Dividend Strategies and Financial Stability of Leading Firms
Essay 1: Payout Policy
Introduction
Share repurchasing of any type of company makes an impact on the following companies' outstanding share values. The essay contains a brief analysis of “the payout policy” including the dividends and the stock repurchases of the selected company “Barratt Developments Plc”. Moreover, in the essay, there is a discussion about the Interpretation of the payout policies of the selected company. The dividend policies of the company will help the company investors to know the previous movements of the selected companies.
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Briefly discussion about payout policies including dividends and stock repurchases
A payout policy means predicted financial retrieval from a type of investment or an annuity. The payout money will be received on the basis of certain periods or annually. The value of payout also referring the company's “capital budgeting tool” to analyse how much time will be taking for the project to pay. Furthermore, the higher authorities of the company are able to pay the share value of the total earnings to the company investors. As per the reference of Tahir et al. (2020), the investors of any kind of company are making their decision by checking “the dividend policies” of the selected companies. When the company wants to improve its earnings per share value or wants to return the funds to the company investors then the company engages in the process of stock repurchases. In the year 2022, the month of September the company announced that they are arranging a “share buyback programme”. The ordinary share value of “Barratt Developments Plc” is 10pence.
The payout policies by Barratt Developments plc
The “Barratt Developments Plc” percentage value of dividend yield is 8.50% in the year 2022. The company has two types of dividends, one of the dividend values is 10.2p and the value of this dividend will be paid in a period of 3 months. Based on the views of (finance.yahoo.com, 2023), another dividend value is 25.7p and the value of this dividend will be paid in the same time period as the previous one. When there is a time of bearing the high level of ratio of the cash flows of the company then the financial experts are rethinking the dividend policies. When the values of cash flows are reducing then the financial experts of the company are cutting down the value of dividends. In the year 2013, the value of the dividend of the company was £0.025 nowadays the increasing value is compared then the values are raised by 35% (barrattdevelopments.co.uk, 2022). The selected company are able to extend its allocation at a rapid rate despite shortening the dividend at least once in the previous year. “Barratt Developments Plc” is a registered company under the FTSE 100 (barrattdevelopments.co.uk, 2022). Although the process of share buyback of the company is being done after the month of December then the exceeding values of the 1 million are being increased by the 1% tax.
Striking fall of the company's shares and use to rising share repurchases
The process of a share buyback or repurchasing is one of the tax-efficient processes of a company. In the process, of buyback sale, the investor of the following company does not incur any types of additional tax values. “Barratt Developments” are able to decline the values of stocks by decreasing the total amount of company stock supply (Do, 2021). The EPS value of “Barratt Developments” will be improved when the company starts the sales process of share repurchasing. The income generated from the company's dividends also represents the current income of the following company. It will be done because the company management acknowledges that the current market share prices will be gone more with the value of the discounting mode (Duqiet al. 2020). Barclays has focused on the effective implication of the policy statement provided by the “Bank of England” to avoid payout issues. “Barratt Developments” has observed the “regular dividend policy” to boost the “dividend range ratio” of the company (barrattdevelopments.co.uk, 2022). The company has spent an “ordinary dividend” of 36.9p per share owned by the shareholders in 2021. Furthermore, share repurchasing can remove any chances of future retrievals from the competitive market (Leeet al. 2022). There are various types of ways to repurchase the shares of the company. The financial experts of the company are able to choose the most suitable option for share repurchasing. In the process of share repurchasing the procedure does not conduct any type of preceding conditions,
The higher authority of the company is able to repurchase its share after a certain period of time from the open market. Another way that the company can do that launching a tender for purchasing the shares from the market. In that case, the values of the share repurchasing are higher than the values of the shares from the existing market. “Barratt Developments Plc”, CSI will be making the buyback decision for the company, they declared that the buyback period will continue in the year 2022 from the month of October to the month of December 2022. On the company’s share buyback programme (barrattdevelopments.co.uk, 2022), the company will be able to cancel any shares on the second trance of the company’s programme. The share repurchasing programme will improve the company’s overall financial ratios. It is because once the company are back their shares then the company are able to cancel those shares or keep the shares as the company’s treasury shares.
Conclusion
The essay can conclude that the “price stabilization” of the following company is more stable cause due to the share market price of the company is low compared to the current market. The company investors are always approaching the company which is more stable in the stock price purpose. Another thing is that the equity of shareholders is reduced when the company repurchases the shares. However, the company management has seen that the current market’s share price value is too steep then the management makes their decision to repurchase their shares.
The essay has been conducted based on the debt policy of the two specific selected companies registered under FTSE 100. The selected companies are “Barclays Plc” from the banking sector and “Barratt Developments Plc” from the construction sector.
Discussion on the Debt Policy with and without taxes
The policy that has been adopted by the financial authority of a business to manage its debt portfolio and make decisions on debt management has been identified as Debt policy. As per the reference of Afiezanet al. (2020), the procedures or policies that reflect the approach of a firm to manage both external and internal debt are referred to as debt policy. The debt policy before tax has focused on avoiding the interest paid by an entity during the estimation of taxable income has been identified as debt policy before tax. Furthermore, the debt policy has been paid after considering the tax rate from taxable income has been acknowledged as an after-tax debt policy.
Interpretation of the debt policies presented by the selected companies
“Modigliani and Miller” have outlined that the market value of an entity does not rely on the capital structure of an entity. However, the “cash performance and future cash value” of an entity has decided the value of the underlying assets of a firm. The debt payment process relies on the future cash performance of an entity (Corporatefinanceinstitute.com, 2022). However, the M&M theory has proposed that tax-deductible interest payment has increased the value of a levered company compared to an unlevered company based on its cash performance. The official website of the selected banking company “Barclays Bank Plc” has used an unsecured debt policy to handle its long-term debt to improve its creditworthiness (Barclays, 2022). The “unsecured debt rating” of the company has focused on the outlook of debt management in the company. On the other hand, “Barratt Developments plc” has followed a “secured debt policy” to manage the burden of debt in the company (barrattdevelopments.co.uk, 2022). The management group has used various types of “bank overdrafts and uncommitted borrowings” to secure all unsecured debt in the firm. The company has focused on securing its legal obligations by putting “legal charges” on the “underlying assets” of the entity.
Comparison of the debt policy of the selected company
The debt policies of both selected companies is totally different from each other due to their different backgrounds. “Barclays Bank Plc” in the banking industry has followed an unsecured debt policy to provide debt or loans to people with “minimum interest rates”. However, “Barratt Developments plc” has focused on the implication of a “secured debt policy” to reduce the risk involved in meeting the debt at a specific time. “Barclays Bank” has focused on developing sustainability in the financial market by providing “green home mortgages”, loans and bonds to the stakeholders. Furthermore, “Barratt Developments” has focused on providing “loan-to-value lending” to secure all its unsecured borrowings (barrattdevelopments.co.uk, 2022). The company has taken Group loans at a joint venture of nearly £177.9 million in 2022 (annualreports.com, 2021). The selected banking company has focused on providing both “long-term and short-term loans” to provide financial support to the population and “promote green loans globally” to £411 billion (annualreports.com, 2021).
The “loan deposit ratio” of Barclays was nearly 70% in 2021, this depicts the effective “deposit and borrowing policy” implicated by the firm. However, the “loan-to-deposit ratio” of the “Barratt developments” has not been maintained at the end of 2021. The authority of “Barclays Bank” has focused on operation through an “unsecured credit policy” to attract more lenders. However, the selected construction company has focused on implicating a “secured credit policy” to reduce the financial burden and meet the leverage requirements of the business. “Barclays Bank” has provided green mortgages, homes, bonds and other industrial loans to the stakeholders by using an “unsecured credit policy”. However, “Barratt Developments” has focused on taking loans for the “expansion and growth” of the business operation and activities by using a “secured debt policy”.
Comparison of corporate financing policy of the two selected companies
The “corporate financial policies” of companies are different from each other. The financial policy has covered the “capital structure, debt policy and payout policy” of an entity to measure its financial efficacy. As per the reference of AA Zaid et al. (2020), the “capital structure” of an entity has outlined the sources of funds introduced by an entity to meet its “capital and revenue” expenditure. “Barclays Bank Plc” has managed its capital structure by introducing “52% of equity” and “22% of debt capital” in the market and the remaining 26% amount has been introduced from advisory services (Barclays, 2022). However, “Barratt Developments plc” has managed its capital structure by introducing “35.7% from debt capital”, “18.52% from equity capital” and the remaining 45.78% of capital from “retained earning or internal capital” (barrattdevelopments.co.uk, 2022). The capital structure of both companies has clarified that the banking company has relied on “equity financing” while the constriction company has depended more on “internal financing”.
Barclays has focused on the effective implication of the policy statement provided by the “Bank of England” to avoid payout issues. However, “Barratt Developments” has followed the “ordinary dividend policy” to increase the “dividend coverage ratio” of the company (barrattdevelopments.co.uk, 2022). The company has paid an “ordinary dividend” of 36.9p per share held by the shareholders in 2021. On the other hand, Barclays has provided a higher rate of dividend compared to “Barratt developments” as “6.0p per share” has been paid as dividends by the company in 2021 (annualreports.com, 2021). It has been identified that payout of the “Barclays Bank Plc” has been comparatively better than “Barratt Developments plc” during the financial year.
Conclusion
The “debt policy” of the selected banking company is an unsecured debt policy. However, the selected construction company has followed a “secured debt policy” to reduce the burden of liability on the “financial performance” of the company. The management of the firm has used different types of “uncommitted borrowings and bank overdrafts” to secure all unsecured debt in the entity. However, the construction company has focused on securing its legal obligations by putting “legal charges” on the “secured assets” of the entity.
References
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Afiezan, A., Wijaya, G. and Claudia, C., 2020. The effect of free cash flow, company size, profitability and liquidity on debt policy for manufacturing companies listed on IDX in the 2016-2019 periods. Budapest International Research and Critics Institute-Journal (BIRCI-Journal) Vol, 3(4), pp.4005-4018.
annualreports.com, (2021). Annual Report and Accounts 2021 of Barclays Bank Plc [Online] Available at: https://www.annualreports.com/HostedData/AnnualReports/PDF/LSE_BARC_2021.pdf [Accessed on: 3rd February 2023]
Barclays, (2022). Barclays Bank PLC [Online] Available at: https://home.barclays/content/dam/home-barclays/documents/investor-relations/fixed-income-investors/2022/221007-Moodys-BBPLC-Credit-Opinion.pdf [Accessed on: 3rd February 2023]
Barclays, (2022). Barclays issues subordinated debt instruments and preference shares that contribute to the strengthening of our capital position [Online] Available at: https://home.barclays/investor-relations/fixed-income-investors/capital-leverage-strategy-and-ratio/subordinated-debt-and-preference-shares/ [Accessed on: 3rd February 2023]
barrattdevelopments.co.uk, (2022). Annual Report and Accounts 2022 [Online] Available at: https://www.barrattdevelopments.co.uk/~/media/Files/B/Barratt-Developments/reports-presentation/2022/barratt-ar2022.pdf [Accessed on: 3rd February 2023]
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Finance.yahoo.com, Barratt Developments (LON: BDEV) Is Paying Out A Larger Dividend Than Last Year (2022) https://finance.yahoo.com/news/barratt-developments-lon-bdev-paying-070230226.html [Accessed on: 3rd February 2023]
Lee, C.W., Hsu, H.H., Peng, S.J. and Nguyen, T.N.H., 2022. Exploring the Determinants of Company’s Dividend Payout Policy in the Vietse Stock Market. Journal of Applied Finance & Banking, 12(2), pp.1-25.
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