Dividend Policy of Coca Cola Company: Dividend Decision and Optimization - Case Study Example

Dividend policy of Coca Cola Company Name: Institution Course Tutor Date Dividend policy of Coca Cola Company Dividend policy involves taking decision on whether to pay cash dividends at present or paying them at a later date after they have accumulated. Dividend policy is usually determined by the dividend payout ratio (Universalteacher4u.com, 2011). This discussion aims at analyzing the dividend policy employed by Coca Cola Amatil Limited Company. The company opts to pay its dividends at an optimized rate as discussed later in the study. Analysis of recent firm’s dividends and earnings Year EPS % DPS% Payout ratio 2004 39 28 0.717949 2005 43.3 31.5 0.727483 2006 43.2 32.5 0.752315 2007 48.8 35.5 0.727459 2008 54.9 39 0.710383 2009 60.5 43.5 0.719008 2010 67.3 48.5 0.720654 Graph 1 Graph 2 The history of firm’s dividends indicates that there is a target payout ratio since the company has a consistent payout ratio throughout the years. Dividend payout trend using comparison of DPS and EPS trends Graph 3 The graph above shows how the dividend per share ratio relates with the earnings per share trend. The dividend payout ratio is calculated as DPS/EPS In this case, the dividend payout ratio for the year 2004 would be 28/39 which equals to 0.717949. This indicates that the rate of dividend payout is above 70%. The average dividend payout ratio for the years 2004 to 2010 is 0.725036. The dividend payout ratios are relative to the company’s earnings at the end of financial periods. The recorded profits for the years 2004 to 2010 are 280.3, 320.5, 282.5, 310.7, 385.6, 449, 497.3 and 591.8 respectively. This shows that there has been a positive trend in profitability. The dividend payout ratio has also been increasing in respect to increase in returns. The company has a constant dividend payout policy with a target policy of generating a dividend ratio of an estimated 72.05% rate per annum. Effects of Franking credits on the dividend policy Franking credits from the year 2007 to 2011 have been decreasing in respect to the progress in years. Franking dividends of the company during the years have ranged from 150.1 to 91.1. Franking credits at the beginning of the year are 150.7, 108.2, 90.4, 84.4, and 91.1 for the years between 2007 and 2011. This shows that the franking credits have been decreasing in rate with progress in years. The decrease is based on the policy of payment of tax at and growth of the company at an upward trend. The company has a dividend policy that ensures that franking credits are at a reducing trend. The franking credits from the income tax have been fluctuating. For instance, a range from 47.8 to 15.8 between the year 2007 and 2008 is observed. The decrease could have been due to change in dividend imputation where the company could be paying less income tax of dividends available. The amounts of other franking credit from income tax are 65.9, 71.8 and 20.1for the years 2009 to 2011 respectively. The fluctuations in the franking credits for the income tax vary due to the different payment strategies by the management while paying for its dividends. The total franking credits are also influenced by the amount of franking credit at the beginning of the year and franking credits from income tax (Little, 2012). The total franking credits observed from the year 2007 to 2011 are 198.5, 124.1, 156.3, 156.2 and 111.2 respectively. The variations on franking credits are due to differences caused by the income tax franking credits. The range would have been decreasing constantly if it was only based on the franking credits at the beginning of the year. How the share repurchases policy of the company affects the dividend policy of the company The company also opts for share repurchase in addition to cash dividends. The company also seems to practice share buyback which is based on reacquisition of shares to the stock of the company (Damodaran, 2010; Luesby, 2012). This is done through distributing some cash to the shareholders in exchange for a fraction related to the outstanding equity (Baker, 2009). The company share repurchase is relatively small where 30% of the remaining share capital is used to reinvest back the shares. The share repurchase affects the dividend policy by reducing the value of dividend amount to the shareholders (Schmidt, 2012). The share repurchases is based on direct offer to the shareholders after dividends payments. The company motivates the repurchase of these shares through supplement dividends and tax benefits through franking income tax. Firm’s dividend policy From the year 2007 to 2011, the net returns have been on the upward trend. The dividends per share have also risen with the profits levels from 41.3, to 52.4, 60.5, 66 and 78.1 respectively. This shows that the company has laid out a plan which ensures constant program of dividend payment with respect to the net profit registered, with this program the dividends per share prices rises as revenue returns increase. Dividend smoothing Dividend smoothing ensures that dividends are relative to earnings per share. The dividends should neither be too high nor too low. In this case, the company has a strategy that ensures dividend smoothing (Damodaran, 2010). In the table below, the trend of dividends seem to be relative to earnings per share. 2004 2005 2006 2007 2008 2009 2010 2011 EPS 39.5 43.3 43.2 41.3 52.4 60.5 66 78.1 DPS 39.3 43.1 43.1 41.2 52.3 60.4 66 78.1 The dividend earnings per share and share earnings relationships are relative (Secondventure.com 2011). According to the trend, earnings per share and dividends per share have a small marginal difference. This is a clear indication that the company has managed to maintain dividend smoothing during its past operational financial periods. Investment and current financial needs of the company The company has liability and financial requirements amounting to $3,994.7 million which are used to ensure financing of the company. The share capital amounts to $2218.2 million with reserves of $91.5 million for future investments. The assets of the company amount to $6029.0 millions, acting as the enhancing factor for stabilization of the company. The dividends are however paid according to the financial returns of the company. The characterization of the dividend payout policy within the company is based on the performance rate in each financial period. Characterization of the dividend policy to Linter’s “stylized facts” According to these facts, a firm or a company should have a target payout ratio of around 40% to 70% especially in Australia (Damodaran, 2010). The company’s dividend payout policy is in line with this fact since it has a payout target average of 72.5%.The management of the company is also focused on increasing the value of the dividends through increasing the revenue returns which are relative to the financing of dividends and the dividend per share payments. The company dividend policy also agrees with Litner’s stylized facts on manager’s reluctance to make dividend changes which may be later reversed (Lease, 1999). This is evidence based on the company dividends payout ratio target of 0.7205 averaged within the years. This shows that the payout policy of the company is to give a dividend percentage ratio which is constant throughout the financial periods. The managers are likely to decline any policy that would prompt changes in the dividend payout strategy since it would lead to complexity in the company operations (Damodaran, 2010). However, the company does not agree with the fact about dividends follow shift phases in the long-term to sustain levels of earnings rather than changes in the short term earnings (Lease, 1999). This is emphasized by the company ability to maintain a consistent run in dividend payout which is brought by changes in both short term and long-run investment activities. In addition, the Linters model states that investors can only access the value in franking credits after franked dividends are issued (Lease, 1999). This is not the case in the Coca Cola Company since the investors can access the franking credits after the financial period. Conclusions The company mostly relies on both Litner’s model and Imputation model where the use of Litner’s model is based on the dividend payment and stability (Damodaran, 2010; Yee, 2004). Managers are more likely to ensure stability of dividends through maximizing on the revenue returns. Imputation model is used where fully franked value surpass that of a single dollar. The fully franked value of this company at the beginning of the year is at high rate of around $91.1 and it has been reducing for a period of five years where the original value in 2007 was $150.7 million. The total franking credits at the end of financial year 2011 are valued at $112 millions, depicting a range in fully franked credits. These fully franked credits vary over the years also. On dividend reinvestment plans, the company selects part of its shareholders dividends to reinvest back into the company rather than giving all in cash. This helps the company to build its future investment plans on financing and generating more capital rather than just transferring all amount to the shareholders. Dividend reinvestment plans acts as fundamental source of equity funding and financing strategy of a firm (Wang, 2009). However the company should be more concerned on increasing its financial dividend reinvestment plans to be able to gain more on equity financing and to generate more funds for its long term financial objectives. The company also bases its payments policy more on the cash dividends. A substantial amount of dividends are paid on cash prompting the investors to either reinvest back on the shares or use their cash dividends for other uses other than investment in the company wealth (Damodaran, 2010). The share repurchases strategy used by the company ensures that it generates more revenue to increase the wealth and funds of investors. This ensures increased leverage, undervaluation combat and share capital maximization (Baker, 2009; Nd.edu, 2010). The company seems to be trading on this field to grant the shareholders more option to utilize their share capital through dividend payouts (Damodaran, 2010). Dividend decision and optimization Dividend decision used by the company is target and not actual. The dividends are relatively increasing with rise in share capital and revenue returns. The dividend decision involves comparison of dividends per share and the earnings per share ratio; this ratio amounts to 72.05% average (Baker, 2009). The relation of the payout ratio and earnings per share are likely to form a trend which also relates to an actual target dividend payout policy. The company has an optimized policy of dividend payment. Having a dividend payment policy relative to the rate of returns is a clear indication that the company has optimized its dividend policy to annual returns and growth of the company. Relation to financial theories The company dividend policy also goes in line with birds-in-the-hand theory or Fallacy model which states that for a company to increase its shareholders wealth value, it should pay more dividends (Lease, 1999). This argument is opposed to the financial policy and investment strategies which advocates for reservation of equity for capital generation. The company should also try to use the Miller-Modigliani strategy which states that the shareholders wealth is not affected by lack of paying dividends or that investment policy is in no way affected by dividend policy (Lease, 1999). However, this theory is based on assumptions that capital market factors are efficient but unrealistic in general financial operations (Baker, 2009). Finally, the company should base its dividend policy on the annual growth rate recorded. The dividend payment policy should be based on the return generated and the capital requirements of the firm. The dividends should be paid when the company has met its core financial obligations to reduce the possibility of the company becoming insolvent. This does not affect the shareholders value since the company wealth is being protected while this is being done. 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