Financial Policies of Westpac Banking Corporation - Essay Example

Corporate Finance Contents Financial Policies of Westpac Banking Corporation related to Capital Structure 1 Dividend Payout Policies of Westpac 2 Buyback of Shares by Westpac 3 Capital Structure Decisions 4 References 6 Westpac Banking Corporation Westpac is a first ever financial institution in Australia that provided banking services to the citizens. It the second largest bank in the country in terms of market capitalization. Apart from Australia, the bank has operations in New Zealand and the Pacific regions. It has operations in other continents as well and has operations in New York, London, Singapore and Hong Kong. The bank is listed in the Australian Stock Exchange and has made a satisfactory performance over time. Financial Policies of Westpac Banking Corporation related to Capital Structure In 2008, Westpac went into a strategic alliance with St. George Bank Limited in a merger operation. In that merger the exchange ratio of St. George Bank Limited to Westpac Bank was 1.31. This means that the valuation of the assets of St George was at a higher level than that of Westpac, and therefore the shareholders of St George have got a better valuation as compared to the shareholders of Westpac. The bank went into a merger policy because it wanted to make more use of its resources and have a better financial health (Rosenbaum and Pearl, 2009, p. 36). This would also help the bank to survive in the long run. At this juncture to retain the positive sentiment of the investors, Westpac announced a special dividend of $ 1.25 per share. This has a positive impact on the prices of the shares and the prices seem to go up; therefore, it is a deliberate step on part of the company to keep a stable position in the securities market. Dividend Payout Policies of Westpac The financial history of the company reveals that dividend has been paid by the company bi-annually in the month of July and at the end of the year, December. The dividend yield for the stock holders had ranged from 0.56 to 0.86. The returns that the shareholders have got by investing in the company is well understood by the dividend yield paid ever time (Gallagher, 2003, p. 194). The mean and the standard deviation of the yield have been calculated. Mean 0.736666667 Standard Deviation 0.108857705 The average yield of the dividend has been 0.736. A dividend payout ratio of 70% per share would encourage the shareholders to invest more money in the stock and to hold the stock for a longer period of time. These dividends are directly transferred to the accounts of the shareholders. The company generally adopts any of the two dividend payout policies- the Dividend Reinvestment Plan (DRP) in which the retained earnings that the company generates are capitalized by the company instead of being distributed (Modigliani and Miller, 1958, p. 282). This is often known as the growth schemes by which the company acquires more assets or uses the money for productive purposes. The second option that the company takes is to distribute the dividends to the shareholders. The shareholders who look forward to short term investments and do not want to engage their money in the long term in the stocks of Westpac would prefer the second option because they would be getting a dividend yield of an average of 70% within 6 months time. For example, in the year 2010, the company paid out dividends at a ratio of 64.9% (Westpac Group, 2012). The share price of Westpac that time was at an average of 23.24. Thus it is lucrative stocks for the investors who would hold the stock for a minimum period of 1 year. Buyback of Shares by Westpac Most of the companies in Australia go for a share buyback for avoiding the risk that any bigger firm may take over the business (Doan, Yap, and Gannon, 2011, p. 69). Westpac followed on the similar line to keep the capital structure fundamentally strong. The company announced the buyback of shares as a strategy for successful management of its finances. The cash profit of the bank from interest income and other supplementary services got increased by 10% during this time. With the retained cash earnings being risen by 13% the amount of liquidity in the company increased. That was the reason why the company had taken this policy (Brown, 2007, p. 371). The liquid cash would be capitalized in a proper manner with the buyback of the share. This would send positive signals to the securities market. The investors would be encouraged to buy the stocks and hence the stock prices would go up. Since the buybacks are undertaken with an auctioning process, the buyers can make better bids and make a good bet with the shared of Westpac. The buyback process that the company undertook was of a value of $ 500 million. Along with that a supplementary buyback was also announced which as worth $ 15 million. Along with this buyback also the company declared dividends. This was done to make the markets more optimistic about the performances of the company and to communicate to the investors about the positive results that the company was making (Otchere and Ross, 2002, p. 511). Capital Structure Decisions The above analysis shows that Westpac has taken several decisions about how to pay out dividends and how the capital structures should be adjusted as per the needs of the company. These kinds of strategic decisions are however not unique for the bank. Most of the companies that are listed in the stock exchanges payout dividends to the shareholders. This is because whether an investor should invest in the stocks of a company does not depend on the prices of the shares but on the dividend yield that it pays out or the frequency in which the dividend is paid out. Along with this a lot of companies also go for buybacks to make use of their liquid cash and to strengthen their financial fundamentals. Mergers also take place between companies that have a common goal and want to maximize their profits out of their mutually exclusive resources. Other banks of Australia like ANZ Bank have also gone into such buyback strategies in order to capitalize their profit. Therefore it is not unique to Westpac. Most companies undertake this to increase the investor sentiments. . References Brown, C., 2007. The Announcement Effects of Off-Market Share Repurchases in Australia. Australian Journal of Management. Vol. 32 no. 2. Doan, D. H.T. Yap, C. J. and Gannon, G., 2011. Takeover Deterrent Effect of On-market Share Buyback in Australia. Australasian Accounting Business and Finance Journal, Vol 5(4). Gallagher, T., 2003. Financial Management. Eaglewood Cliffs: Prentice Hall. Modigliani, F. and Miller, M., 1958. The Cost of Capital, Corporation Finance and the Theory of Investment. American Economic Review. Vol. 48 (3): 261–297. Otchere, I. and Ross, M., 2002. Do share buyback announcements convey firm-specific or industry-wide information? A test of the undervaluation hypothesis. International Review of Financial Analysis. Volume 11, Issue 4. Rosenbaum, J. and Pearl, J. 2009. Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions. Hoboken, NJ: John Wiley & Sons. Westpac Group, 2012. Annual Report. Available at http://www.westpac.com.au/about-westpac/investor-centre/annual_reports/. [Accessed on 20 September, 2013]. Read More