Analysis of Woolworths' Dividend Policy

Question 1

The dividend payout policy is a structured policy used by companies to establish what dividends to payout to its stockholders (Lahiri, 2013). There is a positive and negative linkage between a company’s profits and stock prices. Dividends explain a company’s growth rate; therefore, dictating a direct change in stock prices (Mohammad Hashemijoo, 2012). When a company’s shares amount falls, the stock price is adjusted downwards; this is because the company’s book value reduces with a decrease in the cash balance, and this referred to as the sheet theory. Dividends are subject to taxes since stock prices are bound to change at the onset of cash deductions. However, after the declaration of a stock dividend, the stock prices often go up.

Woolworths, in this case, is an example of a mature company. Woolworths Group Limited (WOW) is a retailer specifically specialising in activities in Supermarkets. A steady increase in its dividend rates is the measure used to determine its maturity (F. G .CRANE, 1988). Increase in dividend prices is an indication of a grown company since it does not retain its earnings to spur growth. Woolworth has since had a significant return on equity.

Question 2

Woolworth’s dividend yields and dividend payout ratios for the last 5 years are shown in the following table.

Table 1: Dividend Yield and Dividend Payout Ratio of Woolworths for the last 5 years

Dividends yield is a ratio calculated based on annual dividends and the current share price (Michael L. Lemmon, 2015). It can be calculated using the following equation;

$\mathit{Dividend\; Yield}= \frac{{\mathit{Div}}_1}{P_0} =$ $\frac{\mathit{Annual\; Dividend}}{\mathit{Share\; Price}}$

(textbook)

The payout ratio is a percentage of the total revenue disbursed as dividends to stockholders. It analyses whether the current dividend payment amount can be supported by a company’s earnings. Payout ratios are calculated depending on total dividends payments per share and net income (Mohammed Amidu, 2006). This ratio can be calculated using the following equation;

$\mathit{Dividend\; Payout\; Ratio}= \frac{\mathit{Total\; Dividend}}{\mathit{Net\; income}} =$ $\frac{\mathit{Dividend\; Per\; Share}}{\mathit{Earnings\; per\; share}}$

Woolworth has serious reforms on dividend pricing. There is a considerable change dividend payout policy in Woolworth corresponding to fluctuations in functional value and revenues. The fiscal year 2019 saw a ratio of 0.05 AUD decrease in profit values from the previous year. Woolworths Group Limited’s massive change in its dividend policy results from an unstable balance sheet with increasing operational costs between the fiscal year 2017 and 2018.

Question 3

Q. How frequently does the company pay a regular dividend? (Michael L. Lemmon, 2015)

Woolworths pays earnings every six months (semiannually) that is paid every 4th and 10th month of every year. The last share paid was on April 5th, 2019.

Q. What is the amount of the dividend?

Dividend = dividend per share (number of dividends for every shareholder) * number of shares the stockholders hold. (NPS)

Therefore, 103 * 132 =13 596 dividends.

Q. By what date must your share be registered with the company to receive the dividend?

A company needs a book closure date to seal off the company’s records beyond which no additions or deduction are available in the register. Woolworth has a book closure date in every 3rd and 9th month of the year. The specific days of those months are varied with the most recent being March 1st, 2019.

Q. How many weeks later is the dividend paid?

The dividend is paid semiannually in 4th and 10th month of every year, and this case, on April 5^th, 2019. Since the book closure is on March 1st, 2019, it will be five weeks to the next dividend payout (5/4/2019).

Q. To what extent are the dividend franked?

A franked dividend is a concept in Australia which avoids double taxation of dividend income. For instance, Woolworths shares are fully (100%) franked, meaning that Woolworths pay tax on the dividend as a whole. Investors obtain a franking credit, which is one hundred percent of the tax paid on the dividend (Ganti, 2019).

 The dividends paid out by Woolworths Group Limited result from the company’s profits, which are already subject to Australian tax levied at 30%. In the fiscal year 2018, the profit before tax stood at 2.3 billion Australian dollars. After-tax net profit was at 1.6 billion dollars, which were used to pay dividends. It indicates the growing potential of Woolworth Company.

Question 4

Q. Examine the ex-dividend price movement?

Ex-dividend price determines who and when to receive the dividends. Those who purchase the bonuses before ex-dividend date receive them, but those who buy after have to wait for the next book closure. Woolworth limited has an ex-dividend price date on the 3rd (March) and 9th (September) months. The year 2019 had its ex-dividend date come earlier on April 28th, 2019. For the period between 2017 and 2018, ex-dividend price movements have been steady with regular dates.

Q. How significant was the price change relative to the dividend?

There was a smaller price change as compared to the dividends given. The relative change was positive, and the dividend per share price was indicated to be 103.00. It suggests a higher value for the company’s assets. A better price change to dividend ratio reflects a growing company with high turnover rates.

Q. Calculate the effective dividend tax rate for each of the dividend

 Tax rate dividends that are paid on ordinary profits are the same as the regular federal income tax rates. For the 2018 tax year, in early 2019 according to file reports, the national income tax rates range from 10% to 37% (slightly down after being 10% to 39.6% in 2017). Single filers with $50,000 of total income, fall in the 22% tax bracket for 2018. The tax rate that will be paid is 22% on ordinary dividends. Qualified dividends are taxed at the capital gains rates, which are lower. For the 2018 tax year, a company does not need to pay any taxes on qualified dividends as long as it has $38,600 or less of ordinary income. If you have let us say between $38,600 and $425,800 of regular income, then you will pay a tax rate of 15% on qualified dividends. The standard for $425,801 or more is 20%.

Woolworths has a high net income and therefore, qualify for 20% taxes on dividends. The federal income tax rate is similar to ordinary dividends tax rate, both the two rates remain unchanged from 2018 to 2019. Besides, the income thresholds for each bracket increases slightly in 2019 to account for inflation. Similarly, the capital gains rate, which you pay for qualified dividends, is the same as in 2018, but the brackets changed slightly due to inflation.

Critically analyze your observation

Woolworth Group Limited has a quantifiable taxable income and a substantial dividend baseline. It establishes a standard rate on the dividend tax rate. The price change relative to the dividend also has a relative margin that stands at 3% above normal relativity. The bonuses are also 100% franked, which means the dividend taxes occur as a result of the profit margins. Woolworths has huge profits after taxes, which are subject to dividends tax rates. Its dividend yields and payout ratios are also relatively higher with increased annual total dividends and stable net income. The cost per share index fluctuates, raising uncertainty over the stability of the dividend yields.

Question 5

Q. Using Data for the last two (2) years report the price movement at the time of the dividend announcement.

At the time of the dividend announcement over the past two years, there was increased volatility in market share prices. There was an observable movement on the dividend costs with positive and negative reactions to stock price changes. Over the past two years, the company has achieved a maximum of 50 AUD cents per share, which is relatively lower than the previous year’s indicating decreased productivity of the company. It explains the reasons for the fluctuation in operational costs.

Q. How do you interpret this price movement in light of finance theory?

Finance theory teaches that the value of an equity share results from by its fundamental significance: the expected discounted amount of its future yield (or dividends). Finance theory provides some specific guidance when forming forecasts of future interest rates. In light with the finance theory, the price movement is unstable and not quantifiable due to the variations in dividend yields. A shift in these dividend rates has a direct impact on asset financing and the operational costs of the company. The price change is imperative to market share index fluctuations. Woolworths unstable cost per share index should be through addressing dividend pricing.

Reference List

• F. G . CRANE, T. K. C., 1998. THE IDENTIFICATION OF EVALUATIVE CRITERIA AND CUES USED IN SELECTING SERVICES. Emeraldinsight, 2(2), pp. 53-59
• Ganti, A. (2019). Franked Dividend Definition. [online] Investopedia. Available at: https://www.investopedia.com/terms/f/frankeddividend.asp [Accessed 15 May 2019].
• Lahiri,P., 2013. The Relationship between Dividend Payout Policy and Foreign Institutional Investment in India. Sage Journals, 1 December, 48(4), pp. 437-459.
• Michael L. Leemon, T. N., 2015. Dividend yields and stock returns in Hong Kong, emeraldinsights, 41(2). Pp. 164-181.
• Mohammad Hashemijoo, A. M. A. N. Y., 2012. The Impact of Dividend Policy on Share Price Volatility in the Malaysian Stock Market. SSRN, 16 September, 4(1), p. 19.
• Mohammed Amidu, J. A, 2006. Determinants of dividend payout ratios in Ghana. Emeraldinsights, 7(2), pp. 136-145