Dividend Payout Policy And Its Influence On Stock Price: A Study On A Mature Firm From ASX

Criteria for identifying mature firm

1.Criteria for identifying mature firm

Mature firm is the company that is well established in the related industry and sells well-known product to the loyal customers followed by average growth. Mature firms are already passed through the rapid growth stage and are expected to grow at the same rate with the economy. Further, these types of firms have various well established competitors.

GWA Group Limited has been chosen as a mature firm on the basis of the following criteria –

• Revenue growth – it can be stated that there are wide level of divergence among the revenue growth rate and earning of various companies. While earning growth for the mature firms can be high owing to the improvement in efficiencies, the revenue growth rate may not be altered. The revenue of GWA Group Limited for the last 43 years is AUD 426,218, AUD 439,666 and AUD 446,332 respectively for the year 2015, 2016 and 2017. Therefore, it can be identified that the company’s revenue is increasing trend over the last 3 years and the growth rate is stable (Gwagroup.com.au 2018).
• Established margin – another feature of mature companies is that they experience stable margins with the only exception that the margin can vary with the function of the overall economy. It can be observed that the net profit margin of the company that is calculated through dividing the net profit by the sales revenue for last 2 years are 12.21% for the year 2016 and 12.02% for the year 2017 (Gwagroup.com.au 2018).Therefore, the company has established margin for the last 2 years (Coad and Guenther 2013).
• Debt capacity – as the firms get matured, the earnings as well as the revenues improve and the reinvestment are required to be dropped off as more amount of cash is available for paying off the debt (Freitas, Marques and Silva 2013).. Therefore, the company always has a scope to raise more amounts through debt financing. It can be identified from the last three year’s annual report of the company that the debt equity ratio of the company that is calculated through dividing the debt by shareholders equity is 0.41, 0.39 and 0.35 respectively for the years 2015, 2016 and 2017 (Gwagroup.com.au 2018).Therefore, the debt of the company is lower than the equity and thus the company always had a scope to raise more fund through borrowing.

As per the above analysis GWA Group Limited is fulfilling all the above mentioned criteria are fulfilled by the company. Therefore, the company is identified as the mature company.

2.Dividend payout ratio and dividend yield

Ratio	Formula	2013	2014	2015	2016	2017
Dividend yield	Annual dividend / stock price	5.00	2.09	2.63	7.66	5.24
Dividend payout ratio	Dividend / Net income	113.2	90.3	–	81.4	81.1

Dividend yield – this is the financial ratio that signifies the amount distributed by the company as dividend each year as compared to its share price. The dividend yield is stated as the percentage and it is calculated through dividing the dividend’s dollar value paid in specific year by the stock price of the share for the time (McMillan and Wohar 2013). This is also states the company’s stability and generally supports the share price of the company. Generally, the dividend is distributed by the profitable companies and therefore, the investors often prefer those companies that are regular in paying the dividends. It is identified that the dividend yield of the company for the last 5 years are fluctuating and had no specific trend (Chortareas and Noikokyris 2014.). the dividend paid by the company for the last 5 years are 12.0 cents, 5.5 cents, 6.0 cents, 16.0 cents and 16.5 cents per share for the years 2013 to 2017 respectively. The share price for the last 5 years was 2.40, 2.63, 2.28, 2.09 and 3.15 for the year ended 2013 to 2017 respectively (Gwagroup.com.au 2018).. The main reason of difference was the difference in the dividend payment by the company. The dividend payment policy that is maintained by the company is paying 65-85 percent of the net profit after tax as the ordinary dividend (Arslan, Zaman and Phil 2014). Therefore, owing to the changes in the net profit the dividend yield of the company also changed.

Dividend payout ratio – it is the amount of dividend that is paid to the shareholders as compared to net income of the company. The amount that is not distributed as dividend and retained by the company for the purpose of growth is known as the retained earnings (Kenyoru, Kundu and Kibiwott 2013). It is calculated through dividing the dividend amount by the net income. Dividend payout ratio of the company for the last 5 years is 113.2%, 90.3% for the year 2013 and 2014 and 81.4% and 81.1% for 2016 and 2017 (Gwagroup.com.au 2018).  As the net income of the company for the year 2015 was in negative, there is no dividend payout for 2015 (Nwozo and Fadugba 2014). For other years there are changes in the payout ratio as there are changes in the net income of the company.

Dividend payout ratio and dividend yield

3.Dividend data for the year ended 2016 and 2017

• Frequency of dividend

Generally the company pays dividend in March and September after releasing the half year annual report of the company. Dividend declared and paid during the period from 1^st July 2015 to 30^th June 2017 are as follows –

• Final ordinary dividends for the year ended 30^thJune was paid at 8.0 cents per share.
• Special dividend for the year ended 30^thJune 2016 was paid at 1.0 cents per share.
• Interim dividend for the year ended 30^thJune 2016 paid at 7.0 cents per share
• Interim dividend for the year ended 30^thJune 2017 paid at 7.5 cents per share (Gwagroup.com.au 2018).
• Amount of dividend
• Ordinary dividend for 2015/16 – Total amount of dividend paid were $ 21,116,000 and the date of payment was 16^thSeptember 2016(Gwagroup.com.au 2018).
• Special dividend for 2015/16 – Total amount of dividend paid were $ 26,39,000 and the date of payment was 16^thSeptember 2016 (Gwagroup.com.au 2018).
• Interim dividend for 2016/17 – Total amount of dividend paid were $ 18,718,000 and the date of payment was 5^thApril 2016 (Gwagroup.com.au 2018).
• Interim dividend for 2016/17 – Total amount of dividend paid were $ 19,796,000 and the date of payment was 7^thMarch 2017 (Gwagroup.com.au 2018).
• Date of registration

To become eligible for receiving dividend, the shares must be purchased prior or during the trading period of cum-dividend and shall hold the shares on ex-dividend date.

  

(Source: Commsec.com.au 2018)

As per the above diagram, if the shares are purchased to receive the dividend then the investor needs to purchase the shares during the trading period of cum dividend that is before 20^th and can sell it or shall hold it till 21^st as per the above example.

• Payment of dividend

Most of the companies in Australia generally pay dividend between 2 to 8 weeks after the date of ex-dividend. GWA Limited’s dividend that was paid on 16^th September it was declared on 2^nd September that is the company took 2 weeks time for payment after declaration. Further, the dividend paid on 7^th March 2017 was declared on 25^th February 2017 that is the company took 2 weeks time for payment after declaration (Gwagroup.com.au 2018).

• Franked dividend

For both the years dividends were 100% franked (Gwagroup.com.au 2018).

4.Ex-dividend price movement

Dividend movement –

Date	Dividend
3/17/2016	0.1
9/1/2016	0.11
2/23/2017	0.11

It can be observed from the above graphs that the movement for ex-dividend price over the periods from 1^st July 2015 to 30^th June 2017 was fluctuating. Highest price of stock was AUD 3.00 as on 30^th June 2017 and the lowest price was AUD 1.79 as on 31^st May 2016. However, if the overall movement is analysed it can be stated that the price was upward moving as the share price has been reached to AUD 3.00 from AUD 1.99 during the period under consideration (Finance.yahoo.com 2018). On the other hand, the dividend paid during the same period was also in upward moving. Therefore, both the share price and dividend were in increasing trend.   

Effective dividend tax rate –

The franked dividends of the company were franked at the rate of 30% corporate tax (Gwagroup.com.au 2018).

5.Price movement at the time of dividend announcement

Dividend declared on 2^nd September 2016

Date	Share price
8/24/2016	2.33285
8/25/2016	2.461029
8/26/2016	2.435393
8/29/2016	2.478119
8/30/2016	2.495209
8/31/2016	2.529391
9/1/2016	2.693192
9/2/2016	2.568754
9/5/2016	2.613196
9/6/2016	2.613196
9/7/2016	2.64875
9/8/2016	2.630973
9/9/2016	2.666527
9/12/2016	2.613196
9/13/2016	2.604308

It can be seen that after declaring the dividend the share price of the company has been increased moderately and there was no major fluctuation in the share price in next 10 days.

Dividend declared on 25^th February 2017

Date	Share price
2/20/2017	2.444316
2/21/2017	2.462093
2/22/2017	2.496395
2/23/2017	2.496395
2/26/2017	2.477903
2/27/2017	2.459412
2/28/2017	2.403936
3/1/2017	2.459412
3/2/2017	2.431674
3/5/2017	2.422428
3/6/2017	2.431674
3/7/2017	2.431674

It can be seen that after declaring the dividend the share price of the company did not experienced any major fluctuation in the share price in next 10 days.

Generally the declaration and payment of dividend influence the potential investors as they feel the payment of dividend generates confidence among the investors and they prefer to invest their money in such company that is regular is paying return to the the shareholders (Adelino, Ma and Robinson 2017). However, the firm like GWA Group Limited is well established in the industry and is regular in paying dividend to the shareholders. Therefore, it does not have much effect on declaration of the dividend as the investors already have positive view about the company. Thus, the company did not experienced major fluctuation in its share price after the dividend declaration.

References

Adelino, M., Ma, S. and Robinson, D., 2017. Firm age, investment opportunities, and job creation. The Journal of Finance, 72(3), pp.999-1038.

Arslan, M., Zaman, R. and Phil, M., 2014. Impact of dividend yield and price earnings ratio on stock returns: A study non-financial listed firms of Pakistan. Research Journal of Finance and Accounting), ISSN, pp.2222-1697.

Chortareas, G. and Noikokyris, E., 2014. Oil shocks, stock market prices, and the US dividend yield decomposition. International Review of Economics & Finance, 29, pp.639-649.

Coad, A. and Guenther, C., 2013. Diversification patterns and survival as firms mature. Small Business Economics, 41(3), pp.633-649.

Commsec.com.au. (2018). When am I eligible to receive a dividend?. [online] Available at: https://www.commsec.com.au/support/frequently-asked-questions/330.html [Accessed 13 May 2018].

Finance.yahoo.com. (2018). GWA.AX Historical Prices | GWA GROUP FPO Stock – Yahoo Finance. [online] Available at: https://finance.yahoo.com/quote/GWA.AX/history?period1=1435602600&period2=1502562600&interval=1wk&filter=history&frequency=1wk [Accessed 13 May 2018].

Freitas, I.M.B., Marques, R.A. and e Silva, E.M.D.P., 2013. University–industry collaboration and innovation in emergent and mature industries in new industrialized countries. Research Policy, 42(2), pp.443-453.

Gwagroup.com.au. (2018). [online] Available at: https://www.gwagroup.com.au/wp-content/uploads/Annual-Report-2017-1.pdf [Accessed 13 May 2018].

Kenyoru, N.D., Kundu, S.A. and Kibiwott, L.P., 2013. Dividend policy and share price volatility in Kenya. Research journal of finance and accounting, 4(6), pp.115-120.

McMillan, D.G. and Wohar, M.E., 2013. A Panel Analysis Of The Stock Return–Dividend Yield Relation: Predicting Returns And Dividend Growth. The Manchester School, 81(3), pp.386-400.

Nwozo, C.R. and Fadugba, S.E., 2014. On the Accuracy of Binomial Model for the Valuation of Standard Options with Dividend Yield in the Context of Black-Scholes Model. International Journal of Applied Mathematics, 44(1).