Capital Structure and Dividend Policy - Case Study Example

Capital Structure and Dividend Policy Capital Structure and Dividend Policy Introduction For the purpose of this report, two companies have been chosen - Limited Brands Inc. and News Corporation. Limited Brand Inc. is a worldwide company which sells lingerie, personal care and beauty products as well as apparel and other accessories. The company has more than 2,600 stores operating in the US. Limited Brands is also selling its products through more than 680 companies worldwide (Limited Brands Inc, 2013). News Corporation is one of the top television groups in the world. Its business includes the best broadcasting company of United States called Fox Broadcasting Company. News Corporation’s cable network programming segment produces and issues licenses for programming to be broadcast on satellite. In addition to this News Corporation is one of the best motion picture producers. Fox Filmed Entertainment is considered to be the market leader in the movie production and distribution (News Corporation, 2013). In this report, some of the strategic decisions made by the companies in the year 2012 and 2011, have been considered and their impact on profitability. Capital structure has also been discussed in detail as well as dividend policy (1)Business Decisions News Corporation In June 2012, the board of director of the New Corporation decided to operate with two specializes segments. One of the segments will focus on news, publishing and education and the other segment will focus on the media and entertainment. The company believes that they will be able to achieve the expected rate of growth with the application of this change. Return on assets measures which the profit in terms of total assets used by the business (Berman & Joe, 2008), for the quarter ended March 2012 was only 1.49% because the total profit was only $937 million and the total assets were $62,745 million. The profit was continuously declining and the company sustained loss of $1,553 million in the quarter ended June 2012. After this decision the profitability in both the quarter ended was improved. News Corporation enabled itself to achieve 3.56% returns on assets in the September quarter and this return further improved a bit in the last quarter and it reached to 3.79%. Market capitalization can be calculates by multiplying the number of outstanding share with the share price on a particular day (Francesco, 2007). The total number of outstanding shares is 1,584.5 million. Share price were increased from $19.71 per share to $25.51 per share in December 2012 which resulted in increased market capitalization. Market capitalization in March 2012 was $31,230.5 (1,584.5 million shares*$19.71) million as compare to the market capitalization of the $40,420 (1,584.5 million shares*$25.51) million in December 2012. News Corporation repurchased capital stock of $4.6 billion in the year ended June 2012. The company is planning to repurchase another $5 billion share from the market next year. This repurchase will definitely improve the profitability in the long. EPS will improve significantly together with ROCE. Since the capital employed will decrease by the heavy amount and there is no serious decline is expected in the profit. However, market capitalization will also decrease since the number of outstanding shares will decline. The company took initiative to make the growth rate faster. The major work was done on the Cable Network Programming. This proved to be the most important factor of the growth in 2011. Due to this growth the company was able to achieve growth of 22% in four quarters of the financial year 2011. This growth also resulted in higher earnings per share and high operating profit I every segment in 2011. Limited Brands The company repurchased shares amounting to $1.190 billion. Due to this repurchase the dividend per share was increased from $0.6 per share in 2009 to $3.8 per share in 2011. Earnings per share have also increased due to this reason. This repurchase has not resulted adversely as far as the profit is concerned since the repurchase has been made for extra shares. This decision will surely have effects on the return on capital employed which will increase since there are no major changes in the profit figure but the capital employed has declined by $1.190 billion. The return on share holder’s equity is 105% in 2012 as compare to 44% in the last year. Return on assets has also increase opened from 12% in 2011 to 14% in all four quarters of 2012. In 2011, the company continuous to expend its operation outside USA and 40 new outlets were opened. Now the company is operating with 57 retail stores. In addition to this, the company has also opened 12 bath and both works stores in 2012. There are further plans for the growth in the near future. As a result of this expansion the sales revenue increased to $10,364 in 2012 from $9,613 million in 2011 and $8,632 million in 2010. Operating profit in 2010 was $448 million which significantly increased to $805 million in 2011 and reached to $805 million in 2012. Higher profit also increased the return on assets from 1.5% every quarter in 2010 to around 3.5% in every quarter in 2012. Return on average share of equity increased from 5.5% per quarter in 2010 to 11% per quarter 2011 and 26% in 2012. (5) Capital Structure (5a) Capital structure describes the relative share of debt and equity to finance the assets of the company (Kent & Gerald, 2011). As far as the capital structure of the Limited Brands is concerned, it is very clear from the computation that the company is too much relaying on the debt finance. In 2008 total long term debt was $2,905 million which increased to $3,541 million in 2012 (Limited Brands Inc, 2012; Limited Brands Inc, 2008). The company repurchased share capital and the total equity was reduced to only $139 million in 2012 as compared to $2,219 million in 2008. Total debt to total assets ratio indicates how much of the total assets are financed by debt (Susan, 2004). Debt to assets ratio is declining continuously from 2008 to 2011, but in 2012 it has increased again from 0.39 to 0.57 due to the reason that the company has obtained more debt in 2012. The debt to equity ratio describes how much the business is owned by the lenders (Tyson & Jim, 2011). Similar is the case with debt to equity ratio, it is increasing continuously from 2008. The debt to equity ratio has shifted from 1.30 to 25.65; the reason for this huge change is the significant decline in the shareholders equity. As far as the News Corporation is concerned the amount of the long term debt is continuously increasing since 2009. The company has the lowest debt in 2009 amounting to $ $12,204 million (News Corporation, 2009). Total debt in 2008 is $13,230 million which increased to $15,182 million in 2012. Total share holders’ equity reduced to $24,684 million in 2012 as compared to $28,623 million in 2008 (News Corporation, 2008; News Corporation, 2012). There are no significant changes in the debt to asset ratio and it has changed from 0.21 in 2008 to 0.26 in 2012. This little increase is due to the reason that the total assets have declined to $56,663 in 2012 from $62,308 in 2008. Total long term debt has also increased to $15,182 million from $13,230n million. Debt to equity ratio is also increasing due to this increase in long term debt. (5b) Leverage Leverage refers to the degree to which the company is using the debt finance (Andrew, 2007). When comparing both the companies on the basis of leverage Limited Brands Inc has much more risky company than News Corporation. In 2012 Limited brands has only $138 million in equity in comparison to the long term debt of $3,541 million. In the same year News Corporation has $24,684 million equity in comparison to the long term debt of $15,182 million. In 2012 debt to equity ratio of Limited Brands and News Corporation are 25.56 and 0.26 respectively. If there is more debt in the capital structure there is a huge risk for the shareholders because the interest on debt will reduce the distributable profit to a significant extent. If the company is unable to pay the interest or the principle amount in due time the company may be liquidated. This increases the risk for the share holders. In this situation they will demand a high return on their investment to cove the risk due to high gearing. (7) Dividend Dividend per share represents the amount of the profit that has been paid on a single share (Michelle, Martin, & George, 2007). Limited brands paid dividend amount to $3.8 per share in 2012 as compared to $4.6 last year. On the other hand News Corporation paid cash dividend of $0.180 per share in 2012 and $0.150 in 2011. On the basis of this data, it is very clear that Limited brands pay the highest dividend in both of the years. An increase in the dividend per share is the signal that the management expects good future earnings or vice versa (Eugene & Joel, 2009). In this case dividend paid by Limited Brands declined by $0.8 per share from 2011 while on the other hand dividend paid by news corporation increased by $0.03 per share, but still Limited Brands has much higher dividend per share. In case of News Corporation, final dividend of $0.85 was declared in August 2012. The share prices before this announcement $22.59 as on July 26, 2012 (Google, 2012) in anticipation of the dividend these prices raised to $23.86 on August 7, 2012 (Google, 2012). The market has reacted to some extent in anticipation of the dividend since, the share prices have gone more than a Dollar after the announcement of the dividend. In case of Limited brands the company announced a dividend of $ 3.8 per share. The share prices before this announcement was $ 41.85 on June 22, 2012. These prices rose to the highest of $47.94 per share on July 30, 2012 (Yahoo! Finance, 2012). This was in anticipation of a high dividend. When comparing both the companies the market has reacted more in case of Limited brands because the dividend per share is much higher. Another reason for this high return to shareholders is that the Limited Brands is operating with high gearing which makes the company risky for shareholders and they demand a higher return. Dividend Payout Ratio Dividend payout ratio indicates the percentage of the dividend that has been paid to the shareholders from the profit generated by the company (Harold, 2010). It can be calculated as Dividend per share divided by earnings per share. Limited Brands paid a constant dividend of $0.6 per share from 2008 to 2010. Afterwards the highest dividend of $4.6 per share has been paid in 2011 followed by $3.8 per share in 2012. Dividend payout ratio does not indicate any particular trends after 2010. Dividend payout reached to 184% in 2011 and 135% in 2012. News Corporation distributed 38.29 % of their earnings in 2008 since then dividend payout is declining. Although the company able to achieve high return on every share in 2012 but still I has distributed only 10% of the earnings. As far as the dividend policy is concerned there is no particular format can be seen from the above calculation and the dividend is paid what management believe is appropriate for any particular year. Dividend Yield Dividend yield is the relationship between share prices and the dividend per share (Jonathan, 1991). Market price of the share on January 18, 2013 is $46.91 in case of Limited Brands. While the share price of the News Corporation is $27.26. On the basis of these prices, dividend yield dividend yield of the Limited Brand is 8.1 % (3.8/46.91*100) as compared to the dividend yield of 0.66 % (0.18/27.26*100) of the News Corporation which are reasonable as compare to the industry average. If the company has a lower dividend yield its share will not attract the investors and the share prices will decline sharply. News Corporation has to take major steps to improve the dividend yield in the future in order to improve the value of their stock. List of References Andrew, G. A. (2007). Financial Management; Principles and Practice. New Jersey: Freeload Press Inc. Berman, K., & Joe, K. (2008). Financial Intelligence for Entrepreneurs: What You Really Need to Know About. Boston: Harvard Business School Publishing. Eugene, B. F., & Joel, H. F. (2009). Fundamentals of Financial Management. Mason, USA: Litten Publishing. Francesco, S. (2007). Value at Risk and Bank Capital Management: Risk Adjusted Performances ... London: British Library Publications. Google. (2012, August). Historical Prices. Retrieved August 2012, from Google Finance: http://www.google.com/finance/historical?q=NASDAQ%3ANWSA&ei=VgEbUeiALIetwAOLIw&start=120&num=30 Google. (2012, July). Historical Prices. Retrieved July 2012, from Google: http://www.google.com/finance/historical?q=NASDAQ%3ANWSA&ei=VgEbUeiALIetwAOLIw&start=120&num=30 Harold, B. (2010). An Introduction to Accounting and Managerial Finance: A Merger of Equals. London: World Scientific Publishing Limited. Jonathan, M. R. (1991). Insider Trading: Economics, Politics, Policy. London: American Enterprise Institute for Public Policy Research. Kent, B. H., & Gerald, M. S. (2011). Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice. New Jersey: Hamilton. Limited Brands Inc. (2013). About Us. Retrieved 2013, from www.limitedbrands.com: http://www.limitedbrands.com/our_company/about_us/Brands.aspx Limited Brands Inc. (2008). Annual Report. Columbus: Limited Brands Inc. Limited Brands Inc. (2012). Annual Report. Columbus: Limited Brands Inc. Michelle, C. R., Martin, ,. F., & George, T. H. (2007). Corporate Finance: A Practical Approach. New York: John Willey & Sons. News Corporation. (2009). Annual Reoprt. New York: News Corporation. News Corporation. (2008). Annual Report. New York: News Corporation. News Corporation. (2012). Annual Report. New York: News Corporation. News Corporation. (2013). Operations. Retrieved 2013, from http://www.newscorp.com: http://www.newscorp.com/operations/index.html Susan, P. J. (2004). Introduction to Health Care Economics and Financial Management. New York: Lippincott Williams & Wilkins. Tyson, E., & Jim, S. (2011). Small Business For Dummies. Indiana: Willey Publishing Inc. Yahoo! Finance. (2012, June). Historical Prices. Retrieved June 2012, from Yahoo Finance: http://finance.yahoo.com/q/hp?s=LTD&a=05&b=20&c=2012&d=06&e=30&f=2012&g=d Appendix 1 Limited Brands Inc 2008 2009 2010 2011 2012 Total debt 2905 2927 2767 2564 3541 Total assets 7437 6972 7173 6451 6108 Share holders Equity 2219 1874 2184 1477 138 Total Debt to Total Assets 0.39 0.42 0.39 0.40 0.58 Debt to Equity 1.31 1.56 1.27 1.74 25.66 . News Corporation 2008 2009 2010 2011 2012 Total debt 13230 12204 13191 15463 15182 Total assets 62308 53121 54384 61980 56663 Share holders Equity 28623 23224 25113 30069 24684 Total Debt to Total Assets 0.21 0.23 0.24 0.25 0.27 Debt to Equity 0.46 0.53 0.53 0.51 0.62 Dividend Payout Ratio Limited Brands Inc 2008 2009 2010 2011 2012 Dividend per share 0.6 0.6 0.6 4.6 3.8 Earnings per share 1.91 0.66 1.39 2.49 2.8 Dividend payout ratio 0.31 0.90 0.43 1.84 1.35 News Corporation 2008 2009 2010 2011 2012 Dividend per share 0.12 - 0.14 0.15 0.18 Earnings per share 1.14 - 0.97 1.14 0.47 Dividend payout ratio 0.10 - 0.14 0.13 0.38 Read More