“Having a clear dividend growth model targeting two dividend increases per year to 2013 of circa 10% annually subject to the TELUS Board’s assessment and determination” (Telus) Telus’s current dividend policy is to continue with its forward-looking dividend growth plan until at least the year of 2013. The plan is aimed to achieve two dividend increases per year with an annual growth rate of 10%. Of the two companies, Telus has a higher-than-industry dividend payout ratio. As compared to a industry level of 46.37%, in 2011, the dividend payout ratio of Telus was 59%, that is 13% percent higher than the industry level of 46% (Reuters, 2012), whereas, the payout ratio of Rogers in 2011 was 49%, slightly above the industry level. In 2011, both companies used cash to pay dividend, expect for that Rogers also use share repurchase to return part of its profit to the shareholders. Both of the companies encourage dividend reinvestment and each lauched a dividend reinvestment plan. Under this Plan, investors are allowed to enjoy the benefit to automatically acquire non-voting shares at market price without brokerage commissions or service charges.
Dividends Policy Factors
Tax: In Canada, dividend incomes are subject to a higher tax than in the form of capital gains. For a firm that has lower dividend payout ratio, it has extra cash to reinvest in more positive NPV project, which increases the value of the firm and the equity. This lead to higher capital gains that are otherwise taxable as a result of dividend payout. In this sense, Telus, as a higher dividend payer, may create a heavier tax burden to its shareholders than Rogers does. In addition, due to the fact that Rogers also applied shares repurchase approach to distribute profits to its shareholders, its shareholders can enjoy a lower tax on capital gains. Flotation costs: since Rogers has a lower dividend payout ratio, its equity will growth faster by investing that extra money in new project. In the long run, to catch up with Rogers, Telus may have to sell new shares through an underwriter, and the floatation cost as a result of a second IPO can be very expense. Desire for current income: As compared to Rogers, Telus is more attractive to those who desire current income and are willing to pay premiums for those securities with a higher dividend payout ratio.
The Review on Determinants of Dividend Payout Ratio
Determinants of Dividend Payout-Ratio: A Study of Philippine Stock Exchange-Listed Banks, 2007-2011 Introduction Dividend policy is one of the most controversial subjects in finance literature and still `management always ponders about the dividend payment and also why investors need to pay attention on dividend. It is also a corporate profit that is paid out or considered as an income by the ...
Even for those preferring capital gains, benefits from lower tax can be offset by transactions, brokerage fees and time consumed. Uncertainty Resolution: Because investors do not like uncertainty associated with forecasting future dividend, value companies that paying a higher dividends are sometimes more attractive than those with longer growth prospects. In this case, since telecommunication is a less volatile industry, with industry beta of 0.57 (Reuters, 2012), investors can potentially bear more uncertainty, which give Telus flexibility to lower its dividend payout ratio. Information and signalling: dividend policy conveys significant information with respect of where the company is directed and how it is going to attribute its cash. In contrary, Dividend cut is often a signal that the company is not doing well financially.
In this case, Telus’s 10% dividend growth model is a positive signal, reflecting that the management is confident with the company’s future earning prospect, and is willing to share the profits with its shareholders. However, such aggressive growth model is potentially risky as any cuts or omissions can result in a powerful negative impact to the company’s stock price. The clientele effect: this refers to the effect resulted from groups of investors attracted to different payouts. In this argument, which dividend policies are more favorable completely depends on the market demand and supply. Since the telecommunication industry is fairly mature and both Telus and Rogers have stable cash flow, shareholders are able to project a constant or increase in their dividends over years. Therefore, it can be reasonably assumed that clientele in telecommunication industry would include large proportion of investors that favors high payouts. This also explains the manner that both of the company has maintained constant growth dividend payouts.
The Essay on Dividend Growth Model
1. Dividend Growth ModelThe basic assumption in the Dividend Growth Model is that the dividend is expected to grow at a constant rate. That this growth rate will not change for the duration of the evaluated period. As a result, this may skew the resultant for companies that are experiencing rapid growth. The Dividend Growth Model is better suited for those stable companies that fit the model. ...
Recommendation:
It is recommended that Telus should gradually slower its dividend growth rate to the company’s growth rate of 4.37% by the end of the 2013. As discussed above, Telus currently employed aggressive dividend growth policy that indicates 10% dividend growth until 2013. The company has a average dividend of 8.8% over the past five year, and its dividend payout ratio and dividend yield are both higher than its peer Rogers and above the industry level. According to the residual dividend policy, the cash flow generated by the company should be first to satisfy necessary capital expenditures and debt repayment, and then the remaining should be the amount that is paid to the shareholder. Considering that Telus’s business strategy focuses on operational expansion, constant high dividend payouts may leave the company with less flexibility and hinder the growth of the business as the capital for reinvestment is leaked by awarding shareholders.
However, since dividend policy is reflection of a company’s financial performance, immediately dividend cut announcement is apparently not a good choice as it may result in market overreaction in the share price. Therefore, Telus should be cautious in dealing with the implementation of the new dividend policy. It is recommended that Telus should first maintain its dividend growth rate at 10% by the end of 2013, which is consistent with its current management decision. And then the dividend growth rate should be slowly adjusted to the company’s growth rate of 4.37% over the time horizon of five years.
The Essay on Pre Control Dividend Profits Company
Depending on when a dividend is announced by the subsidiary will determine if the dividend was pre-control or post-control. If a dividend was announced before takeover, then the dividend is pre-control (before the parent company took control). Pre-control can be described as the owner equity of a subsidiary existing at the moment the subsidiary becomes controlled or existing before an acquisition ...
