What Is The Effect Of Financial Reporting Quality On Corporate?
The current report aims to deal with the historical performance of CapitaLand Limited, which is listed on the Singapore Stock Exchange. It is a Singapore-based real estate organisation established due to the merger of Pidemco Land and DBS Land in November 2000 (CapitaLand, 2018). The organisation is involved in leveraging its asset base, developing strategies for active capital management along with extensive operational abilities and market network for formulating greater quality real estate products and services. Therefore, the first section of the report would aim to provide a critical discussion of the historical performance of CapitaLand Limited for the past three years. The second segment would lay stress on highlighting the dividend policy of the organisation in the Singaporean market. The third part would focus on forecasting the revenue of the upcoming financial year. In a similar fashion, the dividend payout of the organisation would be estimated for the next financial year in the context of CapitaLand Limited.
In order to evaluate the historical performance of CapitaLand Limited for the past three years, it is contrasted with the share performance of Singapore Stock Exchange, which is briefly depicted in the form of a figure as follows:
According to the above figure, it could be found out that the share prices of both CapitaLand Limited and the index have not shown adequate fluctuations in the three-year period. The share price of CapitaLand Limited has varied between 2.98 SGD to 3.84 SGD over the stated period. On the other hand, the share price of Singapore Stock Exchange has varied between 7.08 SGD to 8.52 SGD over this period. Along with this, positive correlation could be observed between the share price of the organisation and the index, which indicates that a rise or fall in the index stock price could result in increase or decrease in the individual stock price as well. Hence, it could be stated that the organisation has maintained a stable position in the stock market possibly due to positive brand image.
The three main factors needed for carrying out the financial analysis of CapitaLand Limited are depicted in the form of the following table:
|
Particulars |
2015 |
2016 |
2017 |
|
Revenue |
4,553.85 |
5,252.33 |
4,609.78 |
|
Growth over prior year |
15.34% |
-12.23% |
|
|
Net income margin |
23.40% |
22.70% |
33.60% |
|
Return on equity |
6.15% |
6.60% |
8.50% |
Based on the above table, it could be cited that there is positive growth in revenue by 15.34% in 2016 in contrast to 2015. However, decline in revenue by 12.23% could be observed in 2017 because of the minimised completion and handover of units from the development projects in China. This is mitigated partially with the help of rental contribution from the newly opened and acquired properties along with revenue consolidation from CapitaLand Mall Trust, RCS Trust and CapitaLand Retail China Trust (Jacob & Michaely, 2017).
Despite the slight decline in net income margin in 2016, significant increase could be observed in 2017. This is because the organisation has managed to sell 1,409 residential houses in Vietnam for achieving record sales of S$459.6 million, which is 63% greater in contrast to S$282.1 million in 2016. In addition, another reason behind such increasing net income margin is the sale of 407 residential houses in Singapore in 2017 valued at S$1,479 million in contrast to S$1,415 million in 2016.
Return on equity helps in measuring the profit of CapitaLand in relation to its shareholders’ equity (Al-Najjar & Kilincarslan, 2016). The increase in this ratio could be observed over the years and return on equity of 8.50% denotes S$0.085 returned on every S$1 invested. The investors expanding their portfolio might intend to increase their return in the diversified real estate activities sector by selecting the stock providing greater returns (Athari, Adaoglu & Bektas, 2016).
The first key factor that needs to be considered in conducting the non-financial analysis of CapitaLand Limited is the industry in which it operates. It has already been identified that the organisation operates in the real estate sector of Singapore and other global markets. The next factor that comes into play is to estimate the performance of the sector in the coming year. As commented by He et al., (2017), the real estate market of Singapore has been the backbone of the economy of the nation despite the fluctuations over the years. In addition, the researchers have stated that the foreigners have made property purchases in Singapore in the first three quarters of 2017, which was 20% more in contrast to 2016. However, as argued by Koo, Ramalingegowda & Yu (2017), the property market in Singapore has been passing through recovery phase due to the effect of en bloc sales. The prices of the properties are reduced at the end of 2017 so that the sales volume could go up between 5% and 10% in 2018. The estimations are made on the existing trend of collective sales, which have surpassed S$3 billion in the initial eight months of 2017. Finally, it is expected that the mid and high-end properties would be bought more in contrast to the other real estate categories in Singapore. 12,000 new properties are expected to be formed and they would be sold in 2018.
The third factor is the competition in the industry and the main competitors include Mitsui Fudosan Corporation, Cheung Kong Holdings and Yeo Hiap Seng Limited. These organisations have strong market popularity and hence, if they minimise their property prices, it would have direct impact on the revenue base of CapitaLand Limited. This is because the potential customers would switch over to these organisations for purchasing properties at lower prices (Baker & Jabbouri, 2016).
The impact of dividend payout would have no impact on the revenue and profit margins, since dividends are paid from retained earnings and not out of the profit made (Huang et al., 2015). On the other hand, when dividends are paid, the amount is deducted directly from retained earnings. In addition, dividend payout minimises the cash balance, which is an asset account reduced by the total dividend amount (Jabbouri, 2016). In case of the non-financial factors, if CapitaLand Limited increases its dividend payout, it would have direct effect on the other competitors in the industry, as they would be forced to increase their dividend payments to the shareholders as well.
As observed from the annual report of CapitaLand, the annual dividend per share of the organisation was S$0.09 in 2015 and it has increased to S$0.10 in 2016. The increase is inherent further to S$0.12 in 2017. Special dividend is not taken into consideration and the organisation has not incurred any special dividend during the years. Hence, CapitaLand Limited adopts regular dividend policy, since it provides dividend at the usual rate (Kajola, Adewum & Oworu, 2015). This is because most of the shareholders in the organisation are retired individuals aiming to obtain regular income. This type of dividend policy is maintained, as the organisation has regular earnings from sale of properties. The reasons that the organisation adopted this dividend policy and the managers would maintain the same are enumerated as follows:
According to this theory, the investors do not pay considerable attention to the dividend history of an organisation and hence, dividends are not relevant in conducting the valuation of the organisation. Instead, it states that earnings only have direct impact on the valuation of the organisation and it is the direct output of the investment policy and future prospects of the organisation (Michaely & Qian, 2016). In this case, as CapitaLand Limited has regular earnings based on which it frames its dividend policy, this theory is significant. However, this theory assumes that there is no variation between internal and external financing and taxes are not present. These conditions are not realistic in the capital markets.
This hypothesis states that at the time an organisation declares an increase in dividend payout, it indicates positive future prospects of the business. The rise in dividend payout of the organisation primarily estimates positive future stock performance and vice-versa. In case of CapitaLand Limited, the dividend payout per share of the organisation has increased over the years and hence, its dividend policy could be linked to this theory. However, this theory could sometimes provide misleading information to the investors, if investigation is carried out to assess current dividends as indicators of future earnings (Mori & Ikeda, 2015).
The clientele effect determines the movement of the share price of an organisation in accordance with the goals and demands of the investors in relation to divided, tax or any change in other policy. The theory assumes that particular investors are drawn towards various company policies and if there is any change in such policies, the investors would adjust accordingly (Renneboog & Szilagyi, 2015). Due to this, there would be significant fluctuations in the share price of the organisation. In case of CapitaLand Limited, the share price of the organisation has not fluctuated significantly over the years, for which the shareholders need not have to adjust with the new dividend or any other policy.
As evaluated above, the property prices are expected to fall between 5% and 10% in order to increase the revenue margin of the Singapore real estate sector. Hence, for forecasting the revenue of CapitaLand Limited, the average of the estimated values in both the years is used as the bases for projecting revenues of the organisation. In addition, it is expected that the customers would purchase properties and residential houses at lower prices. The prices of the properties are reduced at the end of 2017 so that the sales volume could go up between 5% and 10% in 2018. The estimations are made on the existing trend of collective sales, which have surpassed S$3 billion in the initial eight months of 2017. Finally, it is expected that the mid and high-end properties would be bought more in contrast to the other real estate categories in Singapore. 12,000 new properties are expected to be formed and they would be sold in 2018. As a result, the revenue is expected to increase by 3% to 5% in 2018 and 6% to 10% in 2019 (Quotes.morningstar.com, 2018).
In order to forecast the dividend payout of the organisation, the three-year dividend growth rate of the Singapore real estate sector is taken into account, which is 19% (Reuters.com, 2018). Hence, the dividend payout of the organisation in 2018 would be S$0.14 and in 2019, it would be S$0.17. This amount is identical to the amount offered on the part of the market average and the organisations from Singapore. The rise in dividend payout of the organisation primarily estimates positive future stock performance and vice-versa. In case of CapitaLand Limited, the dividend payout per share of the organisation has increased over the years and thus, the regular dividend policy would raise the dividend payout.
According to Moody’s credit rating agency, the credit rating of CapitaLand Limited has declined from A3 to Baa2. Even though the organisation has improved its overall quality of asset portfolio, the credit rating has declined due to the acquisition of a new office. This would be funded bank borrowings of S$1.1 billion and cash in hand of S$340 billion. As a result, it would minimise the return on investment of the shareholders.
Conclusion:
Based on the above discussion, it could be found out that Capita Land Limited is a Singapore-based real estate organisation established due to the merger of Pidemco Land and DBS Land in November 2000. The organisation has stable historical performance, which is validated by positive correlation with the Singapore stock exchange. The company adopts the regular dividend policy, as it would help in strengthening the confidence of the shareholders. Based on these factors, the estimations of the revenues and dividend payouts of the organisation have been made
After critical evaluation of the above completed section, I have gathered adequate knowledge about the dividend policies and strategies that the modern business organisations follow in the current era to sustain competitive advantage in the operating markets. More specifically, this report has focused on the real estate industry of Singapore, in which CapitaLand Limited has been selected as the organisation. I have found out that the organisation is involved in leveraging its asset base, developing strategies for active capital management along with extensive operational abilities and market network for formulating greater quality real estate products and services.
As a member of the group, I have been assigned to evaluate the stock performance of the organisation over the three-year period of CapitaLand Limited. I have assessed that that the share prices of both CapitaLand Limited and the index have not shown adequate fluctuations in the three-year period. Along with this, positive correlation could be observed between the share price of the organisation and the index, which indicates that a rise or fall in the index stock price could result in increase or decrease in the individual stock price as well. Hence, it could be stated that the organisation has maintained a stable position in the stock market possibly due to positive brand image.
I have been assigned to determine the key factors that affect the future performance of the chosen organisation in the market of Singapore. These factors include both financial and non-financial factors. After considerable research, I have found out that the real estate market of Singapore has been the backbone of the economy of the nation despite the fluctuations over the years. In addition, the foreigners have made property purchases in Singapore in the first three quarters of 2017, which was 20% more in contrast to 2016.
Based on my information collected, the other team members of the group have estimated the revenue and dividend payout of the organisation, while highlighting the dividend policy followed on the part of the organisation. I gained an understanding that dividend policy plays an immense role for the shareholders of an organisation to undertake their investment decisions. I understand that CapitaLand Limited adopts regular dividend policy, since it provides dividend at the usual rate. This is because most of the shareholders in the organisation are retired individuals aiming to obtain regular income. This type of dividend policy is maintained, as the organisation has regular earnings from sale of properties.
Thus, this assignment has helped in boosting my knowledge regarding the corporate dividend policy and strategy that an organisation follows in order to sustain competitive advantage in the market. I have obtained clear insight that the shareholders play a significant role in increasing the market value of the organisation. Hence, in order to satisfy their needs, dividend payouts are necessary. This knowledge would help me in my future profession, since I would have thorough knowledge regarding the type of dividend policy and strategy that the organisation undertakes for meeting the needs of its shareholders.
References:
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Athari, S. A., Adaoglu, C., & Bektas, E. (2016). Investor protection and dividend policy: The case of Islamic and conventional banks. Emerging Markets Review, 27, 100-117.
Baker, H. K., & Jabbouri, I. (2016). How Moroccan managers view dividend policy. Managerial Finance, 42(3), 270-288.
Bremberger, F., Cambini, C., Gugler, K., & Rondi, L. (2016). Dividend policy in regulated network industries: Evidence from the EU. Economic Inquiry, 54(1), 408-432.
CapitaLand. (2018). Capitaland.com. Retrieved 1 April 2018, from https://www.capitaland.com/sg/en.html
Florackis, C., Kanas, A., & Kostakis, A. (2015). Dividend policy, managerial ownership and debt financing: A non-parametric perspective. European Journal of Operational Research, 241(3), 783-795.
He, W., Ng, L., Zaiats, N., & Zhang, B. (2017). Dividend policy and earnings management across countries. Journal of Corporate Finance, 42, 267-286.
Huang, T., Wu, F., Yu, J., & Zhang, B. (2015). Political risk and dividend policy: Evidence from international political crises. Journal of International Business Studies, 46(5), 574-595.
Jabbouri, I. (2016). Determinants of corporate dividend policy in emerging markets: Evidence from MENA stock markets. Research in International Business and Finance, 37, 283-298.
Jacob, M., & Michaely, R. (2017). Taxation and dividend policy: The muting effect of agency issues and shareholder conflicts. The Review of Financial Studies, 30(9), 3176-3222.
Kajola, S. O., Adewumi, A. A., & Oworu, O. O. (2015). Dividend pay-out policy and firm financial performance: Evidence from Nigerian listed non-financial firms. International Journal of Economics, Commerce and Management, 3(4), 1-12.
Kajola, S. O., Desu, A. A., & Agbanike, T. F. (2015). Factors influencing dividend payout policy decisions of Nigerian listed firms. International Journal of Economics, Commerce and Management, 3(6), 539-557.
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Michaely, R., & Qian, M. (2016). Stock Liquidity and Dividend Policy: Evidence from a Natural Experiment.
Mori, N., & Ikeda, N. (2015). Majority support of shareholders, monitoring incentive, and dividend policy. Journal of Corporate Finance, 30, 1-10.
Quotes.morningstar.com. (2018). Retrieved 2 April 2018, from https://quotes.morningstar.com/stock/analysis-report?t=0P0000XOCZ®ion=gbr&culture=en-US&productcode=MLE&cur=
Renneboog, L., & Szilagyi, P. G. (2015). How relevant is dividend policy under low shareholder protection?. Journal of International Financial Markets, Institutions and Money.
Reuters.com. (2018). Retrieved 2 April 2018, from https://www.reuters.com/finance/stocks/financial-highlights/CATL.SI
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Travlos, N. G., Trigeorgis, L., & Vafeas, N. (2015). Shareholder wealth effects of dividend policy changes in an emerging stock market: The case of Cyprus.
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