Discuss about the Corporate Governance And Dividend Policy.
The report focuses on the investment in the particular company. Investment decision is one of the crucial process in which various factors are required to be evaluate by the professionals and the investors to make a better choice of investment. Investment decision relates to the choice which is made by the investors along with respect of the funds that is to be invested in the investment opportunities (Brigham & Houston, 2012). There are various methods on the basis of which investment decision is made such as working capital, optimal level, returns, risk, trend in the industry etc.
In the report, two companies of the retailing industry, JB HI FI and Myer limited has been taken in the concern to conduct the report. The daily stock return, monthly stock return, yearly stock return, market index return, systematic risk, unsystematic risk etc of both the companies have been measured to reach over a conclusion that which company is better option for the purpose of invest $ 10 million.
JB HI FI is an Australian company which is operating the activities and the operations in retailing industry. It retails the consumer goods, video games etc in through its offline and online stores. Company has been founded in 1974 and from last 48 years, it is working efficiently in the industry (JB HI FI, 2018). The current market and financial position of the company is quite better. It is one of the highest goring companies in the Australian retail industry.
Myer is an upmarket Australian company which is operating the activities and the operations in retailing industry. It retails the women wear, intimate apparel, beauty, car audio, handbags, accessories etc. Company has been founded in 1990 and from last 28 years, it is working efficiently in the industry (Myer limited, 2018). The current market and financial position of the company is quite better and explains about great future trend of the company.
Australian retail industry has been focused further and it has been found that the retail industry is growing rapidly and due to that, firms are also reaching on great levels. The current growth rate of retail industry is 4.32%.
Daily return of JB HI FI, Myer limited and AORD has been evaluated firstly to measure the returns from the companies and the industry. On the basis of the calculations on daily, monthly and yearly return of both the companies, it has been measured that the return of JB HI FI is better. As, the average return of JB HI FI of last 3 years is 11.34% whereas the average return of Myer limited of last 3 years is -24.36%. Along with it, it has also been found that the market return of last 3 years is 8.67%. This evaluation explains that the return from JB HI FI stock is even higher than the index return which is a great option for the purpose of investment (Yahoo Finance, 2018). However, the return of Myer limited explains about negative return which could raise loss to the investors.
Total risk, systematic risk and unsystematic risk of JB HI FI and Myer limited has been evaluated further to measure the total risk of the companies in retail industry. On the basis of the calculations on Total risk, systematic risk and unsystematic risk of both the companies, it has been measured that the risk of Myer limited is higher than JB HI FI. As, the Total risk, systematic risk and unsystematic risk of JB HI FI of last 3 years is 0.17, 0.15 and 0.02 whereas the Total risk, systematic risk and unsystematic risk of Myer limited of last 3 years is 0.101, 0.07 and 0.02 (Yahoo Finance and Bloomberg, 2018).
Along with it, it has also been found that the market risk free rate is 2.24%. This evaluation explains that the risk of JB HI FI stock is higher than the Myer limited which explains that if the investors would invest in the JB HI FI stock than the risk level would be higher than normal risk level (Ross, Jaffe & Westerfield, 2008). However, the return of Myer limited is also lower and thus the investor must evaluate the main purpose of the investment and must invest the amount accordingly.
Weighted average cost of capital is a process to calculate the total cost of capital of a business in which every category of capital is dividend equally. It takes the concern of all the sources of capital such as common stock, preferred stock, long term debts, bonds etc in WACC calculations. The calculations of WACC have been conducted on the Myer limited and JB HI FI to measure the total cost of capital of both the companies.
The calculations of WACC of JB HI FI explain that the cost of equity of the company is 3.2% and the cost of debt of company is 7.81%. Further, the weight of debt and equity of the company is 45.52% and 54.48%. Due to which, the WACC of the company is 5.31%. Further, the calculations of WACC of Myer limited explain that the cost of equity of the company is 2.7% and the cost of debt of company is 3.51%. Further, the weight of debt and equity of the company is 22.90% and 77.10%. Due to which, the WACC of the company is 2.89% (annual report, 2018).
The WACC of both the companies are different. The reasons behind the difference among the WACC of both the companies have been measured and it has been found that the main reason behind the difference among both the cost of capital is different interest rates of debt, different beta, different proportion of debt and equity, different YTM etc.
|
Calculation of WACC of JB HI FI |
|||
|
Particulars |
Total amount |
Book Weights |
|
|
Equity |
$ 854 |
54.48% |
|
|
Debt |
$ 713 |
45.52% |
|
|
Total |
$ 1,567 |
100.00% |
|
|
Weights (A) |
Cost of capital (B) |
A*B |
|
|
Equity |
54.48% |
3.2% |
1.76% |
|
Debt |
45.52% |
7.81% |
3.55% |
|
WACC |
5.31% |
|
Calculation of WACC of Myer Limited |
|||
|
Particulars |
Total amount |
Book Weights |
|
|
Equity |
$ 1,072,868 |
77.10% |
|
|
Debt |
$ 318,647 |
22.90% |
|
|
Total |
$ 1,391,515 |
100.00% |
|
|
Weights (A) |
Cost of capital (B) |
A*B |
|
|
Equity |
77.10% |
2.7% |
2.09% |
|
Debt |
22.90% |
3.51% |
0.80% |
|
WACC |
2.89% |
(Morningstar, 2018)
The cost of equity of both the companies is mainly different due to the different beta. Beta amount depends on the fluctuations in the stock price of the company which could not be same in both the companies due to which the WACC of the companies are different.
Further, the annual YTM of both the companies are different along with the different coupon rates, number of years etc which has impacted on the cost of debt. Due to which, the cost of capital of both the companies are different (Higgins, 2012).
Further, it has been measured that the book debt share and book equity share of the company is also different due to which the weight of debt and weight of equity get changes and ultimately it impacts on the overall WACC of the company (Brigham & Daves, 2012).
It explains that there are various factors which impact on the stock price of the company and because of it, the WACC of both the companies are different and this is also the reason behind different WACC of an organization in different years.
Dividend policy is a set of rules and guidelines which is followed by a company to decide about the dividend amount. Company uses this policy to decide that how much of the net profit would be paid out to the shareholders of the company (Hussainey et al, 2011).
In case of JB HI FI and Myer limited, the dividend policy of both the companies has been measured through dividend payout ratio. The dividend payout ratio of JB HI FI of last 3 years is 69.08%, 61.25% and 63.86%. It explains that a great amount has been announced by the company as dividend to shareholders from net earnings of the company. It explains that the company is following the relevant dividend policy. On the other hand, the dividend payout ratio of Myer limited of last 3 years is 41.27%, 27.13% and 24.55%. It explains that a good amount has been announced by the company as dividend to shareholders from net earnings of the company. It explains that the company is offering lower amount than the JB HI FI to its shareholders as dividend amount.
|
Calculation of dividend payout ratio of JB HI FI |
|||
|
2017 |
2016 |
2015 |
|
|
Total dividend paid for the year / |
$ 119,100,000 |
$ 93,205,000 |
$ 87,174,000 |
|
Net income available to shareholders |
$ 172,400,000 |
$ 152,181,000 |
$ 136,511,000 |
|
Answer: |
69.08% |
61.25% |
63.86% |
|
Calculation of dividend payout ratio of Myer Limited |
|||
|
2017 |
2016 |
2015 |
|
|
Total dividend paid for the year / |
$ 4,927,600 |
$ 16,426,000 |
$ 7,321,100 |
|
Net income available to shareholders |
$ 11,939,000 |
$ 60,543,000 |
$ 29,826,000 |
|
Answer: |
41.27% |
27.13% |
24.55% |
(Morningstar, 2018)
The stock price of JB HI FI and Myer limited has been evaluated to identify the impact of dividend announcement on stock price of the company. In case of JB HI FI, it has been found that the stock price of the company has been improved and a great change has been seen due to the huge attraction of the customer towards the stock of the company because of high return. Further, the stock price of Myer limited has also been found and it has been identified that the changes into the stock price of the company after dividend announcement was lower in 2015 and 2016 (annual report, 2018). The positive changes have seen in the stock price of the company.
Few evidences say that the dividend policy of an organization doesn’t affect much to the investors as they can sell some proportion of their shares in case they want some amount whereas few evidences explains that the investors invest into the stock for long term and thus in terms of earnings, they depend only on the returns from the stock. There are mainly 2 policies of dividend distribution (Adjaoud & BenAmar, 2010). One is relevant dividend policy which explains that the better dividend amount must be offered by the company. On the other hand, irrelevant dividend policy explains that the investors could arrange the cash through selling the portions of equity. Company should invest the earnings in new projects.
In case of JB HI FI and Myer limited, it has been found that both the companies are focusing on the relevant dividend policies to pay the dividend amount to shareholders. This policy has impacted positively on the stock price and market position of the company. Due to it, the new investors have attracted towards the company.
Investment decision and Conclusion:
The analysis on the return, risk, WACC, dividend policy etc of JB HI FI and Myer explains that the stock performance of both the companies is quite good. In terms of return, it has been measured that the JB HI FI is better option. However, the risk calculations explain that the Myer limited is better option. Further, the WACC level of both the companies explains that the WACC of JB HI FI is higher and thus the net earnings of the company could be lower. In addition, it has been found that the dividend policy of JB HI FI is better as the company offers a great amount as dividend to the shareholders of the company.
On the basis of this evaluation, it has been concluded that the investment in the JB HI FI is better option due to the fact that the return of the company is quite higher as well as the dividend payout policy of the company is also better. The company would offer the great returns to the investors. Though, the risk level of the company is also higher. But the investment is for long term and thus the return of the company would be higher. So, it is suggested to invest into the stock of JB HI FI
References:
Adjaoud, F., & BenAmar, W. (2010). Corporate governance and dividend policy: shareholders’ protection or expropriation?. Journal of business finance & accounting, 37(5?6), 648-667.
Annual Report. (2018). JB HI FI. [online]. Retreived from: https://www.jbhifi.com.au/Documents/Appendix%204E%20and%20Financial%20Report%20-%202017%20Full%20Year.pdf
Annual Report. (2018). Myer limited. [online]. Retrieved from: https://investor.myer.com.au/FormBuilder/_Resource/_module/dGngnzELxUikQxL5gb1cgA/file/Myer_Annual_Report_2017.pdf
Bloomberg. (2018). Australian rates and bonds. [online]. Retrieved from: https://www.bloomberg.com/markets/rates-bonds/government-bonds/australia
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of financial management. Cengage Learning.
Brigham, E., & Daves, P. (2012). Intermediate financial management. Nelson Education.
Higgins, R. C. (2012). Analysis for financial management. McGraw-Hill/Irwin.
Home. (2018). JB HI FI. [online]. Retrieved from: https://www.jbhifi.com.au/
Home. (2018). Myer limited. [online]. Retrieved from: https://www.myer.com.au/
Hussainey, K., Oscar Mgbame, C., & Chijoke-Mgbame, A. M. (2011). Dividend policy and share price volatility: UK evidence. The Journal of risk finance, 12(1), 57-68.
Morningstar. (2018). JB HI FI. [online]. Retrieved from: https://financials.morningstar.com/cash-flow/cf.html?t=JBH®ion=aus&culture=en-US
Morningstar. (2018). Myer limited. [online]. Retrieved from: https://financials.morningstar.com/income-statement/is.html?t=MYR®ion=aus
Ross, S. A., Jaffe, J., & Westerfield, R. (2008). Modern financial management (Vol. 1221). Boston, MA: McGraw-Hill/Irwin.
Yahoo finance. (2018). AORD. [online]. Retrieved from: https://finance.yahoo.com/quote/%5EAORD/history?period1=1435602600&period2=1530297000&interval=1d&filter=history&frequency=1d
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