Question 9.A-S-Q.1: Sandarajan plc has recently obtained a listing on the Stock ...
Sandarajan plc has recently obtained a listing on the Stock Exchange. The business operates a chain of supermarkets and was the subject of a management buyout five years ago. Since the buyout, the business has grown rapidly. The managers and a private equity firm owned 80 per cent of the shares prior to the Stock Exchange listing. However, this has now been reduced to 20 per cent. The record of the business over the past five years leading up to the listing is as follows:
\begin{matrix}Year&Profit\ for\ the\ year&Dividend&No.\ of\ shares\ issued\\&£000&£000&000s\\1&420&220&1,000\\2&530&140&1,000\\3&650&260&1,500\\4&740&110&1,500\\5\ (most\ recent)&880&460&1,500\end{matrix}Required:
(a) Comment on the dividend policy of the business leading up to the Stock Exchange listing.
(b) What advice would you give to the managers of the business concerning future dividend policy?
(a) The dividend per share and dividend payout ratio over the five-year period under review are as follows:
\begin{matrix}Year&Dividend\ per\ share&Dividend\ payout\ \%\\1&22.0p&52.4\\2&14.0p&26.4\\3&17.3p&40.0\\4&7.3p&14.9\\5&30.7p&52.3\end{matrix}
The figures above show an erratic pattern of dividends over the five years. Such a pattern may not be welcomed by investors. In an imperfect market, dividends may be important to investors. We saw in the chapter that this may be due to the clientele effect, the catering effect, the need to reduce agency costs and information signalling.
(b) Managers should decide on a payout policy and then make every effort to stick to it. This will help ensure that dividends are predictable and contain no ‘surprises’ for investors. Any reduction in the dividend is likely to be seen as a sign of financial weakness and the share price is likely to fall. If a reduction in dividends cannot be avoided, the managers should make clear the change in policy and the reasons for the change.