Question 9.E.7: Traminer plc provides software solutions for the airline ind...
Traminer plc provides software solutions for the airline industry. At present, shares in the business are held by the senior managers and by a venture capital business. However, Traminer plc intends to seek a Stock Exchange listing and to make 75 per cent of the ordinary shares available to the investing public. The board of directors recently met to decide upon a dividend policy for the business once it has become listed. However, the meeting ended without agreement.
Information relating to the business over the past five years is set out below:
\begin{matrix}Year\ ended&Ordinary\ shares&Profit\ for&Ordinary\ share\\30\ April&in\ issue&the\ year÷nds\\&000&£000&£000\\2015&500&840&420\\2016&500&1,190&580\\2017&800&1,420&340\\2018&1,000&1,940&450\\2019&1,000&2,560&970\end{matrix}Required:
Evaluate the dividend policy pursued by Traminer plc over the past five years and discuss whether any changes to this policy are required.
The dividend payout ratio and dividend per share of the business over the past five years are:
\begin{matrix}Year& Dividend\ payout&Dividend\ per\ share\\&\%&£\\2015&50.0&0.84\\2016&48.7&1.16\\2017&23.9&0.43\\2018&23.2&0.45\\2019&37.9&0.97\end{matrix}We can see from this table that there is no stable dividend policy. The payout ratio fluctuated between 50 per cent and 23.2 per cent. The dividend per share has also fluctuated significantly over the period. This may suggest that dividends are viewed simply as a residual; that is, dividends will be paid only when the business has no profitable opportunities in which to invest its earnings. A fluctuating dividend policy is unlikely to be popular with shareholders. A policy that is predictable and contains no surprises is likely to be much more welcome. The signalling effect of dividends must also be borne in mind. Sudden changes in payout ratios may produce uncertainty in the minds of shareholders and run the risk that these changes will be incorrectly interpreted.