Using the income statement discuss the dividend policy of your Puma. Answer the
ID: 2383745 • Letter: U
Question
Using the income statement discuss the dividend policy of your Puma.
Answer the following questions as part of your response:
How would you describe Puma's dividend policy?
Why do you believe this company chose the dividend policy they have in place?
Do you agree or disagree that they have selected the best dividend policy for Puma?
How might this dividend policy function in both perfect and imperfect capital markets?
Calculate the dividend rate over the past 2 years. Define why you believe that it has or has not changed over the last 2 years.
Puma Income Statement
2014 2013
€ million % € million % =/-%
€ million
%
€ million
%
=/ - %
Sales
2,972.0
100%
2,985.3
100.0%
-0.4%
Cost of sales
-1,586.7
-53.4%
-1,597.8
-53.5%
-0.7%
Gross profit
1,385.4
46.6%
1,387.5
46.5%
-0.2%
Royalty and commission income
19.4
0.7%
20.8
0.7%
-6.7%
Other operating income and expenses
-1,276.8
-43.0%
-1,216.9
-40.8%
4.9%
Operating income before special items
128.0
4.3%
191.4 6
4%
-33.1%
Special Items
0.0
0.0%
-129.0
-4.3%
-100%
Operating income (EBIT)
128.0
4.3%
62.5
2.1%
104.9%
Financial result / Income from associated companies
-6.2
-0.2%
-8.7
-0.3%
-28.8%
Earnings before taxes (EBT)
121.8
4.1%
53.7
1.8%
126.6%
Taxes on income
-37.0
-1.2%
-32.5
-1.1%
13.7%
Tax rate
-30.4%
-60.5%
Net earnings attributable to non-controlling interests
-20.8
-0.7%
-15.9
-0.5%
30.5%
Net earnings
64.1
2.2%
5.3
0.2%
1,103.0%
Weighted average shares outstanding (million)
14,940
14,940
0.0%
Weighted average shares outstanding, diluted (million)
14,940
14,941
0.0%
Earnings per share in €
4.29
0.36
1,103.0%
Earnings per share, diluted in €
4.9
0.36
1,103.1%
€ million
%
€ million
%
=/ - %
Sales
2,972.0
100%
2,985.3
100.0%
-0.4%
Cost of sales
-1,586.7
-53.4%
-1,597.8
-53.5%
-0.7%
Gross profit
1,385.4
46.6%
1,387.5
46.5%
-0.2%
Royalty and commission income
19.4
0.7%
20.8
0.7%
-6.7%
Other operating income and expenses
-1,276.8
-43.0%
-1,216.9
-40.8%
4.9%
Operating income before special items
128.0
4.3%
191.4 6
4%
-33.1%
Special Items
0.0
0.0%
-129.0
-4.3%
-100%
Operating income (EBIT)
128.0
4.3%
62.5
2.1%
104.9%
Financial result / Income from associated companies
-6.2
-0.2%
-8.7
-0.3%
-28.8%
Earnings before taxes (EBT)
121.8
4.1%
53.7
1.8%
126.6%
Taxes on income
-37.0
-1.2%
-32.5
-1.1%
13.7%
Tax rate
-30.4%
-60.5%
Net earnings attributable to non-controlling interests
-20.8
-0.7%
-15.9
-0.5%
30.5%
Net earnings
64.1
2.2%
5.3
0.2%
1,103.0%
Weighted average shares outstanding (million)
14,940
14,940
0.0%
Weighted average shares outstanding, diluted (million)
14,940
14,941
0.0%
Earnings per share in €
4.29
0.36
1,103.0%
Earnings per share, diluted in €
4.9
0.36
1,103.1%
Explanation / Answer
PUMA's dividend policy:
PUMA has declared and paid out lower dividends of Euro 0.50/ share for each of the past two financial years 2013 and 2014. This most probably could be primarily due to following reasons:
i. PUMA's business has higher operating leverage as well as higher financial leverage [if we refer its annual reports for 2013 and 2014] as is indicated by lower operating margins caused due to lower levels of annual sales and due to higher net interest expenses of Euro 5.00 million respectvely [drastically increased from Euro 0.50 million to Euro 5.00 million from 2013 to 2014, which in turn is mainly due to both: sharp decrease in total interest income and sharp increase in total interest expense]. Higher Operating Leverage is indicated by very high proportion of Other Operating Expenses to Gross Profit of 92.16% in 2014, which again is an increase from previous year's 87.70% of Gross Profit. Higher Operating Leverage majorly eats upon the higher amount of Gross Profit margins earned by PUMA in both the years under study.
Add to all this, the higher financial leverage adds to further worsen the situation for PUMA due to lower sales volumes..
Secondly, to solve / tackle this business problem of lower sales volumes and losing market share, PUMA has incurred some major costs of Euro 129 million in 2013 towards a major cost-cutting and re-structuring exercise which again is debited to Profit and Loss Account [i.e. Income Account] and has been adjusted against company's Goodwill, which in turn will hit company's Tangible Networth.
Thirdly, the company after effecting some turnaround in its financial position / financial health in 2014, post its major cost-cutting and restructuring exercise in year 2013, it intends to capitalize on this favourable outcome by plowback of majority of profits generated during the year 2014 to fund its future expansion and business activities without increasing its financial leverage which is already high..
I agree with the Dividend Policy of PUMA as described above and i think it is wise and prudent of them to do so because under such adverse business circumstances it is the equity shareholders who need to take a hit [they being the ultimate risk-bearers because they have provided high-risk capital to business due to which they have got ownership over company's business and thus the voting rights..
Secondly, plowback of profits into business at the cost of paying dividends for certain number of future years helps the business to fund its future business operations through internal accruals and also helps in keeping financial leverage under check as it is already on a higher side.
In a perfect capital market, this dividend policy will factor in the future potential growth by applying higher internal growth rate and higher sustainable growth rate while arriving at current share price of the company's common stock. This dividend policy of higher retention ratio will boost company's internal and sustainable growth rate.
In an imperfect capital market, thius dividend policy may intially backfire but later on it will correct itself to correct intrinsic value of shares of the company once good results start showing in future quarters and years..
Dividend rate for 2013= Euro 0.50 dividend per share / EPS= (0.50 / 0.36)*100= 1.39*100= 139% which seems to be high mainly due to very low EPS base i.e. in denominator. Despite lower EPS during year 2013, company has decided to pay dividend to common stock-holders at such a higher rate mainly to signal company's "Giving financial returns to Common Stockholders" intention even during adverse circumstances to gain their long-term loyalty and trust so that company stock's share price in the stock market does not sharply fall due to adverse financial performance of business over past certain number of years.
Dividend Rate for 2014= Euro 0.50 dividend per share / EPS= (0.50 / 4.29)*100 = 0.11655 * 100= 11.65%. This is mainly taking a long-term view by plowing back generated profits into business to fund future business operations and to check fianancial leverage which is already high.
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