Select two public listed companies with differing dividend
policies. Critically evaluate their choice of dividend policy in light of
the financial and economic environment. Your solution should consider a minimum
of 5 years data on their dividend policies.
Note: Your report should be fully informed by prior
research and current environmental factors.
Dividend policies of a public listed company (plc) are
crucial, especially for investors, The differing policies indicate how much the
dividend pay-out shall be and the frequency of the pay outs, (Warner,
2019). The exact amount of dividends to be paid out every year is
determined by the board of directors of a company guided by the companies
selected policy. There are three main categories of dividend policies;
retained, constant, and stable. This essay shall focus on comparing the latter
two policy types over the past five years relative to the current financial and
economic environment for two plc’s. The selected companies used shall be,
Walmart which uses a stable dividend policy, and The Automobile
Association (AA) which use a constant dividend policy.
A stable dividend policy indicates that dividends will be
paid out irrespective of the volatility of the market. The pay outs are in line
with the long-term earnings of the company. It is common for a stable policy to
pay out every quarter which is the case with Walmart, (Corporate Finance
Institute, 2020). Whereas under a constant dividend policy the company pays a
percentage of its earnings as dividends each year. This means the investors
experience the full volatility of the market. When profits increase the
dividend received also increases, however when the profits decrease so do the
dividends and occasionally there can be no dividend pay-out, (Investopedia,
2020). As with stable, constant policy often pay out quarterly dividends as
well, if they are paying out.
Walmart is an American retail corporation that operates a
chain of multinational grocery and discount stores. Walmart operates over
11,200 stores in 27 countries and eCommerce websites in 10 countries. Walmart
Inc began trading on the New York Stock Exchange in 1972. The graph below
presents the company’s dividend per share that has been paid over the last 5
All figures were obtained from the company’s website: www.walmart.com
Walmart has increased its annual dividend every year since
first declaring a $0.05 per share annual dividend in March 1974. (Walmart,
2020) This has gained them the title of a dividend Aristocrat in the S&P
500 Index in America. A listed company must have increased their dividends for
at least 25 years to gain this title. Walmart pays a quarterly dividend in cash
and in the last 5 years their annualised pay-out has increased by 4 cents each
year making their current dividend policy a stable one. Although Walmart
historically had much steeper increases in dividends, when it comes to
investment, everything is relevant. Any sign of a decrease in dividend pay-out
could be a signal to shareholders of a cash-flow problem within Walmart so an
increase of even just 1 cent per quarter is considered a safe investment.
In 2016, Walmart experienced its first ever decline in
annual sales, marking the end of an impressive era of growth. The company’s
worldwide sales for the last five years are presented in the graph below:
All figures were obtained from the company’s website: www.walmart.com
As seen in the graph above, Walmart’s Sales dropped from
$482.23 billion in 2015 to $478.61 billion in 2016. But, in line with their
stable dividend policy, the dividends continued to rise in 2016. Walmart
met this drop in sales with plans to close more than 200 stores (Moyler, 2016).
A Walmart investment is therefore low risk for any investor as even though the
increase in dividend from year to year is small, the shareholder is given
certainty on the amount and timing of the dividend.
Walmart is one of the most unique stocks on New York stock
exchange. Firstly, it is one of the largest chains in the world and secondly,
because of its behaviour during certain market environments. Walmart has often
been considered as a recession-proof stock. According to Hilliard (2018),
during the global financial crisis in 2008, many firms felt they had to reduce
or eliminate their cash dividends. In contrast, Walmart’s revenues and sales
tend not to take a hit from any kind of economic downturn (Cummans, 2015).
Instead Walmart seems to benefit as their discount products are sometimes more
coveted when times are financially tough. Which in turn, keeps their sales
income steady and allows them to continue increasing their annual dividend in
line with the stable dividend policy.
AA is operates in the customer service sector and became
listed on the London Stock exchange as AA plc in June 2014 with Walmart
operating in the retail sector became listed on the New
York Stock Exchange in 1972. The AA has adjusted its dividends twice
within the last five years, (Simply Wall St, 2020), increasing in 2017 and
decreasing in 2018. Walmart has steadily increase over the past five years,
(Simply Wall St, 2020).
The Automobile Association Developments Ltd (The AA) was
started up in June 1905 by four driving enthusiasts in London. From day one the
company’s goal has stayed the same – “to protect you, the motorist, and put your interests first” (AA, 2020).
Due to successful growth in the last century The AA is now the UK’S largest
motoring organisation. Although their primary focus is breakdown cover, they
now also branch out into insurance, finance, leisure and lifestyle services.
The AA operates a constant dividend policy which as
mentioned previously, is a dividend pay-out which moves in line with the
company’s profits as a “specific percentage of the company’s earnings is paid
out as dividends each year” (EFinanceManagement, 2019). So, as the company
profit fluctuates so too does the pay-out. The table below shows The AA’s
annual dividend history for the past 5 years.
(Hargreaves Lansdown, 2020).
As seen in the table above, The AA’s dividend pay-out has
decreased from 2015 to 2019. This is in line with The AA’s decreasing profits
in the financial year 2016. From 2017 to 2018 the total dividend paid was
reduced by 4.30p to nearly half of the previous year dividend. This was as a
result of lowering the full-year profit forecast in a mission to stabilise the business
again after the company had sacked the executive chairman (Rumney, 2017). From
2018 to 2019, again there was a drastic fall in the total dividend paid down to
2.00p which is lower than a third of what the pay-out was in 2016. This was due
to the announcement made by the company that pay-outs were slashed and to warn
of lower profits as it was to embark on a technology drive in order to spot and
prevent breakdowns with the use of telematics technology. As a result, “AA
shares fell by 83%” (Campbell, 2018). Shares plummeted as this action is
usually a sign that the company’s financial position is weakening and so is
less attractive to investors. Even now market research shows the AA share price
continues to breakdown.
A constant dividend policy is very sensitive to change in
light of the financial and economic environment. AA’s dividend policy is
greatly affected by any economic downturn as when profits are lower; dividend
pay-out is also lower. This is a good policy for the company to adopt as they will
only be paying out as much in dividends as they can afford to when their
profits are low and could be used valuably elsewhere in improving their
situation in an economic downturn. However, shareholders would not be happy
with this policy as they are not getting a reliable return on their shares.
Overall, The AA may be deemed unattractive to investors in the market as they
are not focusing on the superior objective of ‘maximising shareholder wealth’
which is surely part of promoting
the success of the company (Murphy, 2010).
**Wal-Mart pays dividends to its investors and has across
the years focused on the Dividend Aristocrats. Most of the investors have been
drawn to the latter because of the high yields that come along with it. The
stock is a gold-honoured standard for all the dividend generating stock and is
also suited for the retiring portfolios. The requirements for attaining the
Dividend Aristocrats include an organisation need to have a suitable dividend
policy that contributes to an increase in dividends for the past 25 years
(Piplovic, 2019). Secondly, an entity ought to have experienced immense
financial growth for the past 25 years, and it has been the case with Wal-Mart.
As part of the Wal-Mart’s dividend policy, the company pays
a quarterly dividend of $0.53, and it is usually for an annualised payment of
$2.12. The former is also significant in the sense that it contributes to the
strengthening of the relationship that the firm has with the shareholders.
Secondly, the dividend policy for the company is stable, and this aspect
implies that it has allowed for the institution to experience growth in its
dividends for the past two decades. With a current dividend of 2.12, the firm
has continually shown stability in its dividends and this is an indication of
an improvement of its financial performance (Yahoo Finance, 2020b). Notably,
investors will always prefer channelling their contributions into companies
that have superb stock performance and yearly growth in their dividends. The dividend
income for Wal-Mart has in the past five years been sufficient enough to offset
any significant share price decline and the losses experienced by the
shareholders. The total dividends paid by the Wal-Mart Company increased
significantly from $1.950 in the year ended 2015 to $2.110 in 2019. The firm
maintained its quarterly payments of $0.51 for the period 2016 to 2019, with
the quarterly payments for 2019 standing at 0.489.
To do. Compare AA (motor) and Walmart, and assess their
choice of policy?
The post Select two public listed companies with differing dividend policies
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