Understanding Of Dividend Related Ratios And Influence On Share Price Assessment Answer

Answer :

Dividends

Introduction

The dividend is a share of profit that is paid by the company to its shareholders in return for the capital invested by them. The dividend decisions of the company affect the price of its share in the market. This report aims to provide an understanding of dividend related ratios, the effect of dividend on the share price. Additionally, the concept of a mature firm with its life cycle process has also been covered.

Criteria to identify a mature firm

A business goes through various phases in its life cycle. Maturity is a phase of the business life cycle in which the company has a steady or lower speed of growth. Being a mature firm is a sign that the company has properly established its business in the market. The turnover of the company tends to grow at a slower speed in this phase because the company has reached a level where it has established a strong customer base, and it is not expected that this base may new entries to it. The company may reduce its cost to increase profits as it is facing low growth in revenue generation. A company has to invest many years in the establishment of its business, and in the early phases of the life cycle, it goes through immense growth. In the maturity phase, it has a quite sufficient amount of accumulated profits available with it (Steiner-Khamsi, Appleton, & Vellani, 2018).  Accumulated profits can be distributed amongst shareholders in return for their investments and this distribution is done in the form of a dividend. Hence, it may be observed that if the company is paying dividends in consistent manner then it is a mature company. Also, a low price-earnings ratio may be observed in such scenarios (Smith, Betts, & Smith, 2018). 

Suncorp Limited is a company that has a lower rate of growth in turnover as compared to the growth it had in the earlier phase of its business lifecycle and paying dividends in a consistent manner. Considering this point, it may be concluded that Suncorp Limited is a mature firm (Suncorp, Company 2020).

Dividend Yield and Payout Ratio

Dividend Yield Ratio

The dividend yield ratio is used to do a comparison between the amounts of dividends received by shareholders of the company and the market price of shares of the company. The dividend yield has a direct relationship with the dividend paid by the company and has an inverse relationship with the share price of the shares. It means that if the dividend paid by the company increases then dividend yield will also increase, and if the price of share increases then dividend yield will decrease. Mature firms have relatively high dividend yield (Valaskova, Kliestik, Svabova, & Adamko, 2018).

Dividend Yield Ratio = Dividend paid per share  x 100

Market Price of Share

Dividend Payout Ratio

The dividend payout ratio is used to do a comparison between the amount of dividend paid to shareholders and the earnings of the company.  It is the percentage of the company's earnings paid out as a dividend to the shareholders (Campos, Fidrmuc, & Korhonen, 2019).

Dividend Payout Ratio = Dividend paid per share x 100

Earnings per share

For the last 5 years, Suncorp Group limited has consistently followed the dividend policy of paying out 60-80% of cash earnings to return surplus capital to shareholders (Qehaja, & Ismajli, 2018).

The reason for following the same dividend policy is that Suncorp is in the maturity phase of its business lifecycle (Segre, 2017).

Comparison of 2019 and 2018 Dividend Data (Suncorp Limited)

Frequency of Dividend Payment

Suncorp Limited pays dividend 2 times in a year. The first payment is for the interim dividend and the second one is for the final dividend. In the year 2019, the company has paid the interim dividend on 31st March, 2020 and the final dividend on 25th September, 2019 (Andjelic, & Vesic, 2017).

Amount of Dividend

For the year 2019, Suncorp Limited has paid a total dividend of $1,013 million, and for the year 2018, the company has paid $1051 million (Suncorp, Company 2020). 

Record Dates

To receive the Final dividend on a share of Suncorp Limited for the year 2019, a share must be registered before 14^th August 2019. To receive the final dividend of 2018, the date was 15^th August 2018. These dates are also known as the ex-dividend date (Suncorp, Company 2020).

Payment of Dividend

The payment of dividends is done after 6 weeks from the ex-dividend date. For the year 2019, payment of the final dividend has been done on 25^th September, 2019.

Franking Dividend

In Suncorp Limited, the dividend on each share is fully (100%) franked. 

Price movement and Dividend Tax

Before the payment of dividends in the year 2019, the share price of Suncorp Limited was $14.17 per share and after payment of dividends, the share price dropped to $13.66 per share (Suncorp, Company 2020). There was a change of 3.60% in the price of share after payment of dividend. There was a change of 1.55% in share price due to the dividend paid in the year 2018 (Suncorp, Company 2020).

If a comparison is made between the change in the rate of dividend and change in the rate of share price then it may be observed that dividend has changed in opposite direction and the share price has changed in the same direction (Suncorp, Company 2020).

For the year 2018, dividend per share has increased by 10.96% and for the year 2019, dividend per share has decreased by 3.70% (Suncorp, Company 2020).

As per the finance theories, the price of share generally increases after the dividend is declared as there are more people available who want to buy the shares before the effective date. Later on, the price of shares decreases when the dividend is paid. The same goes for Suncorp Limited share price. Before the payment of dividends, the share price of Suncorp was relatively high and after dividends, it went down (Suncorp, Company 2020).

Franking Credit or Dividend Tax Rate

Dividend Tax Rate =  Dividend paid  -  Dividend paid

1 – Tax Rate

Price movement at the time of declaration of dividend

Before the declaration of dividend, the share price of Suncorp was $14.10 and after the declaration, the price was $14.14 (Suncorp, Company 2020).

The dividend for the year is declared in the general meeting of shareholders. By looking at the above table, it is observed that the share prices are relatively lower at the time of declaration of dividend. An increase in the share prices may be observed after the declaration of dividend. Considering the figures of Suncorp Limited, it may be observed that the change is not that big (Helfert, 2012).

As per different dividend policy theories, decisions related to dividend affects the value of the business. Dividend theories state that share price generally increases after the declaration of the dividend because every investor then tries to buy the shares of the company by paying premiums even. In the case of Suncorp Limited, the prices of shares reacted expectedly. Share prices have risen after the declaration of dividend (Gibson, & Frishkoff, 2019).

Conclusion

High fluctuations in the share prices may be observed when decisions related to dividends are taken for business. Also, there is a fluctuation at different dates related to dividends. As per the above discussion, it may be concluded that a mature firm has high dividend yield and payout ratios and decisions related to dividend surely affects the share price of the company.