The Extent to Which Tomkins Plc Maximize Shareholder Value - Essay Example

Executive Summary This report examines the extent to which Tomkins PLC maximize shareholder value. The key findings are as follows: Stockholders value can be maximized through dividends and capital gains. While dividend is directly related to business profitability, capital gain is dependent on both internal and external factors. In terms of dividend, a stock of Tomkins PLC gained 125p during the ten year period 1996-2005. Stock prices appreciated by 10p during the same period. The wealth creation record of Tomkins PLC can further be enhanced by the presentation of relevant investor financial ratios. Introduction According to the principles of value based management, the main goal of a company is to maximize shareholder value. Thus, the company's decisions should be based on the premise that the certain action will be profitable and can boost the price of company's stocks. Simplistically, shareholders gain from holding a company's stocks in two ways-dividends and capital gains. While dividends are parts of the firm's profits which are directly distributed by corporations to their shareholders, capitals are profits which arise from the appreciation of the stock price from its purchase price. The declaration of dividend is often almost solely dependent on the internal condition of a company. Accordingly, a company is only able to declare a cash dividend if its operation in the fiscal year had been profitable and if it has enough cash. Capital gains on the other hand, are determined by various factors internal and external to the company. Operating performance, investor financial ratios, revenues and profits are often determines the price level of stocks. Other external factors such as interest rates, competitors, and other company issues are irrefutably integrated in the investors' perception of the intrinsic value of a stock. Thus, the creation of wealth for shareholders is often reflected at the dividend pay-outs and the appreciation of its stock price. This report will look at the shareholder value creation of Tomkins PLC for the past ten years. The next section will give a brief background on the company. The paper will then present how the company maximized shareholder value through dividends and capital gains. Relevant investor ratios will also be examined. Lastly, the report will conclude on how the company can further develop its wealth creation record. Company Background: Tomkins PLC Tomkins PLC is player in the international engineering industry listed in both London (LSE) and New York Stock Exchanges (NYSE). Generally, the company is subdivided into two business segments namely, industrial and automotive, and building products. The company expressed that "Our primary business objective is to achieve a long term sustainable growth in the economic value of Tomkins through strategic development of our businesses." Tomkins PLC was recognized by the Euromonitor as one of the top companies in the world in terms of Ownership Transparency and Rights, Financial Transparency & Process, Board Structure, Stakeholder Relations and Alignment of Managerial Interest. The company garnered a high score as it ranked number two in developing countries and the best of four British companies in the top ten (Tomkins top for Corporate Governance 2003). This just reflects the company's commitment in enhancing transparency for investors on the real value of their stocks. Tomkins Chairman David Newlands expressed, "We are very pleased with this accolade from Euromoney, which acknowledges the enormous amount of work that we have put into Corporate Governance. At Tomkins we have made corporate governance and delivering shareholder value our top priorities and this survey is recognition of how far we have come. We continue to concentrate on maintaining the highest standards of transparency and delivering value to our shareholders." Dividends As stated above, dividend is an indicator of shareholder value creation. Through dividends, each stockholder is compensated for holding the company's stock. It is also worth reiterating that as owners are also most concerned on the situation of a business organization, dividend also become a potent meter on assessing the profitability and strength of operations. Table 1 shows the amount of dividend pay-out declared and paid by Tomkins during the ten year period 1996-2005. It can be seen that the company has been consistently paying its stockholders during the fiscal years considered. From the 9.95p per share paid in 1996, dividends peaked during 2000 at 17.45p each. However, it is also observed that after the 2000, dividends level of to 12p per share. Hence, from 2001 to 2006, Tomkins declare a dividend between the 8p-13.23p range. Summing up the dividend declared by Tomkins PLC for the period considered, a common share of the company generated 125p.1 It is notable that the amount of dividend declared to shareholder is directly correlated to each share's earnings (EPS). The highest dividend was paid during 2000 when the highest earning per share of 30.19p was also attained (refer to Appendix 1). It is also observed that the declared dividends are always lower than the EPS except in 2001 when the EPS was 3 but the company still managed to pay 12p per share dividends. Thus, the wealth of shareholder is maximized as profitability of each share is enhanced. Table 1. Dividend of Tomkins PLC's Common Share (1996-2005, in p) Capital Gains As discussed above, capital gain is the profit made by the stockholder when the market value of the share rose above its respective purchase price. The stock of Tomkins is currently trading at 280p with a 12 month high of 349p and low of 241p. Compared to its share price last week, the value plunged by 5.08%. Based on last month price, it recorded a steeper decline of 15.79%. However, looking at its value a year ago, the stock price improved by 12.34%. Table 2 shows the historical stock price of Tomkins PLC. It is notable that the market value of the stock peaked during the first quarter of 1998 reaching a high of 375p. The following years recorded troughs the lowest was the 130p during the third quarter of 2001. The period from 2003 shows an almost consistent upward trend. Sadly, an investor who decided to hold the Tomkins PLC stock for the whole ten year period considered did not benefit much from capital gains. Compared to the price level ten years ago, the market value of Tomkins PLC merely rose by about 20p. Table 2. Historical Stock Price of Tomkins PLC (1996-2005) Conclusion To date, Tomkins PLC is implementing an investor wealth creation record which is very helpful to its customers. This is even highlighted by the recognition of Euromonitor as stated above. However, some measures can still enhance the quality of information derived by stockholders in the company. This report recommends that Tomkins present financial ratios which are highly relevant to current and potential investors. It will be more helpful if the company create a section which shows equity ratios like price-earnings ratio, price-book ratio, dividend yield, and return on equity (ROE). Appendix 1. References Tomkins PLC, 2006, Retrieved 22 May 2006, from http://www.sharecrazy.com/share2607share/share.phpdisp=share&epic=TOMK Tomkins PLC Website Tomkins top for Corporate Governance, 2003, Retrieved 22 May 2006, from http://www.metapraxis.com/news/companynews/20030922.html Read More