epc-13-advanced financial management.docx

8/10/2019 EPC-13-Advanced Financial Management.docx

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ASSESSMENT: Assignment

DEPARTMENT: Lincoln Business School

MODULE: Advanced Financial Management

MODULE CODE: FIN3026M

LEVEL: Three

CO-ORDINATOR: David Latham

NAME:


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Introduction:

Dividends are basically portion of companys earnings distributed among its shareholders. Theportion which is to be given to the shareholders is decided by companys Board of Directors.

Dividends can be in the form of property, stock or cash (Investopedia, 2003).

Mostly stable and secured organizations offer dividends to its shareholders. Sometimes, we seethat there are companies having high growth but still they do not offer dividends, this is due tothe fact that the profits obtained by the company is re-invested to achieve higher growth.

Dividend per share (DPS) is the amount of dollar each share receives (Investopedia, 2003).

The generation of mutual funds pays the dividends and interest income to its shareholdersreceived from portfolio holdings.

Dividend History:

In this report, Tesco PLC is chosen whose dividend policy announcements for a period of 10

years will be analysed. In the following table, we will look upon the dividend history of Tesco

PLC. All dividend payments are made before September 2014.

Year DescriptionDiv. for Period

(Pence PerShare

Ex-DividendDate

RecordDate

PaymentDate

2013 Interim 4.63 9/10/2013 11/10/2013 20/12/13

Prelim 10.13 24/04/13 26/04/13 5/7/2013

2012 Interim 4.63 10/10/2012 12/10/2012 21/12/12

Prelim 10.13 25/04/12 27/04/12 6/7/2012

2011 Interim 4.63 12/10/2011 14/10/11 23/12/11

Prelim 10.09 27/04/11 3/5/2011 8/7/2011

2010 Interim 4.37 13/10/10 15/10/10 24/12/10

Prelim 9.16 28/04/10 30/04/10 9/7/2010

2009 Interim 3.89 14/10/09 16/10/09 24/12/09

Prelim 8.39 29/04/09 1/5/2009 10/7/2009

2008 Interim 3.57 8/10/2008 10/10/2008 19/12/08

Prelim 7.7 23/04/08 25/04/08 4/7/2008

2007 Interim 3.2 10/10/2007 12/10/2007 21/12/07

Prelim 6.83 25/04/07 27/04/07 6/7/2007

2006 Interim 2.81 11/10/2006 13/10/06 22/12/06

Prelim 6.1 3/5/2006 5/5/2006 14/07/06

2005 Interim 2.53 28/09/05 30/09/05 9/12/2005

Prelim 5.27 20/04/05 22/04/05 1/7/2005

2004Interim 2.29 29/9/2004 31/10/04 26/11/2004

Prelim 4.77 28/4/2004 30/4/2004 25/6/2004

Table 1


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At Tesco, dividends are paid to its shareholders in two periodic dividends, i.e. in semi-annual

amounts. Dividends are paid can be paid in two forms depending upon its shareholder. It is paidout either in the form of cash or shares of Tesco are being bought (Tesco plc, 2014).

(Table 1, 2014) depicts two kinds of dividends being paid; Interim & Prelim. The interim

dividend payment is made before launch of company's final financial statements. This dividendsupplements with Tescos interim financial statements. The Prelim dividend is a dividenddeclared after the decision of BoD (Board of Directors) and the launch of full financial

statements (Accountingtools.com, 2014).

Pence per share are the dividend for the particular period. The Ex-date is the date on whichshares are sold out without any entitlement to the preceding dividend payment. If shareholder

buys any share before the ex-dividend date then that person is entitled to the most recently-

announced dividend. If dividend is bought after that date then the dividend is paid to previous

share owners. On the record date, dividend is paid held on the share register based on the numberof shares. The record date come one two days after the ex-dividend date. If shareholder is not

sure about the entitlement of the bought dividend, he/she should contact the agent from whom

shares have been bought. When dividends are finally paid in the form of cash or shares to theshareholders, that date is called the payment date.

The bar chart shows that the dividend pay trend in year 2012-2013 was same. If we take a closer

look, we can see the dividend pay-out from year 2004 till year 2013 is gradually rising. Theinterim and prelim dividends are combined together and then the final dividend is paid out in the

particular year. The bar chart demonstrates the final dividends paid by Tesco in the

corresponding years (Stockopedia, 2014).

0

2

4

6

8

10

12

14

16

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Dividends 14.76 14.76 14.72 13.53 12.28 11.27 10.03 8.91 7.8 7.06

Pence

PerS

hare

Dividends


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The dividend policy of the organization helps in contributing in very crucial activities. The most

important activities in any company are investing and financing activities (Steinhoff, J. 2000).

We will comprehend how dividend policies of Tesco are contributing towards maximizingshareholders wealth & we will further comprehend the dividend trends of the company.

Dividends Payback:

The payment of dividends plays an important role in boosting up the market value of Tesco. The

company can maximize its shareholder value in a way that the price at which shares or assets

would be sold in the market, this setting will increase the market value. Tesco has been payingscrip dividends as well, this includes in the selling of additional shares to shareholders. In this

way, Tesco doesnt need to pay out cash to its shareholders.

Dividend PolicyPrice Estimate:

Tesco uses underling Earnings per Share (EPS) as the basis for their dividend policy. The

amount of underlying profit which is adjusted for the number of issued shares is the underlyingdiluted EPS (Earnings per Share). The company has 8033 million outstanding shares and the

weighted cost of equity is taken as 8%. The cash surplus for year 2013 is 5 million.

This contributes to the estimation of paying cash per dividend

Similarly, when we will calculate the total cash back dividend, we will use the following price

estimate:

( )

( )

=0.0463 (Pence per share) + 10.13 (Pence per share)

Total Price of dividend =14.73 (Pence per share)

Share-Holder Wealth Maximization:

It is important to know that while dividend prices are being accumulated, the stock prices also

plays a role along with it. The stock prices are the ones affecting the shareholders wealth. Theshareholder wealth maximization is also dependent on companys retained earnings as wel l. The

increment in the wealth is done if the common or ordinary stock has been traded on high prices.

The shareholders are the ones who risk their capital and hand over it to the company in lieu of apromised asset (Cash or shares) that will assist them in the long run.

As informed earlier, Tesco has been following the EPS ratio for assisting their dividend policy.

In the annual report (Anon, 2014), we came to know that earnings per share in 2013 was ratherlow than previous year but still Tesco paid the dividend as it was the previous year (2012).


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This dividend was paid to the shareholders due to the accumulated retained earnings of Tesco. It

is important to know that if the company has accumulated retained earnings then it I necessary to

pay cash to its shareholders. If the cash is not available then the company will borrow in order togive back the cash balances to its share owners. This is another reason, Tesco has borrowed

finance on interest from banks mentioned in the annual report (Anon, 2014),

It is important to know that Stakeholder is any group or an individual who can affect or isaffected by the achievement of an organizations purpose Lawteacher.net, (2014).This argument can also be presented as that whether shareholders are the ones whose wealth is

affected by dividend payment methods or these dividend payment methods of company is aiding

them in terms of achieving higher growth.

From the dividend yield pattern mentioned in the (Table 1, 2014), there seems like Tesco has

been trying to gradually accelerate the dividend pay-out for its share owners. In a way, this

demonstrates that Tescos directors know that their chief responsibility is to work for theirshareholders wealth maximizations. Any actions or activities pointing that they have been more

reluctant towards the company is an indication that they have been violating their duties. A point

that favours Tesco, is that they are growing and dedicated to achieve superior results and theykeep on assuring shareowners that companys actions are affiliated with their expectations.

Tesco Share Price History:

Figure1

(Figure 1, 2014) demonstrates the share price history of Tesco. In the above figure, we can

analyse the rise and downfall of share prices. Multiple factors are responsible for a high or lowshare price. As we are specifically discussing dividends, we will focus on the retained earnings

given as dividends. Beginning from year 2004 we can see that the share price has started to rise.


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The share price has been rising and gone to its peak in year 2009. Fluctuations in the prices were

also observed but Tesco maintained its share prices. The reason for the higher share price is due

to the manipulation. Sometimes company manipulate their share prices in order to get higherreturns. The company buy back their shares and try to hold shares in order to make shares scarce

and buyers assume that the share price shall rise. In the end, the shareholders of the company buy

more shares in the form of dividends. In this situation company does not need to pay off cashinstead they give dividends. In year 2009, Tesco achieved higher growth. They opened manyoutlets and they implied a different structure in order to give rise to high sales fulfilling customer

demands.

Currently, in year 2013 the share price went to 336.35, the opening bid was 340.35; trade high at341.30 while trade low was recorded as 334.81. The above figure depicts amazing share price

evolution over time. One of the greatest factor that has affected share price is the rate of inflation

and as the competition is getting tougher among the competitors, the customers buying power is

on higher demand.

Investing Decisions:

(Tesco plc, 2014) Tesco has been investing largely on their marketing campaigns in order to give

more brand recognition for their customers. If we look at the dividend yield given by the

company, we observe that the company has been investing in joint ventures and associates. As a

result of this investment they get a certain amount of dividends from these joint ventures. Thisadds to the accumulated retained earnings of the organization.

Next acquisition or disposal of subsidiaries is another step taken by the firm in order to utilize

the net cash in other investments. Tesco has been also involved in long term and short terminvestments so that whatever proceeds they receive, they can add it in their retained earnings.

These long term and short term investments are the proceeds from sale (Tesco plc, 2014).

Every year the company look forward for the sale of intangible assets. The cash collected from

the sale is then invested by the company. These activities contribute in making a decision forgiving dividends to stakeholders. The company knows that the stakeholders are the main

constituents responsible for good fortunes.

Financing Decisions:

If company has made their accumulated retained earnings it is necessary to pay the dividends tothe share owners. If the company is out of cash, then company usually takes loans or borrows

from its associates. The financing decisions depict the selling of shares to shareholders. The

proceeds obtained from share capital are re-financed in order to yield high dividend growth. The

borrowings of the company also show that company has been giving dividend payments as aresult they make borrowings.

Every year company makes repayment of borrowings, this concludes to their financing activities

as well.

The companys financing activity also includes dividends paid to equity owners. This is afinancing decision because the equity owners give their equity to company so that the firm could

utilize the amount in their investments. This is done for achieving maximization in shareholders

equity.


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It is important to notice companies who do not give dividends to shareholders for a particular

year or two; those firms re-invest their accumulated retained earnings in order to yield higher

growth objectives.The shareholders will always want that the company give them higher dividends while the

managers of the company usually thinks to re-invest the entire earnings which would be

beneficial for the companys growth. This conflict has always existed between the shareholdersand the managers but if we take companys perspective, it is the core objective of the companysemployees that they should always work for the shareholders wealth maximization.


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