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Corporate Finance - Debenhams Dividend Policy

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Corporate Finance - Debenhams Dividend Policy

  1. 1. Dividend Policy Copyright 2013 Jason Cates and Ravi Patel
  2. 2. Contents 1. Debenhams 2. Overview 3. M&M (& assumptions) 4. Signalling Effect 5. Clientele Effect 6. Management Incentives 7. Business Life Cycle 8. Conclusion 9. References
  3. 3. Debenhams Plc.  British retailer operating department stores with franchises on a global scale.  Philippines, Cyprus, Denmark  First store open in London in1778 by William Flint  In 1813, William Debenham invested in the firm  Returned to the LSE in May 2006 after being acquired by Baroness Retail Ltd in 2003. -£10 £40 £90 £140 £190 2008 2009 2010 2011 2012 Value(£Million) Profits Cash Level £- £0.01 £0.02 £0.03 £0.04 £0.05 2008 2009 2010 2011 2012 Value(GBP) Dividend Per Share (Debenhams, 2008 - 2012)(Debenhams, 2013a)(LSE, 2013)
  4. 4. Dividend Policy M&M  Why does dividend irrelevancy exist?  Paying out dividends vs. investing in new business opportunities  Effect on Debenhams share price  Higher Dividend = Lower Capital Growth  Debenhams finances:  Investment Opportunities funded by Debt & Equity  Dividend funded by Retained Earnings (Cash) (Watson & Head, 2010)
  5. 5. Dividend Policy M&M Assumptions  Tax Shield and Transaction costs  Clientele Effect  High income individuals  Higher income tax rate, prefer capital growth.  Low income individuals  Lower income tax rate, prefer dividends.  Bankruptcy risk – Debenhams  High Gearing in 2008  Increased bankruptcy risk, cancelled dividend to repay debt (25% by 2011) (Debenhams, 2008)(Barrett, 2011)(Watson & Head, 2010)
  6. 6. Dividends & Buy backs Signalling Effect (Debenhams, 2012)(Watson & Head, 2010)  Change in Level of Dividends more important than absolute level of dividends.  Asymmetry of Information  Actions speak louder than words.  Residual Theory (Share Buy Back)  Business Life Cycle – Lack of Positive NPV’s to invest in.
  7. 7. Dividend Policy Clientele Effect  Tax considerations for individuals and their cash position  Capital Gains tax lower than Income Tax  Share buybacks preferred by Short Term Investors  Pensions want steady incomes.  LT Mutual Fund  18.4% Shareholding (2011 – 15.56%)  High Income Individuals prefer Capital Growth.  ST Investment Funds  57.98% Shareholding (2011 – 58.41%) (Debenhams, 2013b)(Watson & Head, 2010)(Grullon & Michaely, 2002)
  8. 8. Share Buy Back  Management Incentives  CEO - Michael Sharpe  2,456,836 Shares & Share Options  CFO – Simon Herrick  647,127 Shares & Share Options  Reduces the cost of maintaining dividend.  Research suggests that dividends and share buy backs are substitutes  No effect on long term shareholder return (Debenhams, 2012)(Watson & Head, 2010) )(Grullon & Michaely, 2002)
  9. 9. Dividends & Buy backs Business Life Cycle  Fewer Investment Opportunities  High dividends/Share Buy Back  £40m Buy Back in 2011-2012  Declining Business ?(10% fall in UK profits)  No positive NPV’s to invest in?  To Maintain or Increase Share Price?  More Investment Opportunities  Lower or No Dividends (2008-2010)  Increasing Cash Levels & Lowering Debt (Debenhams, 2008 - 2012)(Barrett, 2011)(Watson & Head, 2010) (Vernon, 1966, cited in Proxim Group, 2013)
  10. 10. Conclusions Share Buy Backs vs. Dividends  Share Buy Backs provides shareholder return in the form of capital growth.  Can be used to improve share price.  Used by declining companies?  Dividends provides smaller, but more stable share holder return.  Attracts long-term shareholders, reducing share price volatility.  Used by mature stable companies (Watson & Head, 2010) )(Grullon & Michaely, 2002)
  11. 11. References  Barrett C., (2011) ‘Debenhams rises 7% over buy-back plan’, Financial Times, 21st October 2011  Debenhams (2008) Annual report 2008. [Online] Available at: http://media.corporate- ir.net/media_files/IROL/19/196805/reports/ar2008_new.pdf [Accessed: 11th February 2013]  Debenhams (2009) Annual report 2009. [Online] Available at: http://media.corporate- ir.net/media_files/IROL/19/196805/reports/ar2009_new.pdf [Accessed: 11th February 2013]  Debenhams (2010) Annual report 2010. [Online] Available at: http://media.corporate- ir.net/media_files/IROL/19/196805/agm2010/ar2010.pdf [Accessed: 11th February 2013]  Debenhams (2011) Annual report 2011. [Online] Available at: http://media.corporate- ir.net/media_files/IROL/19/196805/agm2011/ar2011.pdf [Accessed: 11th February 2013]  Debenhams (2012) Annual report 2012. [Online] Available at: http://media.corporate- ir.net/media_files/IROL/19/196805/agm2012/ar2012.pdf [Accessed: 11th February 2013]
  12. 12. References  Debenhams (2013a) History. Available at: http://www.debenhamsplc.com/phoenix.zhtml?c=196805&p=history [Accessed: 20th February 2013]  Debenhams (2013b) Ownership Summary. Available at: http://www.debenhamsplc.com/phoenix.zhtml?c=196805&p=irol- ownershipSummary [Accessed: 13th February 2013]  Grullon G. and Michaely R. (2002) Dividends, Share Repurchases, and the Substitution Hypothesis. The Journal of Finance, Volume 57, Issue 4, pp1649 – 1684  London Stock Exchange (2012) Debenhams Plc. Available at: http://www.londonstockexchange.com/exchange/prices-and- markets/stocks/summary/company- summary.html?fourWayKey=GB00B126KH97GBGBXSTMM [Accessed: 13th February 2013]  (Vernon, 1966, cited in Proxim Group, 2013) The Business Life Cycle. Available at: http://www.proximgroup.com.au/Understanding-The- Business-Life-Cycle-Is-Important-To-Improving-Your-Small-Business- Success.php [Accessed: 23rd February 2013]  Watson, D. & Head, A. (2010) Corporate Finance: Principles and Practice. 5th edn. Harlow: Prentice Hall.

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