This week
BHP, the largest global mining company, announced they are to scrap their
progressive dividend policy, comically only 6 months after their CEO Andrew
Mackenzie made the contradicting statement “over my dead body sounds a little
strong but it’s almost right”! In light of this news returns us once again to
the age old question: Is dividend policy relevant?
An
interesting point to begin with is the fact BHP vowed to maintain their
progressive dividend policy by increasing the annual dividend by 2%, despite
their share price and first half profits tumbling 92%! (Stringer, 2016). It is
clear that the directors disagree with Modigliani and Miller’s (1961) dividend
irrelevance theory. This is congruent with the popular view that dividend policy is important, as evidenced
by the large amount of money involved and the attention that firms, security
analysts, and investors give to dividends (Baker & Weigand, 2015).
Personally I believe their decision to initially raise the dividend was to try
raise investor confidence even though the market conditions are in a state of
turmoil, with the price of a barrel of oil falling from 114.83p per barrel on
april 01, 2011 to just 26.05p on feb 01, 2016 (Kumar, 2016). In a rather
fitting quote, Andrew
Lapping, deputy chief investment officer for South Africa-based fund Allan Gray
Ltd., recently described miners promising ever-rising dividends as a “joke.”
(Hoyle, 2016). It is likely BHP took Linter (2007) and Gordon’s (1959; 1962)
“Bird-in-the-hand theory” into consideration when deciding to continue their
progressive dividend policy. In their research, Linter and Gordon argue that
dividends are preferable to capital gains due to uncertainty, and that
investors would rather have the money now rather than leave it tied up in
uncertain investments. This approach is likely to raise concerns amongst BHP’s
investors.
Personally I
agree with the dividend relevance theory, due to the fact Modigliani and Miller’s
theory was based upon a number of assumptions, such as the reliance of perfect
capital markets, no issue cost for securities and no tax. In reality, these
factors have to be taken into consideration. Unfortunately we do not live in
strong form markets, and there are transaction costs and hefty taxation
implications.
Source: (Wsj,
2016).
BHP’s
decision to scrap the policy has largely been influenced by the rest of the
market’s attempts to improve their financial position by also cutting dividend. All the main players have now cut their
dividend, including Rio Tinto and Anglo-American. From this ordeal it has been
made clear to myself the implications dividend policy has on the shareholder’s
perceptions of the company. This dividend cut, which BHP were forced to do to
try and savour their credit rating, even though this has been downgraded by
Barclays and HSBC to “underweight,” has resulted in BHP’s stock falling
significantly.
Source:
(Cunningham, 2016).
From this
ordeal it has been made clear to myself the implications dividend policy has on
the shareholder’s perceptions of the company. This dividend cut, which BHP were
forced to do to try and savour their credit rating, even though this has been
downgraded by Barclays and HSBC to “underweight,” has resulted in BHP’s stock
falling significantly, as illustrated below.
This highlights how short term the market is, because now the short term
returns have been cut a lot of shareholders have began to sell, hence the price
drop.
Baker, H., &
Weigand, R. (2015). Corporate dividend policy revisited. Managerial Finance,
41(2), 126-144. http://dx.doi.org/10.1108/mf-03-2014-0077
Cunningham, T.
(2016). BHP Billiton tumbles amid fears of dividend cut. Telegraph.co.uk.
Retrieved 14 March 2016, from
http://www.telegraph.co.uk/finance/markets/marketreport/12095897/BHP-Billiton-tumbles-amid-fears-of-dividend-cut.html
Hoyle, R. (2016). BHP
Billiton Slashes Its Dividend. WSJ. Retrieved 14 March 2016, from
http://www.wsj.com/articles/bhp-billiton-slashes-its-dividend-1456177003
Kumar, D. (2016). Oil
plumbs new lows below $27 as oversupply woes persist. Reuters.
Retrieved 14 March 2016, from
http://www.reuters.com/article/us-global-oil-idUSKCN0UY04U
Stringer, D. (2016). BHP Cuts
Dividend for First Time in 15 Years on Profit Drop. Bloomberg.com.
Retrieved 14 March 2016, from
http://www.bloomberg.com/news/articles/2016-02-22/bhp-cuts-dividend-as-first-half-profits-fall-92-on-price-rout
No comments:
Post a Comment