1. Investors may attempt to infer a company’s dividend policy by observing its profits, dividends and payout ratio over time. Select 2 companies that are part of the ASX50 index. Both companies must not be from the same industry. If you select one from the financial industry, then the second company cannot be from the financial sector.
A) For each company, list out the past 12 years (FY2006 to 2017)
2. Based on the dividend payout ratio data for the period 2006 to 2017, how would you describe each of the company’s dividend policy?
3. Compare the dividend payout ratio of both companies over this period. What might you infer from the differences in their dividend payout policy and the industry that they are in? Give reasons
Answer:
Calculating the weights of different portfolios and detecting whether retrun holds CAPM calculations:
|
Particulars
|
Value
|
|
Expected return
|
12.00%
|
|
Weight A
|
(12%-17.1%) / (9.80%-17.10%)
|
|
Weight A
|
69.86%
|
|
Weight B
|
1 – 69.86%
|
|
Weight B
|
30.14%
|
|
Variance
|
(69.86%^2*318) + (30.14%^2*269) + (2*69.86%*30.14%*80)
|
|
Variance
|
213.33
|
|
Stdev
|
SQRT(213.33)
|
|
Stdev
|
14.61
|
|
Particulars
|
Value
|
|
Expected return
|
12.00%
|
|
Weight A
|
(12%-15%) / (9.80%-15%)
|
|
Weight A
|
57.69%
|
|
Weight M
|
1 – 57.69%
|
|
Weight M
|
42.31%
|
|
Variance
|
(57.69%^2*318) + (42.31%^2*80) + (2*57.69%*42.31%*56)
|
|
Variance
|
147.50
|
|
Stdev
|
SQRT(147.50)
|
|
Stdev
|
12.14
|
|
Particulars
|
Value
|
|
Expected return
|
12.00%
|
|
Weight B
|
(12%-5.6%) / (17.1%-5.6%)
|
|
Weight B
|
55.65%
|
|
Weight F
|
1 – 55.65%
|
|
Weight F
|
44.35%
|
|
Variance
|
(55.65%^2*269) + (44.35%^2*0) + (2*55.65%*44.35%*0)
|
|
Variance
|
83.31
|
|
Stdev
|
SQRT(83.31)
|
|
Stdev
|
9.13
|
|
Particulars
|
Value
|
|
Expected return
|
12.00%
|
|
Weight M
|
(12%-5.6%) / (15%-5.6%)
|
|
Weight M
|
68.09%
|
|
Weight F
|
1 – 68.09%
|
|
Weight F
|
31.91%
|
|
Variance
|
(68.06%^2*80) + (31.91%^2*0) + (2*68.09%*31.91%*0)
|
|
Variance
|
37.08
|
|
Stdev
|
SQRT(37.08)
|
|
Stdev
|
6.09
|
|
Particulars
|
Value
|
|
Beta A
|
0.7
|
|
Beta B
|
1.2
|
|
Risk free rate
|
5.60%
|
|
Market return
|
15%
|
|
Market premium
|
9.400%
|
|
CAPM A
|
5.60%+(0.7*9.4%)
|
|
CAPM A
|
12.18%
|
|
CAPM B
|
5.60%+(1.2*9.4%)
|
|
CAPM B
|
16.88%
|
From the overall evaluation of the above table the returns expected by the company with the help of CAPM model can be identified. In addition, the overall CAPM returns of Asset A is relatively higher than the actual returns of the asset. This indicates that the expected returns of the company are relevantly higher, which will increase the overall return from investment. Moreover, the CAPM expected return of asset B is relevantly lower, than the actual returns provided by the company. This indicates that the company’s overall returns are higher than the expected returns provided by the CAPM value. In this context, Novak (2015) mentioned that with the help of CAPM value overall estimated retunes from an investment could be identified.
Portraying the details of both the companies:
|
c
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
Net profit after tax
|
3,959
|
4,497
|
4,822
|
4,753
|
5,680
|
6,410
|
7,106
|
7,693
|
8,650
|
9,084
|
9,243
|
9,952
|
|
Earnings per share
|
308
|
345
|
363
|
329
|
368
|
411
|
449
|
478
|
534
|
557
|
542
|
578
|
|
Dividend per share
|
224
|
256
|
266
|
228
|
290
|
320
|
334
|
364
|
401
|
420
|
420
|
429
|
|
Dividend pay-out ratio
|
73%
|
74%
|
73%
|
69%
|
79%
|
78%
|
74%
|
76%
|
75%
|
75%
|
77%
|
74%
|
|
BHP Billiton
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
|
Net profit after tax
|
10,534
|
13,496
|
15,962
|
6,338
|
13,009
|
23,946
|
15,532
|
11,075
|
15,224
|
2,878
|
(6,207)
|
6,222
|
|
Earnings per share
|
173
|
230
|
275
|
106
|
229
|
429
|
290
|
204
|
257
|
66
|
(120)
|
111
|
|
Dividend per share
|
32
|
39
|
56
|
82
|
83
|
91
|
110
|
114
|
118
|
124
|
78
|
54
|
|
Dividend pay-out ratio
|
18%
|
17%
|
20%
|
78%
|
36%
|
21%
|
38%
|
56%
|
46%
|
189%
|
-65%
|
49%
|
Stating dividend policy of both the companies:
From the overall evaluation of above data, the dividend policy of Commonwealth Bank and BHP Billiton can be identified. In addition, the evaluation indicates that the currency dividend policy of BHP Billiton is mainly stable, where it provides more than 50% of the EPS as dividend pay-out ratio. Moreover, the company relevantly provides dividends pay-out ratio in the range of 15% to 60% (Bhp.com 2018). The company provides adequate returns to its shareholders, as and when it generates net income after tax. The company’s dividend pay-out ratio is relevantly adequate over the period.
On the other hand, the dividend policy of Commonwealth Bank is relevantly adequate, where the company has been providing stable dividends to its shareholder overt the period of 12 years. In addition, the dividend pay-out ratio of the company has been at the range of 70 to 80, which indicates the stable dividend policy maintained by the overall over the period of 12 years (Commbank.com.au 2018). Therefore, it could be understood that the company has intended to provided stable returns to its shareholder over the period of the time without changing overall dividend policy.
Evaluating and contrasting the dividend pay-out ratio of both companies:
The overall evaluation of calculations mainly helps in understanding the dividend pay-out ratio of the both the companies as its different in paying out dividends. The overall companies work attributes is the main reason behind the change in dividend policy adopted by the organisations. The BHP Billiton mainly has a positive outlook towards dividend policy, where the company is relevantly paying dividends in accordance with their net income. However, the company is not able to maintain the level of adequate dividend policy due to the changes in net income. However, from the overall evaluation of Commonwealth Bank the dividend policy has relevantly increased over time, which has helped in improving the level of dividends over time (Jacob and Michaely 2017).
The main difference in dividend pay-out ratio is due to the stability in income of both companies. BHP Billiton falls under mining and petroleum industry, while the operations of Commonwealth Bank falls under financial industry. The difference in industry level is also the main reason behind the changes in dividend pay-out ratio of both the companies. The revenue and cash volatility of BHP Billiton is relevantly high, which is the main reason behind its change net income after tax. However, the stable growth in seen in Commonwealth Bank, which has allowed the company to obtain stable income overall the period of 12 years.
Evaluating the changes in dividend policy of the companies:
|
BHP Billiton
|
2015
|
2016
|
2017
|
|
Net profit after tax
|
2878.000
|
-6207.000
|
6222.000
|
|
Earnings per share
|
65.500
|
-120.000
|
110.700
|
|
Dividend per share
|
124.000
|
78.000
|
54.000
|
|
Dividend pay-out ratio
|
189.31%
|
-65.00%
|
48.78%
|
From the overall evaluation of above table, the change in dividend pay-out ratio of BHP Billiton can be seen on 2016, where the company paid dividends to its shareholders even after incurring loss during the period. This relevantly indicates the change in dividend policy of BHP Billiton conducted during 2016, as its dividend policy indicated that payment of dividends will only be conducted after incurring profit for the period. However, there is no dividend policy change in Commonwealth Bank, as identified from the calculations (Erickson 2017).
Evaluating and identifying the share price performance of the company after changes in dividend policy:
From the evaluation of above chart, the share price movement of BHP Billiton can be identified, which might help in understanding the impact of dividend policy change on its share valuation. The dividend policy change in 2016 has mainly helped the company to maintain higher value of its share price even after obtaining losses during the financial year. Therefore, it could be assumed that the changes in dividend policy has mainly helped the company to improve the level of returns from investment. Hence, the share price movement compliments the decision regarding the changes in dividend policy obtained by the organisation (Baker and Jabbouri 2017).
Reference and Bibliography:
Baker, H.K. and Jabbouri, I., 2017. How Moroccan institutional investors view dividend policy. Managerial Finance, 43(12), pp.1332-1347.
Bhp.com. (2018). [online] Available at: https://www.bhp.com/-/media/documents/investors/annual-reports/2017/bhpannualreport2017.pdf [Accessed 19 Apr. 2018].
Commbank.com.au. (2018). Shareholders – Financial information – 2004-2010 Annual reports – Commonwealth Bank Group. [online] Available at: https://www.commbank.com.au/about-us/shareholders/shareholder-information/2004-2010-annual-reports.html [Accessed 19 Apr. 2018].
Erickson, M.J., 2017. The Relation Between Firm Dividend Policy and the Predictability of Cash Effective Tax Rates.
Jacob, M. and Michaely, R., 2017. Taxation and dividend policy: The muting effect of agency issues and shareholder conflicts. The Review of Financial Studies, 30(9), pp.3176-3222.
Market Index. (2018). S&P/ASX 50 – Shares Prices & Charts. [online] Available at: https://www.marketindex.com.au/asx50 [Accessed 19 Apr. 2018].
Novak, J., 2015. Systematic risk changes, negative realized excess returns and time-varying CAPM beta. Finance a Uver, 65(2), p.167.
Ofori?Sasu, D., Abor, J.Y. and Osei, A.K., 2017. Dividend policy and shareholders’ value: evidence from listed companies in Ghana. African Development Review, 29(2), pp.293-304.
