Dividend Policy
Company Information:
The Company Wilmar International Limited is the Asia’s leading agribusiness group, and has been ranked in the largest listed companies in Singapore Exchange in terms of market capitalization. Company operates at a large scale by producing the product like Oil Plam cultivation, Crushing, edible oils etc., Company has its 400+ subsidiary, 450 manufacturing plants and has an extremely large distribution network over more than 50 countries including China, India and Indonesia. Company operates with a workforce of 92000 people and having their Equity balance of US$15,378.965million, (2016) in which share capital amounts to US $8,458.995 million.
The below is the basic details of the dividend paid by the company, which will be discussed after discussing the various theories and dividend policy of dividend as empirical evidence of those theories in the dividend policy of the company.
Particulars | FY 2016 | FY 2015 | FY 2014 | FY 2013 | FY 2012 |
Dividend Per Share | 6.5 | 8.0 | 7.5 | 8.0 | 5.0 |
Dividend Payout Ratio | 30 | 36.1 | 31.9 | 30.8 | 20.5 |
Dividend Yield (%) | 2.57 | 2.57 | 2.41 | 1.77 | 1.64 |
What is Dividend Policy?
The net profit of the company usually divides into two ways, either as a retained earnings or as a dividends. Dividends are paid to the shareholders by way of cash, whereas the retained earnings of the company are being used for the long term financing decision. Company has to choose whether they will be paying the dividend to the shareholders or not, from the accumulated profit. This very much decision depends upon the returns on investments that the company can gain from the long term investment of all the net earnings of the company. Usually company prepares a plan where if they are getting the higher returns from the funds invested then they pay low dividend to the shareholders and if there is lower returns from the market then they pay higher dividend to the shareholders.
The above policy will be affected with the market price and EPS of the company. If the company is paying dividend then it has been monitored that the share price of the company rises, whereas if no dividend is paid then the share price decreases due to current expectation of the shareholders rather than future capital gain. Inversely, if the company re-invest the earnings then the EPS of the company will increase and but if the company pays the dividend then the company will borrow the amount for investment and will decrease the EPS of the company. So the company have to develop a perfect framework between EPS and MPS and have to determine the beneficial wealth maximization to the shareholders.
Forms of Dividend:
Usually dividends are divided into two types: Cash Dividend and Stock Dividend (Bonus Shares). In common parlance, the share price of the company decreases when dividend is paid via cash dividend. (Hastings, 1936). Stock Dividend are transformed as the shares distributed to the shareholders instead of the cash dividend. Though stock dividend are beneficial for the company interm of reserving the cash in the company, but the shareholders doesn’t prefer stock dividend because it will not affect the wealth of shareholders and therefore it has no value for them to receive instead of their wealth invested in the company.
Theories of Dividend Policies:
Traditional Approach:
According to Graham and Dodd, “Stock Market places more weight on dividends than on retained earnings”. So, it is believed that if the dividend is paid then the stock prices will behave more accurately as the company want to behave their share prices, but non- payment will liberally disappoint the share prices of the company. As per this model, valuation of the share price is measured with the weight attached to the dividend. So the weight of the dividend will be equal to four times the weight attached to the retained earnings.
As derived the formula will be (P) = m{D+(D+R)/3}
= m(4D/3)+m(R/3)
This approach is an oral and subjective approach as it could not be possible to determine the weights as asked in the given policy.
Walter Approach:
As per Prof. James E. Walter the share price of the company is nothing more than the present value of the expected dividend. So, the retention will be taken into accounts if there is an expected dividend to the shareholders. This formula is derived from the internal rate of return, market capitalizations rate and dividend payout ratio but it does not cover the factors like the taxation, legal and compliances, management policy. This approach derives two main factors, IRR of retained earnings and dividend per share.
In case the IRR of the company is lower than what the actual market expects then it will results in lower share price of the company. In such case the shareholders demands the higher pay back as a form of dividend so that they can re-invest their funds elsewhere, and inversely the same.
Formula is derived as, D+ IRR (E-D)/Ke)/ ke
So, it derives that if there is R>ke, then firm should not pay any dividend to the shareholders and if there is R<ke, then the company should pay 100% and no investment of retained earnings. In case of R=ke, the firm is at a indifference point between dividends and investments.
Gordan Model:
From an instant view it can be reviewed that the Gordan Model illustrates that, when the ROI is higher than the discount rate, then the share price increase and the dividend ratio is decreased and if the return is less than discount rate it is vice versa. The formula is derived as : [div0 (1+g) /ke-g]
This formula is especially designed with the issue that the company should pay dividend as the investors are of the thinking that the future price is uncertain, so the price of the company is paid at higher price only if the company is paying dividend at constant rate. The shareholders discounts it at a present value so to determine the price of the share.
Modigliani and Miller (MM) Hypothesis:
This model is in against of the dividend policy. So, as per this policy the dividend has nothing to do with the value of the assets and are irrelevant to the shareholders wealth. This hypothesis is based on the arbitrage argument. This hypothesis decides that the how the firm value will remain same in both cases, whether they pay dividend or not. It believe that the dividend will not affect the wealth of the shareholders as it if offset by external financing. So, it means that the price of the shares at termination will decrease if the dividend are paid. So, in such the price of the share will be determined by the formula, (P) = P1+D1 / 1+ke
Linters Model:
As per John Linter (1956), investment needs are not a major consideration in determining the dividend policy. So, the basic parameters of this model are: Target pay out ratio and the spread at which current dividends are adjusted with target. So, he concluded that the company has to set long run target dividends-to-earning ratio for a positive NPV of the project.
Radical Approach:
This approach considers the factors like taxation of both the company and the individual for determine the price. In case there is higher tax on the dividend in comparing to the capital gains, then the share of the company will be more attractive to invest at.
Dividend Discount models:
The share price of the company is determined by taking the present value of the dividend paid by the company during all years at a risk adjusted rate.
So, the dividend discounted model is the instric value of the stock.
Chosen company dividend policy:
As per the policy of the Wilmar International Limited, the company is being paying twice the dividend during each year since 2008. While determining the dividend of the company the BOD usually take cares of several other issues which will include the projected levels of capital expenditure and other investment plans, as well as the Group’s working capital requirements and general financial conditions.
The Two factors adopted by the company while paying dividends are: Economic Condition of the company and Tax consideration. These factors has been molded during determining the dividend policy of the company. These factors has been effected the dividend payout ratio during last five years.
So, as the overall dividend policy of the company is decided as per the theories mentioned above. So, as company is admiring the payment of dividend so it means that there is an understanding of Traditional approach, where if the dividend is not paid to the shareholders the share price of the company will be decreased.
As shown in the chart the company has paid lower dividend during the year 2012, which increases to 8 per share in 2013 and has a continuous payment term till 2015. There is a little downfall of dividend per share in the year 2014 and 2016. So, the dividend has paid at lower rate during this year due to decrease in net earnings of the company. But sill the continuous payment of dividend reflects that the company dividend policy has adopted the framework to maximize the shareholders wealth and have an equal balance in the Earning per share of the company.
Similarly, as the dividend yield of the company is at the higher range each year from 2012 to 2016, it reflects that the returns of dividend on the net profit of the company has been increased in each of these years. So, the retention of the shareholders will exist at a huge level, further the price of the company has an increasing trends during all these years.
Now, if we observe the dividend payout ratio then we can accumulate that, during the year 2012 the dividend has been paid at lower scale than in year 2014 and 2013. The payout ratio has been increased to 36.1 in the year 2015 which is at the record high, but in 2016, it has some lower payout due to re-investment plan in some huge projects of the company.
Conclusion:
As the company is paying a constant dividend and has a policy to pay the dividend twice a year, then it stipulates that the company is in believe of traditional approach and believes that the share price of the company will be at higher level only if they pays dividend to the shareholders. The other theories like Gorden and Modern approach doesn’t seems true to this company, as company has been able to re-invest their other funds too along with the dividend payments.
Referencing:
- Wilmar International Limited Annual Report, (2016), “Financial Highlights”; Available from : http://media.corporate-ir.net/media_files/IROL/16/164878/Wilmar-International-Limited-AR-2016-Revised.pdf
- sg, (2017), “Dividend Yield for the period 2012-16”, Available from : https://www.dividends.sg/view/F34
- Wikipedia, (2017), “Company Information”, Available from : https://en.wikipedia.org/wiki/Wilmar_International
- Wilmar International Limited Annual Report, (2016), “Dividend Policy, Dividend Payout Ratio”; Available from : http://media.corporate-ir.net/media_files/IROL/16/164878/Wilmar-International-Limited-AR-2016-Revised.pdf
- Wilmar International, Media, (2017), “ Dividend History”, Available from : http://ir-media.wilmar-international.com/phoenix.zhtml?c=164878&p=irol-dividends
- Wikipedia, (2017), “Dividend Theories and Policy”, Available from : https://en.wikipedia.org/wiki/Dividend_policy
- Morning Star, :(2012-16), “Dividend Ratios of Wilmar International Limited”, Available from : http://performance.morningstar.com/stock/performance-return.action?p=dividend_split_page&t=F34®ion=sgp&culture=en-US
- Institute of Chartered Accountant of India, (2017), “Dividend Decision & Related Theories”, Available from : https://resource.cdn.icai.org/19347sm_sfm_finalnew_cp4.pdf
- ntu.edu.sg, (2017), “Dividend policy in Singapore companies”, Available from : https://repository.ntu.edu.sg/handle/10356/10136