Financial analysis of Man Group Plc
Topic- Financial analysis of Man Group Plc
This report reflects the key financial analysis of the Man Group Plc Company has been taken into consideration. This report is divided into following parts such as computation of the dividend valuation of company, growth rate of company, business analysis of company and financial performance of company. In addition to this, capital assets pricing model have also been undertaken in this report to estimate the company’s cost of equity, weighted average cost of capital and its share price. After that, estimated share price and market share price has been compared to identify whether the company is undervalued or overvalued in the market. After that obtained data, such as market share, profit, dividend, share price index, and current inflation rate have been used to determine the future share price of company by using dividend growth model. In addition to this, Fisher-Hirshleifer model has been used to examine the firm’s investment decision and role of capital market.
1.1 Description of company
Man group Company is active management Business Company which was initially founded as a sugar cooperage and brokerage by James Man in 1783. The stock price of company is 173.05 GBX +2.80 (+1.64%) which reflects good indicator. The total revenue of company is 82.7 crores USD (2016) which is 20% higher as compared to last three year data.
There are several factors which may affect the dividend policy and adoption of the same by the listed companies. It is very difficult to lay down an optimum dividend policy which would maximize the long-run wealth of the shareholders resulted to increment and decrement of the firm’s value. In this case, Man group Company has been taken which followed profit based dividend policy to distribute the return of company to its shareholders.
The dividend policy is an important component of the corporate financial management policy. It could be defined as amount of profit or return earned by company distributed to shareholders on their shareholding proportioned basis. For a long term, the subject of dividend policy has captivated the interest of many investors and researchers. It is evaluated that the dividend policy of the company is highly based on the profit earning capacity and the future growth of the company. There are several factors which have been affecting the dividend distribution decision of company such as nature of the business, profitability of company, future growth, market share price and return on capital employed by company. As per the point of views of the general investors, dividend serves as important indicator of the strength and future prospective of the business. It is analysed that if company reduce its dividend offered rate then it has been decreasing its earning capabilities and vice-versa. Ideally, big organization such as GE capital, Wesfarmers, JB HI-Fi Company are following stable dividend policy to maintain an effective brand image in the mind of investors irrespective of their earning capacity. However, in case of loss of its business, it keeps its dividend payout zero. Nonetheless, extensive level of literature reviews and research papers have been formulated on determine the optimum level of dividend policy for an organization but nothing such qualitative information have been collected which could be used to evaluate the best dividend policy of company.
Dividend policy of the Man Group plc
There are several factors which may influence the dividend policy and dividend payout decisions such as cost of the equity, debt interest rate, inflation rate of market, growth available in business, shareholders return, capital employed by company and financial leverage of company. The share price fluctuation is based on the earning and market situation of company. However, the share price of company has increased by 20% since last five years.
Man group Company has followed profit based dividend policy. It is evaluated that the net income of company has increased from USD 72 million to 255 million in 2017. On the other hand,
|MAN GROUP PLC ADR (MNGPY)|
|Fiscal year ends in December. USD in millions except per share data.||2013-12||2014-12||2015-12||2016-12||2017-12||TTM|
Man Group Company has followed hybrid dividend policy. It is analysed that the company is offering way too high dividend to its shareholders in market. This strategy is highly useful to attract investors for raising capital in market. However, in 2016 and 2015 company followed dividend policy and kept its dividend payment stable. It reflects that company has been following stable divided policy since last three year. On the contrary to that, company has been increasing its profit throughout the time. The main important point is related to the fact that in spite of having loss in its business, company consistently offered dividend to its shareholders. This reflects that company is more inclined towards attracting the shareholders and keep them attracted toward its business. It is analysed that if company is having high growth in its business then it should instead of offering its dividend amount to its shareholders, put more efforts to plug back its profit in its business. It will not only help organization to provide capital for the business growth but also establish the proper linkage between organization development and economic growth. After evaluating the annual report of Man group Company, it is analysed that company has been following hybrid dividend policy to distribute its dividend to its shareholders. This policy reveals that company keeps its dividend payment stable in some years and at point of time it follows residual dividend policy. This strategy is highly attractive towards investors. It is used by company to maintain effective brand image to attract more investors. The cash flow statement of Man group Company has shown that company has increased its dividend payout amount with the increase in its profitability. Nonetheless, in several years, company has increased its retained earning with a view to plug back its profit for the future growth of the company. As per the perception of it is revealed that company having high profitability will give offer high dividend to its shareholders.
1.2 Valuation Models
There are several valuation models which could be used to assess the market value of Man group Plc. There are several valuation models such as dividend valuation model, free cash flow to equity model, price earnings ratio model and value ratio model. This valuation model reflects that company has issued good amount of dividend to its shareholders. However, there are several valuation modes which could be used by company to assess the value of its company. Nonetheless, the dividend valuation model is the most suitable method to analyse the future value of company.
1.3 Dividend valuation model
This model is used to identify the true value of company based on the stock price and sum of all the future dividend payments. This model is used to evaluate the net present value of the future dividend available to shareholders.
Future value of stock =
|VS||= Stock Value|
|D0||= Dividend at time 0 (most recent)|
|G||= Growth rate|
|RF||= Stockholders Required Rate of Return|
|Future value of stock||8.261832559|
With the help of dividend discount model, the future stock price of the Man group of company would be USD $ 8.21. It is evaluated that Man group Company has overvalued its shares in market as compared to its book value. As per the point of view of the investors, it will give less return to investors on their investment. Nonetheless, with the increasing profitability of the Man group company, investors would be having more value creation on their investment. After using this model, it could be inferred that share price of company is undervalued. It shows that required rate of return of company is 9.11% which is computed by using CAPM model. The dividend growth model analysis all the future dividend payment and on the basis of these dividend payment, it determine the share price of company. However, as per the DVM, share price of company is $ 8 which is lower than its market value.
The dividend policy, payment and managerial decision play pivotal role in the success of organization influence the value of the firm in determined approach. In this ramified economic, investors are more inclined towards investing their capital in those companies which are offering high dividend to shareholders. However, long term shareholders are more inclined towards the long term value creation of the company.
In simple words, dividend policy could be described as set of guidelines which company uses to decide how much of its earning and amount of profit it will pay out to its shareholders. However, some of the researchers are of the view that investors are not concerned with the dividend policy of company since they could sell a portion of their portfolio of equities if they want to earn money.
The Man Group Plc Adr (Mngpy) has been paying dividend since last five years. However, there is no such detail which could be used to determine as basis on which these dividend payment was done. However, Capital assets pricing model could be used to analyse the dividend policy and true value firm in the market.
Capital assets pricing model
The capital assets pricing model is the model used to determine the value of the assets and required rate of return before investing in the particular project. This method assists Man Group Plc Adr (Mngpy) to determine whether the earned profit should be plugged back in the business or distributed to shareholders.
Computation of the required rate of return
CAPM= RF+ (Rm-RF)*B
RF= Risk free rate of return
RM= Market Risk
B= Beta of company
Computation of required rate of return
|Calculation of Required rate of return under CAPM model|
|Risk free rate (A)||1.44%|
|Market Risk premium (C)||12%|
|Required rate of return [A+(B*C)]||9.11%|
This required rate of return is the amount of cost of capital which is required to be paid by company to its shareholders. However, this rate is also used by company to set the present value of the future inflow and outflow from the busienss. This rate of return plays pivotal role in determining the dividend policy in company. For instance, if company uses dividend discount model or Gordon model then it could use required rate of return to compute the future share price and dividend growth rate of company.
Weighted average cost of capital
The Weighted average cost of capital is the rate that company expected to pay on average to all its security holders to finance its assets. This WACC is highly influence by the financial leverage and cost of capital of company. It is evaluated that company has more than 53% of equity capital and 46% debt capital in its financial structure. It reflects that company has higher financial leverage in its business. Ideally, the financial leverage of company should be low otherwise at the time of sluggish market condition; it will destruct the busienss value of company. However, the cost of debt of company is already way too low. Man group has used this debt portion to keep its cost of capital low. At the same time, use of this debt portion will also increase the financial risk of organization. This weighted average cost of capital will assist company to identify the areas which could be improved to lower down its cost of capital. However, company has high financial leverage and due to the increased financial risk, company needs make payment of its debts otherwise it may destruct the business in long run in case of loss of its business.
The computation of the weighted average cost of capital has been given as below.
|WACC||Capital Amount||Cost of capital||% of portion||WACC|
The Fisher-Hirshleifer model, stipulets that the goal of any firm is to increas the future value of company and increasing the overall return on capital employed. This Fisher-Hirshleifer model could be broken down into three key asssertation such as firm’s investment decisions are separate from the preference of firm’s owners. As per the Fisher-Hirshleifer model, it is considered that consumption and investment decisions of an individual is examined in the presence of frictionless of capital market. In the simple words, Fisher-Hirshleifer model revealed that total investment of the investors should be equaivilaint to his saving. However, interest rate should be more than saving interest rate when investors wants to invest his funds in market. The Fisher-Hirshleifer model provides the conceptual frameworks for the Net present value model. As per this model, the only way to increase the value of its investment is to invest in the market so that it could compensate the time value of money. In context with the dividend case, it is inferred that investors would be inclined towards invesitn money only in those firms which offers good amount of return to its investors. On the other part, if company is having good option to create value on its investment then instead of distributing the dividend to shareholders, it would plugged back its funds in its business. The Fisher-Hirshleifer model clarify all the possibilities and issues of the capital market. It also helps investors to assume that the capital market is offering good amount of return and less fluctuated.
The investment decision of Man’s Group is aggressive. It has been plugging back most of its funds in its business to expand the business chains in market. Nonetheless, the role of capital market in the investment decision is very pivotal. The capital market is highly unstable and as per the Fisher-Hirshleifer model if investment made in capital market in the particular time period then the yield output would be received only in the next period. The investment decisions of the Man’s group is highly based on the present value, discounting factors and return available in the capital market. It has invested most of its capital market with a view to increase the overall return of tis investment. However, hedging process have also been used as per the Fisher-Hirshleifer model with a view to mitigate the market transactional risk factors. Fisher only focuses on the consumption of the value and investment. If company keeps its capital idol in it business then it will destruct the value of the investment. Nonetheless, capital market offers good amount of return. Company needs to opt best option to save its capital from the capital market loss and risk arise from the inflation rate.
After evaluating all the details and theory given by the Fisher-Hirshleifer model, it is clear that Man group needs to keep its capital investment decision active. It needs to assess all the available profits and competitor’s offering in the market.
The dividend policy of company should be based on the profit, inflation rate, interest rate and external factors of business. The Man group company has followed hybrid dividend policy to offer dividend to its shareholders. This dividend policy is useful to attract the investors. The Man group has used this dividend policy to attract more investors in market. Now in the end, it could be inferred that Man group plc should lower down its dividend payment otherwise it would have to face high amount of loss in its business. Company should plug back its investment to expand its business instead of offering dividend to its shareholders. It is analyzed that for the long term sustainability, Man Group Company should use this retained earnings in its business. It is analyzed that retained earnings is the cheapest source of finance available to company. It will assist in increasing the overall return on capital employed in determined approach.