Essay: Dividend Payout And Profitability Of A Public-Listed Company - Analysis.

Literature review

Describe about the Dividend Payout and Profitability of a Public-Listed Company.

To find out if there exists any relationship and the extent of the relationship between dividend payout and profitability of Woolworth supermarkets, Coles and Aldi

Profitability is key to long term success of a company or organization. Therefore, it is imperative to find out the other factors that will affect the profitability of Woolworths so as to make informed judgement about any future investments in the company.

According to (Woolworths Online, 2016), Woolworths supermarket is a subgroup of the Woolworths limited and was founded in December 1924 and is found in 961 locations and account to more than 80% of the Australian market with fellow giant Coles. Their strong dominance makes the Australian market look almost near perfect duopoly. The three of them, Woolworths, Aldi and Coles hold the largest market share in Australia.

The independent variable is dividend payout while the dependent variable is the profitability of the company.

According to (McLaney and Atrill, 2012), a study between the relationship between the dividend and profitability was already carried out. In this research, we will narrow down to find if this relationship exits for public-listed companies like Woolworth, Coles and Aldi in Australia. The study, therefore, narrows down to the companies that are all located in Australia.

Methods

According to (Financeformulas.net, 2016), dividend can be described as the amount of money which will be paid by a company regularly and mostly quarterly and is drawn from the profits made by the company in that period. Therefore, dividend payout ratio is said to be the amount of the dividends, as described above, that will be paid to the shareholders of a company and which is dependent to the total bet income that a company earns in a given time period. Not all the profits are paid out to the shareholders and the amount that is retained by the company is used for development and growth purposes by the organization. This amount that is held back by the company for such purposes is called the retained profits of a company.

According to (My Accounting Course, 2016), profitability of a company can be defined as being capability of an organization to utilize all the resources at its disposal so as to earn profits from its operations and this often forms on of the four pillars that are commonly used in the analysis of the statements of finance as well as the general performance of an organization.  Other than profitability, other pillars that will be often used in this analysis include; solvency, the prospects of the potential market as well as the efficiency. These are the factors that anyone linked to the business may it be as an investors, client, creditors or even managers  will attempt to use in their forecasts about the future and the effects these could have if carried out well. Two things that affect profitability include revenues, which is the income made by the business and his includes the sales of goods as well as the provision of services and expenses which is the general expenditure by the business.

Methods

According to (Reference, 2016), a pubic listed company is the direct opposite of the private business and is owned by stakeholders who can buy themselves the shares of the company or dispose of them from the stock exchange market or the open over-the –counter market.

The formula for the dividend payout ratio is given by;

Dividend payout ratio = Total Dividends / Total Net income

Another method of obtaining the dividend payout ratio is;

Dividend payout ratio = 1- Retention

The total net income as given in the formula above can be calculated from the company’s books of accounts and specifically the income statement.

This formulae will be used when there are considerations to be done in order to determine whether it would be profitable to make any investments in the public-listed company whose shares can be bought in the stock market. This formula will take into account both the dividends and also the high potential growth rates. As such, this formulas will makes assumptions on the steady income as well as the rate of reinvestment with future possible earnings in mind, given that the chosen company posts a net income.

It is worth noting that the ratio of retention and also the ration of the dividend payout should sum up to 1 or 100 percent of the total net income posted by the company. The assumption made in these calculations is that whatever amount that is not paid out to the shareholders as profit revenue is recycled by the company as funding for future business activity expansion.

There also exists the possibility that a company could post a net income but still have its dividend payout ratio as 0%. In such cases, it would mean that the company had decided to reinvest all the cash that that been found from the net income into future investment opportunities.

The sampling technique applied is the simple random sampling. Sampling is a techniques in which statistical data from a large data set is picked at random and is often predetermined (Investopedia, 2016). Data from different reliable sources is collected by way of observation.

There exists relationships between the dividend payout ratio and the profitability of a company. According to the results obtained in this study, a high dividend payout ratio would translate into the company investing very little amount of cash into its possible future business options. As such, the company might be at risk for failure to diversify and may be heavily affected in case of business failure in the field that the company focusses on.  It is therefore important for a company to have a healthy dividend payout ratio that ensures that the shareholders are paid for the risk they take in investing in the business but also it gives the company enough resources to face any hard circumstances and gives it the power to change and/ or diversify its portfolio.

Posting a low dividend payout ratio could be interpreted as meaning that the company is making low net incomes which means less dividends and less retained cash. In this situation it likely that the company is having a difficult time in the market or they are making normal profits but have a lot of debts and other backlogs to clear.

Results and Discussion

If a company is posting dividend payout ratio of 0 despite the fact that the said company had posted a posting a total net income, it would mean that the company is so concerned about its future that is willing to sacrifice the earnings payable to a the shareholders to invest all the net income made and thus the company would have a ready arsenal if the opted to expand and/or diversify to a new market.

Conclusion

According to (Boundless, 2016), when taking an investor’s viewpoint, the most important thing is the retention of profits to ensure and this is one of the fundamental pillars on which a company is built on and whose importance cannot be undermined. A shareholders is likely to be keen on what is the capital that is given to the company releases to them as the dividend payout ratio and the amount of money that is retained by the company which is known as retained funds. The amount of money that the company pays to investors through the dividend payments as well as the indirect capital gains and the retained profits.

From their viewpoint, stakeholders will want the retained profits to be used by the company to not only maximize on  operations that are currently in place but also to ensure that the company is able to make the highest profits possible. Thus, retained profits will be held in the reserves of the company and their main purpose will be to aid in future earning growths and expansion.

Some firms need hefty sums of startup capital objective to carry on tasks. These corporations are typically not capable to dispense remunerations, since their capitals are secured up for maintenance and repairs. These firms also offer limited development opportunities, as incomes are not invested for the purpose of development. In the meanwhile some firms can retain incomes and put it back to create more for example, spend in development opportunities. These companies are striking to investors, despite of the low dispersal of profits.

Shareholders are more likely to support and invest in companies that give the higher income and that have much lower rate of capital growth and as such a company that offers low dividend payout ratio would be ideal since this would translate to lower rates of capital gains tax. Companies that have very high rates of growth in their early life will tend to have the low ratios of payout as the focus on reinvestment and diversification. In the process of maturation, the earnings that are returned to the investors will gradually increase.

A relationship exists between the dividends payout and the profitability of the public listed company. There exists a link between dividends payout that are paid out to the shareholders and the long term profitability of the company.

References

Woolworths Online. (2016). Woolworths Supermarket - Buy Groceries Online. [online] Available at: https://www.woolworths.com.au/ [Accessed 14 Dec. 2016].

Financeformulas.net. (2016). Dividend Payout Ratio. [Online] Available at: https://www.financeformulas.net/Dividend_Payout_Ratio.html [Accessed 14 Dec. 2016].

My Accounting Course. (2016). Profitability - Definition | Meaning | Example. [Online] Available at: https://www.myaccountingcourse.com/accounting-dictionary/profitability [Accessed 14 Dec. 2016].

Reference. (2016). What is a publicly listed company?. [Online] Available at: https://www.reference.com/business-finance/publicly-listed-company-c0f52a5d3cd3b20 [Accessed 14 Dec. 2016].

Boundless. (2016). Relationship between Dividend Payments and the Growth Rate. [Online] Available at: https://www.boundless.com/finance/textbooks/boundless-finance-textbook/stock-valuation-7/stock-valuation-74/relationship-between-dividend-payments-and-the-growth-rate-335-6420/ [Accessed 14 Dec. 2016].

Investopedia. (2016). Sampling. [Online] Available at: https://www.investopedia.com/terms/s/sampling.asp [Accessed 14 Dec. 2016].

McLaney, E. and Atrill, P. (2012). Accounting. 1st ed. Harlow: Financial Times/Prentice Hall.