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The Dividend Policy

Modigliani and Miller (1961) said that the dividend policy in firms would not influence the value of firms. But this result is based on many strictly assumptions, including “perfect capital markets”, “rational behavior” and “perfect certainty”. According to Bhattacharya (1971), given that the outside investors have imperfect information about companies’ profitability, so the cash dividend policy will be used as a signal about companies’ future cash flow, and influence the investment decision of outside investors and value of companies in the end. So to the company, it should think about dividend policy carefully. In corporate finance, there are two dividend policies including residual dividend policy, constant growth dividend policy and constant dividend policy. And at the same time, the dividend categories include cash dividend, stock dividend, property dividend and scrip dividend. In this part, it will state the dividend policy of Telstra and TPG in current. Table one shows the dividend of TPG from 2009 to 2013 and table two shows its annual EPS and dividend in 2009-2013.

Table one: the dividend of TPG (2019-2013)

Financial year

Dividend (cents/share)

Interim FY09

1.0

Final FY09

1.0

Interim FY10

2.0

Final FY10

2.0

Interim FY11

2.25

Final FY11

2.25

Interim FY12

2.75

Final FY12

2.75

Interim FY13

3.50

Final FY13

4.00

Table tow: annual EPS and dividend of TPG (2009-2013)

Financial year

Dividend (cents/share)

EPS

2009

2.0

2.6

2010

4.0

7.6

2011

4.5

10.1

2012

5.5

11.5

2013

7.5

18.8

(Source: http://www.tpg.com.au/about/investorrelations.php)

From table one and table two, it can be seen that the annual EPS and dividend of TPG in 2009-2013 are increasing constantly. In 2009, the annual EPS and dividend are 2.6 cents/share and 2.0 cents/share respectively, but in 2013, the annual EPS and dividend are 18.8 cents/share and 7.5 cents/share respectively. The average growth rate of annual EPS in these five years is 124.6% and the average growth rate of annual dividend in these five years is 55%. These data indicate that the TPG’s operating is in good condition and its business is expanding continuously. So the dividend policy of TPG is constant growth dividend policy and the shareholders gain huge wealth due to the TPG creates great value to them.

Now it will analyze the dividend policy of Telstra. Table three shows the dividend of Telstra from 2009 to 2013 and table four shows its annual dividend in 2009-2013.

Table three: the dividend of Telstra (2010-2014)

Financial year

Dividend (cents/share)

Interim FY10

14

Final FY10

14

Interim FY11

14

Final FY11

14

Interim FY12

14

Final FY12

14

Interim FY13

14

Final FY13

14

Interim FY14

14

Final FY14

14.5

Table four: annual dividend of Telstra (2010-2014)

Financial year

Dividend (cents/share)

2010

28

2011

28

2012

28

2013

28

2014

28.5

(Source: http://www.telstra.com.au/aboutus/investors/financial-information/dividends/)

From table three and table four, it can be seen that the dividend of Telstra is very stable and from 2010 to 2014, its interim dividend and final dividend almost are 14 cents/share and its annual dividend almost is 28 cents/share. So from this point, the dividend policy of Telstra is constant dividend policy. No matter its operating performance is good or bad, Telstra will give the shareholders constant returns.

According to the analysis, Telstra and TPG both are telecommunication companies and belong to the same industry, but their dividend policies are very different. And at the same time, it can be seen that the dividend of Telstra is bigger than TPG’s, even the dividend of TPG is increasing constantly. So it can be concluded that the total revenue and operating performance of Telstra are better than TPG’s.

Off course, the dividend policy is just a part of financial management and to the company; only the investment policy can bring huge cash flow and create value. And then the company can have resources to distribute the dividend to the shareholders. So according to Brav, Grohan, Harvey and Michael (2003), in their investigation, many CFOs think that the dividends is very important to the development of the company but they think increasing the level of dividends per share is less important than investment decisions

References:

Miller, H. M. and Modigliani, F. (1961), ‘Dividend policy, growth, and the valuation of shares’, The Journal of Business, Vol.34, pp. 411-433.

Bhattacharya, S. (1971), ‘Imperfect information, dividend policy, and ‘the bird in the hand’ fallacy’, The Bell Journal of Economics, Vol.10, pp. 259-270.

Brav, A., Groham, R. J., Harvey, R. C. and Michaely, R. (2003), ‘Payout policy in the 21st Century’, NBER Working Paper, No.9657.