Austal Limited Current and Recent History of the Companys Dividend Policy - Case Study Example

Dividend policy Introduction Every business organization aims at making profit in order to ensure continuity of its processes and operation in the market. Dividend decision of the firm is another important area of financial management. Dividend policy is therefore an important aspect because it helps the firm to determine the distribution of earnings to the shareholders as well as the amount to be retained in the firm in order to boost the capital base and increase cash flow funds to run the business. It is imperative to note that retained earnings are the most important sources of internal financing that helps to ensure the continued growth of the firm. From the shareholders’ point of view dividend is a desirable mode of increasing current returns and increase the shareholders confidence regarding the firm’s operations. The objective of the dividend policy, in theory, should therefore to maximise the return of the shareholders so that the shareholders’ investment value is maximised. The return of the shareholders can be grouped into two categories or components which include capital gains and dividends. Dividend policy has a direct impact and influence on the two components. The dividend policy is therefore considered a trade-off between dividend payout and investment decision (Ross, Jaffe & Westerfield 2009). Dividends can be distributed or paid to the shareholders in terms of shares or cash or they can also be distributed both as cash and shares (Ross, Jaffe & Westerfield 2009). The dividend paid to the shareholders is an important signal that woes more investors to the company or contributes towards the loss of investors from the company. It is also an important source of information used by investors to determine the value of the company, the cash flow trends of the company (used to predict cash flows in the future) and the important source of information to determine the stage of growth of the company. Austal Limited current and recent history of the company’s dividend policy ASB has been paying dividend to its shareholders once per year. The dividend paid is the final dividend which is paid at different dates of the year depending on when the company’s books are closed. For instance, in 1999 the books were closed on 18th October of the same year and the dividend was paid out on 25th October of the same year. In 2000, the company’s books were closed on 16th October while the dividend was paid out on 23rd October. However, it is prudent to say that the final dividend is paid out in October. (ASB, 2011) Ordinary Dividends Balance Date Dividend Type Cents per share Ccy Franked % Books Close Date Pay Date 30/06/11 Final 6.0000 AUD 100 22/09/11 06/10/11 30/06/10 Final 6.0000 AUD 100 23/09/10 07/10/10 30/06/09 Final 6.0000 AUD 100 24/09/09 08/10/09 30/06/08 Final 13.0000 AUD 100 25/09/08 09/10/08 30/06/07 Final 12.0000 AUD 100 27/09/07 11/10/07 30/06/06 Final 11.0000 AUD 100 28/09/06 12/10/06 30/06/05 Final 9.0000 AUD 100 11/10/05 25/10/05 (Source: Aspect Financial 2011) From the table above it is evident that ASB’s dividend is fully franked all the time. From the year 2005 to the year 2008 the final dividend paid to the shareholders had significant variations. For instance, the final dividend paid in 2005 was 9 cents per share while the following year the dividend paid was 11 cents per share which was an increase of 22%. The trend shows that the dividend paid from the year 2005 to 2008 increased from one year to the other which reveals that the company was performing relatively well. However, the 2009 to 2011 the final dividend paid out to the shareholders decreased drastically from a record high of 13cents in 2008 to a low of 6cents in 2009. This represents a decrease of 53.84%. This reflects the fact that the performance of the company in 2009 was lower than in the preceding years shown in the diagram above. This can be attributed to the economic recession that hit the world in the better part of 2008 and also 2009. However, it is important to mention that that final dividend of 6 cents has remained for three years from 2009 to 2011 which shows that the performance of the firm is stable. Stability of dividends is perceived positively as a desirable policy by companies. Shareholders also prefer to have a stable dividend rather than a fluctuating dividend. All other things remaining constant, it is imperative to state that a stable dividend policy may yield positive results on the market price of the share. DPS DPS (dividend per share) 2009 2010 2011 Although, ASB has been paying varying amounts of dividends per share from the year 2005 to 2008, it is clear that the company has adopted the strategy of paying a constant dividend per share or a constant dividend rate from the year 2009 which stands at 6 cents per share. Company 1 year EPS adj 3 years EPS adj PER Dividend Yield ASB -44.61% -24.84% 18.44 2.73% BOL -55.21% -49.37% 19.83 0.00% HST -43.50% -29.90% 1.24 0.00% SSM 21.59% -15.23% 4.83 0.00% (Source: Aspect Financials 2011) From the peer analysis above, the one year earnings per share adjusted is -44.61% while a three year earnings per share adjusted is -43.45%. This brings the PER to 18.44. The dividend yield is therefore 2.73%. The dividend yield is an important indication of whether the company’s stock is underpriced or overpriced. A lower dividend yield means that the firm’s stock is overpriced which gives the shareholder and investors that dividends to be paid by the company in future may be higher. Comparably, the one year earnings per share adjusted for BOL (Boom Logistics Limited) is -55.21% while three years earnings per share adjusted is -49.37%. This brings the PER to 19.83 and the dividend yield to 0.00%. As compared to ASB, BOL has a lower dividend yield which means that BOLs stocks are overpriced and the future dividends paid to the shareholders may be higher than the future dividends paid by ASB to its shareholders. Similarly, HST or Hastie Group Limited’s one year earnings per share adjusted is -43.50% while the three years earnings per share adjusted is -29.90%. This brings the PER to 1.24 and the dividend yield to 0.00% which shows that HST has a lower dividend yield a reflection that the company’s stocks are overpriced and the future dividends payments will be higher in the future as compared to those of ASB. SSM or Service Stream Limited has one year earnings per share adjusted of 21.59% and three years earnings per share adjusted of -15.23%. The PER is 4.83 while the dividend yield is 0.00%. This is also a reflection that SSM’s stocks are overpriced and thus the future dividends paid by the company may be higher than the dividends that will be paid by ASB in future. Comparing the dividend yields in four companies, it is evident that ASB’s stocks are underpriced and therefore the likelihood of the company paying lower dividends in future are high as compared to the other three companies whose stocks are overpriced. As mentioned above, overpriced dividends are desirable to the shareholders and the shareholders are likely to invest more in companies whose stocks are overpriced in anticipation that the stocks will be overpriced in future. Analysis of the company’s dividend policy Franking Credit Since, ASB became listed company in 1999 they have been able to pay 100% fully franked dividend up to the current year 2011. For tax purposes the full franked dividends apply only to the shareholders who are residents of Australia and whose shares are held in the capital account. It is important to state that this type of dividend policy increases the shareholders confidence. Although, as seen above ASB lags behind other companies in terms of the dividend yield, the company’s dividend policy is favourable to the shareholders which ensure continuity in shareholding among the shareholders. Constant high dividend payment ratio ASB paid a 6 cents dividend from 2009 to 2011. From the profit and loss summary of the company it is evident that although the profit was $9.17 million in 2009 the shareholders received a dividend of 6 cents per share. In 2010, the profit of the company jumped to $37.13 million but the dividend was maintained at 6 cents. Similarly, the profits in 2011 dropped to $21.89 million but the dividend was maintained at 6 cents. Earnings per share increased in 2009 to 2010 but dropped in 2011. However, since the board of directors maintained a constant dividend payment in the three years it is clear that they have confidence that the company will continue performing well even in the future. Reinvestment plan The company has a dividend reinvestment plan that commenced in 2010 that allows the shareholders to apply for the dividends declared or paid by the company by subscribing for fully paid ordinary shares in the company rather than receiving the dividends in cash. This policy takes into consideration the interests of the shareholders who receive their ordinary shares partially. The reason for this is that for shareholders with a high threshold of tax capital gains is more preferable than dividends while for the low the shareholders with a low threshold tax dividend is the most preferable. Consistency of ASB dividend’s policy with the Lintner’s analysis There are three stylised facts laid down by Lintner (1956) regarding the distribution of corporations’ incomes among retained earnings, dividends and taxes. The first one is that firms prefer the long term dividend payout ratio target. From ASB’s case, it is clear that the company’s payout ratio has been a bit above 40% for a long time meaning the company has been stable. Hence, this is consistent with Lintner’s fist stylised fact. Years 2005 2006 2007 2008 2009 2010 2011 EPS 18.53 17.98 24.10 28.10 21.04 21.54 11.93 Dividends 9.00 11.00 12.00 13.00 6.00 6.00 6.00 Payout ratio 48.60% 61.12% 49.80% 46.23% 28.52% 27.90% 50.29% The second and third stylised facts hold that the focus of the manager is on changes in dividends than on absolute levels. From ASB’s case, the dividends and the earnings per share (EPS) have been growing up even though not with a big margin. In 2010 the EPS dropped from 21.54 to 11.93 and the shareholders were compensated by increasing the payout ratio from 27.90% to 50.29%. Investors regard increase in dividend as a sign of increase in the firm’s profitability and hence investors are likely to reward increase in dividends. However, a drop in dividends is perceived as a reflection of loss on the part of the company. In this regard, the investors are likely to penalise the drop in dividend by bidding low prices for the shares. Hence, it can be construed that ASB’s policy on dividend is in tandem with Lintner’s model which states that the value of the investors is on the steady and stable growing dividends rather than on varying payouts. Relevant characteristics to the company’s policy on dividends One of the key characteristics is that ASB can use its steady growing payout ratio maintained at above 40% most times to attract investors. They can also use the higher asset value which has gone to increase from $277 million in 2005 to over $600 million in 2011 to build the investors’ confidence. The second characteristic is the company’s life cycle. Moving from the $9.14 million profits in 2009 to more than $20 million in profits in 2011 shows that the company is on a favourable life cycle of growth. This is also relevant to the dividend policy. Whether the company’s dividend policy is optimal Miller and Modigliani (1961) held that the firm’s dividend policy does not have effect on the wealth of the shareholders. However, it is assumed that the market is perfect. This means that the company does not incur agency costs and there is no information asymmetry. However, the reality is that transaction costs, brokerage fees and tax are some of the costs the company must incur. The dividend reinvestment plan in ASB provides one of the ways of cutting transaction costs because not all dividends are paid in cash. Hence, some amount of money that would be incurred as transactions costs is saved. The authors argued that investment is one way through which the company’s value grows. From 2005 to 2008 the company’s dividend increased steadily. A stable dividend of 6 cents has also been paid from 2009 to 2011. This means that the company’s life cycle has reached the maturity phase. From 2008 to 2011 when the economic recession hit many economies the company’s revenues and profits rose steadily to over $600 million in 2011. This means that the company has a favourable capital base to invest in other projects. Hence, the current dividend payout policy is optimal. References FinAnalysis. (2011). AustalLimited http://www.aspectfinancial.com.au.ezproxy.lib.uts.edu.au/af/company/mainview?ASXCode=ASB Ross, A.S., Westerfield, R.W., Jaffe, J.F., & Jordan, B.D 2009, Modern Financial Management, 8th ed. New York , USA: MacGraw Hill/Irwin Read More