Dividend Policy for Home Retail Group Plc Essay

Dividend Policy for Home Retail Group Plc and Yell Group Plc 2008, 2009, 2010

Once a company is profitable, the executives must determine what to do with the profits. The firm may continue to retain the profits, or it may pay out the profits to the owners/shareholders of the firm in the form of dividends. Once the firm decides on whether or not to pay dividends, it may establish a semi-permanent dividend policy, which may, of course, impact investors as well as the perception of the company in the global financial markets. See, Bhattacharyya, N. (2007). Dividend policy: a review, Managerial Finance, 33 (1), pp 4 -13.

What executives decide depends on the situation the company faces now, and is likely to face in the future. The policy also depends on the preferences of investors and potential investors. The most common dividend policies are as follows:

• Constant Dollar Dividend Policy

• Constant Payout Ratio

• Regular with Extras

There are several strategies for setting these dividend policies, including:

(a) Information Content, or Signaling

The signaling hypothesis indicates investors regard dividend changes as a signal of management's earnings forecasts.

(b) Clientele Effect

The clientele effect is based on the tendency of a firm to lure the type of investor who likes its dividend policy.

(c) Free Cash Flow Hypothesis

All things being equal, companies paying dividends from cash flows that cannot be reinvested in positive net present value projects -- i.e. free cash flows -- have greater values than firms that retain free cash flows. See, Tse, CB. (2005). Use Dividends to Signal or Not: An Examination of the UK Dividend Payout Patterns, Managerial Finance, 31 (4), pp 12 -33.

Executive Summary

This research essay examines the dividend policies of Yell Group plc and Home Retail Group plc for the years ending 2008, 2009 and 2010. Unlike Commonwealth Brewery's new dividend policy of paying out 100 per cent of profits to shareholders, these two venerable companies have more modest dividend policies. See, Hartnell N., Compelling' 100% dividend payout by Commonwealth, Thursday, March 10, 2011, The Tribune.

Introduction/Background

Home Retail Group plc

Home Retail Group plc (LSE: HOME) is the corporate holding company for the U.K. And Republic of Ireland retailers Homebase and Argos. The firm is listed on the London Stock Exchange and is a component of the FTSE 250 Index.

The firm was established in 2000 when GUS plc merged its Argos and Reality U.K. businesses. The firm went on to acquire Homebase in 2002 and 33 Index stores in 2005. The firm was demerged from its parent company, GUS plc, effective from 10 October 2006. Shares in Home Retail Group were traded on the London Stock Exchange as of 11 October 2006.

Objectives/Approach/Methodology

My objective here is to determine the company's dividend policy. My methodology is simple: examine the annual reports for the fiscal years 2008, 2009, and 2010, and cite the dividends, earnings per share, and overall revenues of the firm for those years in question.

Main discussion

Literature Review

The company's half-year dividend is typically paid in mid-January, with the final dividend paid in mid-July, according to the corporate web site, http://www.homeretailgroup.com/home/investors/faqs/

Shareholders can ask to have their dividends paid directly into a U.K. bank or building society account, which avoids the risk of cheques being lost in the mail. The dividend is credited to the investor's account on the payment date and the investor does not have to wait for a cheque to clear. What is more, a tax voucher will be sent to the investor's registered address annually, according to the corporate web site, http://www.homeretailgroup.com/home/investors/faqs / .

The firm maintains tight cost controls and focuses on absolute cash gross margin to substantially offset the cost of goods pressures while remaining highly price competitive, according to its Full Year Results for fiscal year 2010, published on April 28, 2010. See, http://www.homeretailgroup.com/home/media/hrg/news/2010/2010-04-28/2010-04-28.pdf

2010 Dividend

A final dividend of 10.0p recommended; full-year dividend held at 14.7p. Ibid.

Basic benchmark earnings per share3 down were 10% to 23.4p. Sales up 2% to £6,023m; cash gross margin down 3% to £2,276m.

2009 Dividend

Final dividend of 10.0p recommended; full-year dividend held at 14.7p. See, Full Year Results for Fiscal Year 2009, http://www.homeretailgroup.com/home/media/hrg/corpnews/2009/2009-04-29/

Total sales were down 1% to £5,897m (from 2008: £5,985m), with like-for-like sales down 4.8% at Argos and down 10.2% at Homebase. Basic benchmark earnings per share were down 24% to 25.9p (2008: 33.9p).

2008 Dividend

Sales were £5,985m. Earnings per share were 33.9p. Final dividend of 10.0p recommended; full-year dividend up 13% to 14.7p (2007: 13.0p).Investigation into Company Policies/Analysis/Conclusion

The company's dividend has been consistent for the last three fiscal years at 10 pence per share. We believe that the firm has adopted a "constant payout ratio" policy for dividends in order to attract investors who want steady dividends, no matter what annual sales may be, or the overall share price may be, of the company.

Introduction/Background

Yell Group plc

The Yell Group plc (LSE: YELL) is one of the world's leading publisher of international telephone directories. Headquarted in Reading, U.K., the company emerged over the years from of the privatised former British state telecommunications operator BT Group plc which produced the U.K. version of The Yellow Pages, the world famous phone directories. The company is listed on the London Stock Exchange and is currently a constituent of the FTSE SmallCap Index, having been a member of the FTSE 100 Index prior to March 2008.

The firm today operates in the classified advertising market place in the U.K., U.S., Spain and Latin America, according to the company's web site, http://wwwyellgroup.com . Products include the following:

UK Printed Directories

Other UK Products and Services

Yellow Book USA

Yell Publicidad

Yell Adworks

Objectives/Approach/Methodology

My objective here is to determine the company's dividend policy. My methodology is simple: examine the annual reports for the fiscal years 2008, 2009, and 2010, and cite the dividends, earnings per share, and overall revenues of the firm for those years in question.

Main discussion

Literature Review

The fiscal year 2010 for Yell Group saw a continuation of the "very challenging business environment," i.e., the impact of the overall decline in advertising revenues, globally, according to the chairman's statement in the firm's annual report. The company refinanced its debt, raised £660 million of equity and generated nearly £400 million of free cash flow. Operationally, the company's internet business continued to grow and its product offerings have been enhanced,

The economic pressure on the firm's revenue was significant with total revenue decreasing 11% to ?2,123 million. The proportion of revenue contributed by the internet business, however, grew to ?415 million representing 20% of total revenue up from 15% the previous year. The benefit of our cost savings initiatives, partially offset both the declining revenue and the continued investment for future recovery, to leave adjusted EBITDA 24% down at ?620 million.

According to the company's annual report for fiscal year 2010, adjusted EPS was down 66% as a result of the declining operating profit, the effect of higher interest rates and the larger number of shares resulting from the equity raise. Reported EPS increased, mainly as a result of the one-off impairment charge in last year's results, according to the annual report.

Cash performance remained strong as the company converted 117% of its EBITDA

into operating cash flow of ?724 million, only 1% down on the prior year, according to the annual report.

Over the year, the company decreased its net debt by ?1.1 billion to ?3.1 billion. This was as a result of our strong free cash flow before exceptionals of ?397 million, a strengthening of sterling since last March and a successful equity raise in November, according to the company's annual report.

The firm raised ?660 million of equity, (?559 million net of all fees), after it successfully reached agreement with the majority of our lenders to extend the maturity of its debt until 2014. This outcome was a significant endorsement of the company's business model by the financial community and leaves its balance sheet in a far stronger position than it otherwise would have been in, according to the annual report.

2010 Dividend

Accordingly, the company's dividend in fiscal year 2010 was nil. "We are not in a position to consider reinstating the dividend until we have further reduced our senior debt," according to the company's annual report.

2009 Dividend

The company cancelled its dividend in fiscal year 2009, according to its annual report, at http://www.yellgroup.com/files/7T5D94/2009+yell+group+plc+annual+report.pdf

2008 Dividend

The company halved its dividend in fiscal year 2008, to 5.7 pence per share, according to its annual report, at http://www.yellgroup.com/files/7T5D94/2009+yell+group+plc+annual+report.pdf and http://www.yellgroup.com/files/7FVGPF/2008+yell+group+plc+annual+report.pdf

Investigation into Company Policies/Analysis/Conclusion

The Yell Group's board of directors does not propose to reinstate a dividend until its leverage is below four times EBITDA. The company's dividend was as high as 11.4 pence per share in fiscal 2007. The company continues to face a very competitive advertising market, but has been steadily reducing its debt, as planned, for two years….....