Dividend Policy of the Coca-Cola Company - Essay Example

The Coca-Cola Company (NYSE:KO) dividend policy A profit refers to the payments made to the shareholders from the profits made by a company. Payments of dividends provides a return for shareholders to compensate them for the loss of utility of the cash that they have invested and the risk they have taken .the compensation being referred for the opportunity cost of tying their capital up in company. It’s made of the same things as the cost of capital when discounting. According to Maximizing shareholder wealth means maximizing the flow of dividends to shareholders through time. The governing objective of the company should be to maximize the value of the company for shareholders but to achieve this purpose, it also requires serving the economic interests of all stakeholders over time as maximizing stakeholders interests also maximizes shareholder wealth. According to (Altucher, 2005)Coca-Cola company pays its dividend quarterly though currently it offers a yield of about 2.8%.The stocks quarterly payout of 0.28 dollars per share has held a stable all the way through 2013 .the company has had a history of raising dividends on a yearly basis. For the year 2013 based on the analyst, Coca-Cola pay-out ratio sits around 53.68% and for this year it has a pay-out ratio of 50%.Shareholder wealth being defined as the net present value of the expected future returns to the shareholders of the firm where these returns can take the form of periodic dividends payments and proceeds the sale of the stock whereby the shareholder wealth is measured by the market value of the firms common stock. Through the quarterly periodic of paying dividends to the Coca-Cola company, shareholders have in a way promoted the maximization of the shareholders wealth. Since 2008 Coca-Cola has increased its dividend by more than 60% where in the year 2008 its dividend per share was $0.76,$0.82 in the following year,$0.88 in the year 2010,$0.94 for the year ended 2011,$1.02 in the year 2012 and $1.12 dividend per share for the last year and currently having $1.22 dividend per share. This has given Coca-Cola Company a very solid yield of approximately 2.95%.Free cash flow is a financial metric that helps Coca-Cola company yield 2.95 % and allow for the continual increase. Quarterly an year Coca-Cola company approximately its left with about $6.824 billion after paying its bills, employees, taxes, interest on debt and making necessary capital expenditure which on the statement of cash flow its calculated by subtracting capital expenditures from net cash provided by operating activities. Analysing the five-year historical look at the Coca-Cola earnings growth from the year 2006 is as follows: 2007-$5.981 billion, which was a 17.73% increase over year 2006 2008-$5.807 billion, a decrease of 2.99% 2009-$6.84 billion, an increase of 17.55% 2010-$11.809 billion an increase of 73.05% and for the year 2011 it had a $8.572 billion decrease of 37.76% .clearly from the trend it can be seen that Coca-Cola earnings growth over the past five years is positive thus making the assumption that the company makes a net profit of $6.824 billion showing an increase of 43.32% over its 207 earnings. In analyzing a company’s gross profit calculated by the Total sales –Cost of sales ,it is very crucial as it indicates how efficiently management uses labor and supplies in the production process where specifically its used to calculate gross profit margin of the firm. For the past two years Coca-Cola’s gross profit is as follows: Year 2010 - $35.119 billion - $12.693 billion = $22.426 billion, Year 2011 - $46.542 billion - $18.216 billion = $28.326 billion. According to (Rappaport, 1999)Gross profit being a measurement of company’s manufacturing and distribution efficiency in the production process is calculated by Gross Income divided by Sales. Investors tend to pay more for the businesses that have higher efficiency ratings than their competitors as the business should have the capability to make a decent profit as long as overhead costs are controlled. Analyzing Coca-Cola’s gross margin over the past 5 years, the highest margin was at 68.39% in the year 2008 while the lowest margin of 60.86% in the year 2011. For the year 2007 with $18.451 billion / $28.857 billion = 63.94%, Year 2008 had $20.570 billion / $31.944 billion = 64.39%, In the year 2009 it had $19.902 billion / $30.990 billion = 64.22% and for the year 2010 - $22.426 billion / $35.119 billion = 63.86%. 2011 - $28.326 billion / $46.542 billion = 60.86%.this consistent in the gross margin implies that the management has been very reliable in the competence of manufacturing and distribution in the production process. According to (Lambert, 2000)Operating margin calculated by dividing operating income by total sales is defined as a measure of the proportion of a companys revenue that is left over after paying for variable costs of production, such as wages and raw materials. A strong operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. If a companys margin appreciates in value, it is earning more per dollar of sales. Coca-Colas operating margin for over the past 5 years, has been good with 2010 reporting the highest operating margin at 39.13%.listed are the operating marginal for the Coca-Cola company for the past 5 years: 2007 - $7.252 billion / $28.857 billion = 25.13% 2008 - $8.446 billion / $31.944 billion = 26.44% 2009 - $8.231 billion / $30.990 billion = 26.56% 2010 - $13.741 billion / $35.119 billion = 39.13% 2011 - $10.732 billion / $46.542 billion = 23.06% Since the operating margin has been good for over the past 5 years, there has been relatively the same percentage of total sales left over, for paying for variable costs of production, such as wages and raw materials enabling the Coca-Cola Company to maximize the shareholder wealth In the profitability ratios defined as an indicator of how profitable a company is relative to its total assets. It gives an idea how reliable management is at using its assets to generate earnings. Return on assets ratio is calculated by dividing a companys net income by total assets given in percentage. According to (Engelberg, 2012)Coca-Cola’s return on assets over the past 5years ratios has been very constant expect for a drop in 2011. The return on asset ratio for this company reduced from 16.19% in 2010 to 10.17% in 2011.The return on asset ratio for the past ten years are as follows: Year 2007 with $5.981 billion / $43.269 billion = 13.82%, Year 2008 had $5.807 billion / $40.519 billion = 14.33%, Year 2009 - $6.824 billion / $48.671 billion = 14.02%, Year 2010 - $11.809 billion / $72.921 billion = 16.19% and Year 2011 - $8.572 billion / $79.974 billion = 10.17%. The current return on asset ratio of 10.17% is lower than the 5-year average of 13.70%. This clearly indicates that management was less reliable at using the companys assets to generate earnings compared to its 5 year average. According to (Shaban, n.d.)The cash flow margin calculated by dividing cash flow from operating activities by total assets helps determine whether the company is making profit and not losing money as a negative number in the in the cash flow margin equation means that although the company is generating sales revenue it is losing money. In Coca-Cola Company, for the last 10 years its cash flow margin is positive so it does not require to take measures of borrowing money or raise money from investors for it to keep operating .following are the illustrations for the past 10 years showing the cash flow margin in each year: Year 2007 - $7.150 billion / $28.857 billion = 24.77%, Year 2008 - $7.571 billion / $31.944 billion = 23.70%, Year 2009 - $8.186 billion / $30.990 billion = 26.41%, Year 2010 - $9.532 billion / $35.119 billion = 27.14% and year 2011 - $9.474 billion / $46.542 billion = 20.35%. Free Cash flow which is the operating cash flow less capital expenditure represents the cash that the company is capable of generating after laying out the money required to expand its asset base. Free cash flow are important in that it allows a company to pursue opportunities that enhance shareholder value as it is hard to develop new products ,make acquisitions, pay dividends and reduce debt without having to borrow or raise money to maintain operations. Over the past 5 years, Coca-Colas free cash flow has been positive and increasing as seen below: Year 2007 with $7.150 billion - $1.648 billion = $5.502 billion, Year 2008 with $7.571 billion - $1.968 billion = $5.603 billion, Year 2009 with $8.186 billion - $1.993 billion = $6.193 billion, Year 2010 had $9.532 billion - $2.215 billion = $7.317 billion Year 2011 with $9.474 billion - $2.920 billion = $6.554 billion Year 2012with $10.474 billion - $2.920 billion = $7.554 billion and Year 2013with $11.474 billion - $2.920 billion = $8.554 billion This clearly indicates that Coca-Cola has enough cash to develop new products, make acquisitions, pay dividends and reduce debt that helps maximize the shareholders profit. Every company should have dividend policy that enables shareholders to make decisions regarding their shares and help maximize their wealth. Coca-Cola Company has its own dividend policy. For a shareholder in a Coca-Cola company to transfer shares where he or she is an ordinary shareholders that can only be transferred through selling .the share owners of the record is required to fill a form which its only after it has been processed that the share transferring will be accepted. Coca-Cola Company pays the dividend after considering the accumulated retained profit so that it will be possible to pay the dividend and if the cash is not immediately available the alternative to borrow to pay a dividend. According to (Coyle, 2002)Shares can either be cum-div or Ex-div whereby a share is referred to as Cum-div if the owner of the share is entitled to receive the forthcoming dividend and for the Ex-dividend share its a share whereby on a certain date Cum-dividend changes to Ex-dividend. Though once a share goes to ex-div it becomes less attractive, the Coca-Cola company implements use of Ex-dividend shares where it pays dividend quarterly of $ 0.305 on October 3rd this year. Firms have different alternatives dividend policy. According to (Miller, 1961)the choices of whether accepting cash dividend at present or adopting a larger dividend in the future is what is referred to as the dividend policy. This, therefore, means dividends can be also paid as stock dividends, which may provide the stockholders ensured capital gains. The decision of dividend policy is very crucial as different shareholders may have various views regarding current cash dividends and future increased dividend. Coca-Cola Company has several alternatives dividend policies. Residual theory of dividends that means that after-tax cash generated from operations is first used to fund forthcoming investments where the balance is later paid as a dividend is implemented by this company. This policy is important as the first priority in finance shall be given to the most profitable investment opportunities. According to (Baker, 2002)dividend stability is the other dividend policy wherein different time period the income of a firm may differ thus most firms do not prefer to have an erratic dividend payment along with their differing earnings where the company tries to maintain stability in their dividend policy and this does not guarantee that the dividend may not change over a period of time. This stability is mostly concerned with the positive correlation between previous dividends and the present dividends. Coca-Cola being a large mature company with high share price and a long history gives priority of secured dividends payments, and their shareholders receive dividends quarterly. From 1994 to 2004 the dividend per share of Coca-Cola West plc.Slowly appreciated from 17.5 to 40.0. Such policy takes the M&M model into reflection and continually adopts a simple form of dividends payment. Having such dividend policy, Coca-Cola Company needs to put more attentions to its profitability. The investors won’t sell their share since the company shows good profitability and carries out a regular and high dividend return. This also has some correlation to the stability theory of dividend policy. Besides, Coca-Cola Company also takes advantage of the residual theory in their dividend policy, which refers to full deliberation of the company’s retained earnings and current performances, as well as future business opportunities. This ensures maximization of the shareholders wealth. There are arguments made in favour of dividend irrelevance where some assumptions are made regarding dividends. Coca-Cola Company pays its dividend quarterly a year, and shareholders or those who want to buy shares makes the assumptions on the amount of dividend paid, share price and the market capitalization. Some investors like the idea of reliable dividends every year. Coca-Cola being one of the reliable company and its quarterly, whereby even if the price per share of their stock doesn’t go up much every year, they still make money from these payments .shareholders get paid regardless of the number of shares they own. Taxation purposes, the dividend is regarded as income whereas profit made on selling a share is a capital gain .depending on the size of the gain and underlying taxation liabilities which is preferred may change. Signalling There is empirical evidence that dividend announcements convey information that is useful to shareholders.Shareholders are not as well-informed as directors about the prospects of the company.Announcing a depreciated dividend may be seen as a negative indicator, even if this is explained as retaining cash to fund new investments, If the company has poor trading results, the announcement of an unchanged dividend may be treated as a signal of good future prospects. Coca-Cola Company has a good trading result thus there are no cases of unchanged dividends Reference List Altucher, J., 2005. Trade Like Warren Buffett (Vol. 222). John Wiley & Sons.. s.l.:s.n. Auerbach, A. J., 1980. Wealth maximization and the cost of capital. s.l.:s.n. . Baker, H. K. &. S. D. M., 2002. In Search of a Residual Dividend Policy.. s.l.: Journal of finance and Real Estate.. Coyle, B. (., 2002. Overview of the Markets.. s.l.: Global Professional Publishi.. Engelberg, J. G. P. &. P. C. A., 2012. . Friends with money.. S.l.:Journal of Financial Economics, 103(1), 169-188.. Lambert, D. M. &. B. R., 2000. Measuring and selling the value of logistics.. s.l.: International Journal of Logistics Management, The, 11(1), 1-18. Miller, M. H. &. M. F., 1961. Dividend policy, growth, and the valuation of shares.. s.l.:the Journal of Business, 34(4), 411-433.. Rappaport, A., 1999. Creating shareholder value: a guide for managers and investors. Simon and Schuster.. s.l.:s.n. Shaban, O. S. &. A.-Z. Z., n.d. ATINERs. S.l.:Conference Paper Series BLE2014-0901.. Read More