Dividends and Payout
This paper is aimed at revealing dividends and payouts for British petroleum Co for a period of 5 years (2009-2013) with a full analysis of them and a chart that reflects the company`s behaviour. In dividend payout, there are major explanatory variables were identified to disclose their close relationship and effects on determination of dividend payment. These variables are Earning, firm size, profitability levels, growth, financial leverage and corporate tax.
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Dividend payout policies have been analyzed for many years but with no universally accepted explanation. These explanations are forms of observation on the dividend payment behaviors that are established in the corporate world. According to Brealey and Myers (2005), divided payout policy is one of the most unsolved and difficult challenges faced by financial economists. This statement by Brealey and Myers is related to a statement by Black that The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that dont fit together.
Management of a companys earnings is very important for every firm. The way in which a company divides its earnings between its shareholders is very important and challenging to many managers. The earnings and cash flow information is important not only to the equity investors but also to all other stakeholders since it allows them to make informed choices about their investment decisions. It also provides them with information regarding which activities make money and which ones do not. This in turn provides room for decision making; stakeholders of an organisation take into consideration all information available and consider whether the organisation will continue to provide the products and services or not (Pinto 2010).
Rationale of the assignment
What is essential to note is that financial analysts have been much focused on the primary development of markets. Hence, less attention was paid to the divided policy especially in the emerging markets. Due to this the dividend payout policy has not been well established in financial literature. These issues on the divided payout policy in the emerging markets are quite different in the characteristics, nature and efficiency from those of the developed markets (Akbar, & Stark 2003). Owners of petroleum enterprises need to know the whole concept of dividend allocations to shareholders and the essence of having a large dividend base which reflects the higher earnings of a company. This will help the owners of the petroleum companies to understand whether they can undertake the activity effectively.
Terminology and Methodology
Variable measurement on the dividend payment policy
This variable measurement will be a framework used in discussion of the dividend policy within different markets. This will help formulate different hypotheses that will further examine the factors that are affecting a company`s dividend payment policy. As well, there is the examination of the variables that measure general factors that are affected by the issue of dividend payout.
Dividend payout ratios
Dividend payout ratio is calculated by dividing the total dividend to the net profit of the stock. The calculation is done to calculate net profits and dividend payments of each company in order to regulate and control the challenges of having extreme values that lead the results to low or negative net incomes. Most studies regarding dividend payments employed payout ratios as being a determinant of dividend instead of dividend per share and dividend yield.
In this case the dividend pay out ration has been applied due to several reasons rather that applying dividend per share or dividend yield. Firstly, dividend payout ratio accounts for both dividend payout and dividend retention. Secondly, both dividend per share and dividend yield are considered unsuitable in this case, since they do not consider the dividend paid in relation to a firm`s income levels (Allen & Michaely 2003).
Review of articles
Empirical studies on the theories of divided payout have given different outcomes on the issue; a decrease or increase in divided payout can affect the market value of the company. This is the divided policy of the company that does not affect the market value of the company at any instance. However, there are other theories that examine and determine when and why the firm should pay dividends.
Braouezec, (2008) ModiglianiMiller Theorem in Encyclopedia of Quantitative Finance made full illustration of the dividend policy with certain assumptions such as: the issue related to dividends is irrelevant and has no direct influence on the share price of a firm.
According to Braouezec (2008), Miller and Modigliani theorem, in a perfect market situation, the payment of dividend does not affect the firms value. The shareholders do not require cash as dividend to represent their capital gains if the company does not interfere with the investment policies. In such a situation the firm dividend payout ratio will affect the residue free cash flow due to the firms decision to use free cash flow to pay dividend or to issue more shares.
Miller & Modigliani (1961) in Dividend policy, growth, and the valuation of shares, the Journal of Business, state that changes in the dividend policy may convey information to the market regarding the future earnings of the firms. Many financial practitioners expressed their disagreement with the assumption made by Miller and Modigliani and they state that those assumptions are not applicable in the real world. Those practitioners and analysts who disagreed with Modigliani and Miller introduced the competing theories.
In hisarticle To pay or not to pay: using emerging panel data to identify factors influencing corporate dividend payout decisions, Al-Kuwari (2010) illustrated that when capital markets are imperfect dividend payout does not matter. For example, the bird in the hand theory gives an explanation that investors prefer payment of dividends to retained earnings. Due to that, a firm should set a high dividend payout ratio so as to maximize its share price. The theory explanation indicates that investors prefer cash rather than future promises of their capital gains.
Allen Michel, (2009) in his article industry influence on dividend policy states that when a company has realized profits, the management has to decide whether to give out the profits as dividends or retain some to be ploughed back to the business. There have been debates as to whether companies should pay all their profits to shareholders as dividends. The shareholders want to get 100% of dividends but is it good for a business? Management earnings may mean allocation of earnings among dividends and increase of profits. A firm should have a dividend policy that decides the portion of earnings to be paid out as dividends to ordinary shareholders and the portion to be ploughed back to the business for growth. When a part of net earnings is paid as dividends, this leads to higher capital gains and higher market price.
According to a book by Jaffe & Soligo (2007), The international oil companies, an oil company should make a dividend decision after taking into consideration the companys operating and financial conditions. It should adopt a policy that suits the conditions at the time. Managers have some dividend polices which they implement depending on the circumstances. Stable dividend policy means the firm pays a certain amount of dividends regularly in that it can pay a constant dividend per share or a constant payout ratio.Dividend payout ratio is good since it compares the paid dividends of a firm with its earnings. Those investors who prefer capital growth will invest in firms that have low dividend payout ratio. This means the ratio may differ from company to company in that big companies have high payout ratios. However, investors are motivated by consistent or improving ratios but not the ones that keep on depreciating.
According to Haushalter`s (2000) financing policy, basis risk, and corporate hedging variable measurement provides a framework that will help in making decisions regarding dividend policy within the oil market. Different hypotheses will be formulated that will further examine the factors that are affecting a company`s dividend payment policy. As well, variables that measures general factors that affect issue of dividend payout are examined. After all the returns from all a company`s branches are collected, the company`s management has to formulate the payment policies to its shareholders as per their equities in the company.
Dividend payout ratio, according to Jin & Jorion, (2006) Firm value and hedging: Evidence from US oil and gas producers article, is calculated by dividing the total dividend to the net profit of the stock. The calculation is done to calculate net profits and dividend payment of each company in order to regulate and control the challenges of having extreme values that lead the results to low or negative net income. Most studies on dividend payments employed payout ratios as a determinant of dividend instead of dividend per share and dividend yield.
In this case, dividend payout ratio has been applied due to several reasons rather that applying dividend per share or dividend yield. Firstly, dividend payout ratio accounts for both dividend payout and dividend retention. Secondly, both dividend per share and dividend yield are considered unsuitable in this case, since they do not consider the dividend paid in relation to a firm`s income levels.
Summary, Comments and Criticisms
Taking into consideration the books, articles and journals stated above, one can find that the most profitable firms with stable earnings will always be in a position to manage large cash flows. This is due to their capabilities to pay more and bigger dividends to their investors. As a result the company increases its market share in terms of equity because it will attract more investors. As well, those firms with a faster growing trend will make distribution of the large dividends with an aim of attracting more investors as compared to those that dont. Another major determinant of a dividend payment within these firms is the level of anticipated future earnings of a firm.
It has been revealed that dividend payments mostly depend on cash flows with a reflection on a company`s ability to make payment of dividends, as compared to current earnings of the firm that are in fewer situations are influenced by the accounting practices. The firms claims of the current earnings do not influence the ability of the firm to pay dividends.
Miller & Modigliani`s (1961) article regarding dividend payout ratios has faced a lot of disagreement; many financial analysts state that the authors assumed that markets are perfect. However, this is not the case as there is much competition in the market that may make firms realisable profits decrease.
Sample Data and Period
Source: ( US Energy Information Administration)
The graph illustrates US Crude Oil Production and Imports by year (1910-2012) in millions of barrels per day illustrating a drop in production and increase in import of petroleum products that has a negative impact on the economy.
The oil spill also resulted in debate regarding the offshore drilling policies. In April 2010, US President Barak Obama sent an order to the federal government to restrict the issuance of new off shore drilling licenses and an investigation was to be conducted in the existing companies to find out the cause of the disaster. Consequently, a six-month offshore drilling below 150 meters of water ban was imposed by the US Department of Interior (United States National Commissionon the BP Deep waterHorizon Oil Spill and Offshore Drilling, P.62). In 2010, the National Energy Board in Canada that was charged with the duty of regulation of off shore drilling issued a letter requiring explanation of the companies arguments against the safety precautions necessitating same-season relief wells. There have been adamant calls by the US federal government to restrict offshore drilling projects, for example, in California and Florida since both states illustrated their distaste for off shore drilling in state waters.
Analytical Approach, Tables, charts, diagrams
A firm profitability level is self explanatory variables that are directing the dividend payout policy. There are evident differences regarding dividend policies in the developing and the developed countries. These differences show that dividend payout rates within the developing countries are about two third of those in the developed countries. In most cases emerging market corporations do not follow any stable dividend policy. Dividend payment for a given period is determined by a firm`s profitability for the same period. Profitability is the ratio of net profits to the amount of money that shareholders have invested into the firm. Return on equity (ROE) has to be applied in this study as a proxy that will determine the profitability level of firms. Profitability of a firm is calculated as follows;
PROF = (Net profit/shareholder equity) x 100
This creates the assumption that the dividend payout ratio of each year will be determined by the firm earnings for the same year. The payout policy in this case will be fully influenced by the cash flow positions, profitability levels, the growth scenario paths, and investment opportunities of the company. For long a firm`s profits have been regarded as the primary indicator of the capacity of the firm to pay dividends. As well, the current and the past profit trends of the firm will be essential factors that will influence the payment of dividends. Hence, dividend payout policy is highly associated with the firm`s profitability levels.
Summary of Findings, Suggestions and Recommendations
According to this empirical analysis of dividends and payouts for British petroleum Co for a period of 5 years (2009-2013) the company might have followed unstable cash dividend policies. This policy is the main factor that had to determine the total amount of dividends to be paid to investors. Most firms anticipate making full distribution of dividends each year in accordance with the targeted payout ratios. A firm`s payout ratio is determined by the total amount of dividends that are distributed as part of earnings and the size of the company.
This discussion creates the assumption that dividend payout ratio of each year will be determined by the firm earnings for the same year. The payout policy in this case will be fully influenced by the cash flow positions, profitability levels, the growth scenario paths, and investment opportunities of the company. For long a firm`s profits have been regarded as the primary indicator of the capacity of the firm to pay dividends. As well, the current and the past profit trends of the firm will be essential factors that will influence the payment of dividends. Hence, the dividend payout policy is highly associated with the firm`s profitability levels.