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Dividend Decision Undertaken

Essay by   •  July 9, 2019  •  Coursework  •  1,905 Words (8 Pages)  •  13 Views

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PART A: Dividend Decision Undertaken

Dividend decision is one of the crucial decision among the corporate financial strategy which may give the significant impacts on its capital structure, share price, payouts to the shareholder and the amount of taxation that shareholders required to pay. Dividend decision is very important to Gamuda Berhad as it is a decision made to rationalize the dividend payout ratio and retention ratio. The ability of company to distribute dividend is depends on the management decision and development of company. A company is able to provide a more favourable returns to shareholders as dividend payout when the company developed beyond their growth phase or in the absence of any potential investment opportunity.

Based on the past annual reports, we observed that the ordinary shareholders are entitled to receive dividends from time to time and are entitled to one vote per share at meetings of the Company (Appendix 1). In this 5 financial years from year 2013 to year 2017, the dividend payout ratio of Gamuda Berhad is increased gradually over the years within a range of 39%-49% (Appendix 2). We discovered that the Gamuda’s dividend payment guideline is to pay out at least 30% of its annual earnings. During financial year 2017, Gamuda Berhad declared its interim dividend of 12 cents per ordinary share which amounting to a total payout of RM 292 million (Appendix 3). The dividend distributed a 49% (RM292 mil/ RM 602 mil) of the Group’s net profit. 

According to the Gamuda’s dividend payout history (Appendix 4), shows that the Group has 2 interim dividends in a year. The Group declared with a consistent total amount of dividend of 12 cent per share a year from financial year 2013-2017. Thus, we believed that Gamuda Berhad adopts the stable dividend policy over the years as their usual practice for the distribution of dividend payout. Stable dividend policy is the easiest and most commonly used by the corporate. The dividend payouts of stable dividend policy is steady and predictable every each year, which is what most the investor seek. Investor will receive a dividend, whether the earnings increase or decrease. Hence, clientele effect theory which is also adopted by Gamuda Berhad. The Group is likely to attract a clientele of investors who favour their dividend policy. As some of the clientele of investors (such as retirees and pension funds) require a steady and reliable stream of dividend income. While some of the higher rate tax payers may also prefer their dividend policy as they able to choose the timing of the gain to reduce the tax burden.

Part B: Impact of Dividend Decision Undertaken

Dividend yield is the ratio to a share's annual dividend payments to shareholders, conveyed as a percentage of the share's current price. Based on the dividend yield calculated in the Appendix 5, shows that the dividend yield 3.6% of 2018 which is higher than the 2.2% in 2017 which indicate  a good sign of the stability of a company and often supports a firm's share price. However, sometimes a high dividend yield is the result of a decreasing in share price. The yield will mathematically increase because the price is dropping. As the calculation in the Appendix has shown that the share price of RM3.62 in 2018 is lower than the share price of RM5.27 in 2017. This type of situation is often referred to as a "value trap," so investor beware. 

Furthermore, the dividend payout ratio for Gamuda Berhad has gradually increased over the years. Based on the appendix 2 shows that the payout ratio of 2018 is 57% which is higher than the ratio of 49% in 2017. An increase in dividend payout ratio is a positive indicator for the market but it also may not be a good sign for the investor. The investor is to expect a return on their investment which come from capital gains and dividends. When the company decided a high payout ratio means that the company is reinvesting less earnings in the future and upcoming projects, in turn means less capital gains in future periods. In contrast, low payout ratio today result in higher capital gains in future. Dividend payout ratio also indicate a company’s future growth potential. A high dividend payout ratio may not be a good sign for investors that are interested in high growth companies. The best situation is the increases the dividend rate instead of increase the payout ratio. From the financial statement of Gamuda, we can see that the Company is making less profit compared to previous year. Hence, the company’s future growth potential may be a bit worrying.

Benefits and limitations of stable dividend policy

Started from year 2010, the Company maintained its distribution of dividend per share in 12 cents every each year. From the point of view of the Company as well as shareholders the stability of dividends has various benefits. Firstly, it can be a resolution for the investors’ uncertainty. When the company fail on the earnings and it continues to distribute same amount of dividend as in the past, it delivers a message to investors that the company’s future is positive and bright than suggested by decrease in earnings. Furthermore, is also beneficial to the company in its efforts to raise external and additional finances. Stable and regular dividend policy tend towards to the shares of a company and investment instead of a speculation.

In spite of many benefits, this policy also suffers from certain limitations. After adopted the stable dividend policy, it cannot be altered and changed since it will seriously affecting investors’ attitude and the company financial standing. A cut in dividend will bring a serious depressing consequence on investors due to a dividend cut, hence the directors have to maintain stability of dividends during lean years. Therefore, to be on the safe side, the dividend rate should be fixed at a safe and conservative figure so that it may be possible to sustain it even in a lean period of several years.

Dividend Decision

Appendix 1

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Appendix 2

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Appendix 3

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Appendix  4

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Appendix 5

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From Appendix 4 above, the table has shows the ex dividend date for Gamuda Berhas on 12 July 2018 and 12 July 2017 respectively.

Dividend yield         = Dividend per share / Ex-Dividend market price per share

2018            = (12 cents / 338 cents) *100 %

                    = 3.6%

        2017            = (12 cents / 541cents) * 100 %

                                 = 2.2%

To improve the company’s performance, I suggest an alternative financing decision that Gamuda Berhad can consider to use sources of debt finance which is issuing convertible bond to raise capital. As an illustration purpose, assuming the company proposes to issue convertible bonds for the purpose of the investment. Convertible bond is a hybrid securities that has the features of debt and equity which allows the bondholders convert their bonds into cash before maturity and a predetermined number of shares at maturity during the bond’s life.

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