leeds 1990). However, because of the differences in treatment when it comes to taxes for dividend income and capital gains, the third theory, the tax preference theory suggests that high dividends in effect hurt investors (Chang & Rhee 1990). Because of the high taxes for dividend income, the higher dividends hurt investor, which in turn affects the company's stock price (Hakansson 1982). The tax deferral feature of taxes for capital gains also provide some advantage over paying higher dividends, where taxes are required to be paid as soon as the dividends are paid to the investors (Hakansson 1982). Therefore, paying low dividends will in turn maximise the company's stock price-taxes on capital gains are usually deferred and there is less risk associated with the stock because of the presence of a cash payment in the form of dividends (Chang & Rhee 1990). ii. Company's Dividend Policy Implications The company's dividend policy is comprised of its dividends per share and its payout ratio. In relation to the dividends per share, the company's basic earnings per share is also assessed, as well as the company's price-earnings ratio. The company's basic earning per share in 2004 is 2.49, 3.05 in 2005, 3.96 in 2006, 2.08 in 2007, and 5.15 in 2008 (Table 3). The company's EPS has been in a constant increase from 2004 to 2006, until the trend is reversed from 2006 to 2007, before it increases again in 2008 (Exhibit 5). The anti-trust fine has affected the company's profitability in 2007, which has, in effect, reduced the company's EPS as well (Schindler Holding Ltd 2007). As the company's income grow, without any huge increases in the number of outstanding shares through seasoned equity offerings, the company's EPS grows with its net profit. The company's dividends per share has been constantly growing over the course of the years (Exhibit 5). The company's dividends per share amount to 0.7 in 2004, 0.9 in 2005, 1.3 in 2006, 1.6 in 2007 and 2.0 in 2008 (Table 3). Although the company follows an increasing dividend policy, the growth of the dividends are not constant. This is consistent with the company's payout ratio which has also grown steadily over the years (Exhibit 5). The company's payout ratio in 2004 is 28.4%, 29.8% in 2005, 33.3% in 2006, 36.4% in 2007 and 36.6% in 2008 (Table 3). In order to calculate the price-earning ratio of Schindler Holding's stock, stock price before the end of the year, specifically on the 21st of December each year is used for the analysis (Schindler Holding Ltd 2009). The company's P/E ratio in December 2004 is 18.24, where the stock price is 45.5 and the EPS amounts to 2.49 (after being adjusted for the 10:1 stock split in March 2006, for the purpose of comparative analysis). In December 2005, the company's P/E ratio has decreased with the increase in the company's stock price to 50.95, and but a higher increase in the company's EPS, which amounts to 3.05. The company's P/E ratio in December 2006 is 19.09 as its stock price has gone up to 75.6, and its EPS has gone up to 3.96. The company's EPS in December 2007, however has gone up to 34.76 even though its stock price has gone down to 72.3. This is mainly because of the decrease in the company's EPS, which has gone down to 2.08. In December 2008, the company's P/E ratio has gone down to 9.22. This decline in the P/E ratio is attributable to a drastic decrease in the stock price, which has gone down to 47.5, and an increase in the company's EPS which amounts to 5.15. Schindler Holding Ltd has a dividend policy that includes a constant increase in dividends and payout ratio over the years. The decrease in EPS in 2007 due to the anti-trust fine that the company has incurred has resulted in investors' adverse reactions which has brought the company's stock price down in 2008. Although the company's financials have been strong in 2008, the stock price does not reflect this improvement in the company's fundamentals, and has resulted in lower P/E ratio for its stock. III. Summary, Conclusions and Recommendations All in all, the company has been steadily growing, with strong fundamentals as measured by the upward trend in the ratios that are used in the analysis. Although liquidity issues and increasing operating efficiency can still be addressed and improved, the company has remained very profitable over the years, with the exception of one year, 2007 where the anti-trust fines that Schindler Holding Ltd has incurred affected its profits, and hurt its stock price in the process. But this is an outlier event. In perfect markets, dividend policy may not matter. However, because of certain inefficiencies in the market, especially in the form of taxes, dividend policy matters as to how investors perceive the company's value. While Schindler Holding pays dividends, it does not pay high dividends which will hurt the company's investors due to high taxes for dividend incomes. The low dividends that the company pays maximise the value of Schindler Holdings. Because of the higher EPS and the higher dividend in 2008, these improvements in the company's fundamentals will be incorporated in the company's stock price in the coming period. Because the company has strong fundamentals, it is good a good thing if Martin Mayer invests in the company's stocks for the intermediate period, with the benefit of receiving additional cash in the form of dividends. Appendices References Baker, H. Kent, and Gary E. Powell. 1999. "How Corporate Managers View Dividend Policy." Quarterly Journal of Business & Economics 38, no. 2: 17. Business Source Premier, EBSCOhost (accessed November 15, 2009). Bar-Yosef, Sasson, and Richard Kolodny. 1976. "DIVIDEND POLICY AND CAPITAL MARKET THEORY." Review of Economics & Statistics 58, no. 2: 181. Business Source Premier, EBSCOhost (accessed November 13, 2009). Chang, Rosita P., and S. Ghon Rhee. 1990. "The Impact of Personal Taxes on Corporate Dividend Policy and Capital Structure Decisions." FM: The Journal of the Financial Management Association 19, no. 2: 21-31. Business Source Premier, EBSCOhost (accessed November 15, 2009). Google Finance. 2009. "Schindler Holding Ltd." Company. Google.com (accessed November 13, 2009) from http://www.google.com/finance'q=SWF:SCHN HAKANSSON, NILS H. 1982. "To Pay or Not to Pay Dividend." Journal of Finance 37, no. 2: 415-428. Business Source Premier, EBSCOhost (accessed November 13, 2009). Leeds, Eva Marikova. 1990. "The bird-in-the-hand argument revisited." Atlantic Economic Journal 18, no. 4: 77. Business Source Premier, EBSCOhost (accessed November 13, 2009). SADKA, GIL. 2007. "Understanding Stock Price Volatility: The Role of Earnings." Journal of Accounting Research 45, no. 1: 199-228. Business Source Premier, EBSCOhost (accessed November 15, 2009). Schindler Holding Ltd. 2004. "Company Annual Report." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_pdf_schindler_fb04_e.pdf Schindler Holding Ltd. 2005. "Company Annual Report." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_e_fb05.pdf Schindler Holding Ltd. 2006. "Company Annual Report." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_pdf_finance06_e.pdf Schindler Holding Ltd. 2007. "Company Annual Report." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_kg_ir_schindler_fb07_e_complete.pdf Schindler Holding Ltd. 2008. "Company Annual Report." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/schindler_fb_08e.pdf Schindler Holding Ltd. 2009. "Company Factsheet." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_index/group_kg_about/group_kg_ir/group_kg_ir_company_factsheet.htm Schindler Holding Ltd. 2009. "Dividend Policy and Payout Ratio." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_index/group_kg_about/group_kg_ir/group_kg_ir_divid.htm Schindler Holding Ltd. 2009. "Share/Bearer Participation Certificates Information." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_index/group_kg_about/group_kg_ir/group_kg_ir_sharebpc.htm Schindler Holding Ltd. 2009. "Strategic Direction." Schindler Holding Ltd. Schindler.com (accessed November 13, 2009) from http://www.schindler.com/group_index/group_kg_about/group_kg_strategy.htm Yahoo Finance. 2009. "Schindler Holding Ltd." Company. Yahoo.com (accessed November 13, 2009) from http://biz.yahoo.com/ic/91/91987.html Read More