Intoduction to Vodafone
Vodafone is well reputed organization and it is known all over the world due quality of service and good network that it provides to its customers. Before making investment in any company it is necessary to understand its fundamentals and past track record. In this regard, gearing ratio and dividend policy is considered. By using gearing ratio, capital structure of the company is analyzed. Along with this, possible reasons of change in ratio values are also discussed in detail. Other than this, dividend policy is also discussed which always acts as lucrative factor for the investors. Hence, by using both factors Vodafone is analyzed and on the basis of discussions recommendations are also made at the end of the report.
Analysis of information
Before analyzing gearing and dividend of the company it is necessary to understand these terms. Gearing refers to a combination of debt and equity in the firm capital structure. Change in both variables of this ratio indicate the direction in which company is going and along with this it also to some extent reflects firm economic conditions. On other hand, second term is dividend policy and it reflects the way in which company is paying dividend to its shareholders. There are many kinds of dividend policies like constant dividend and fluctuating dividend policy (Muradoglu, Bakke and Kvernes, 2005). In order to understand performance on gearing debt equity ratio of the company is considered.
Table 1: Gearing ratio
|Debt equity ratio
On analysis of data it can be seen that ratio of the firm is declined continuously. This reflects that share of debt in the company capital structure is continuously declined in FY 2013 followed by FY 2014. Thus, gearing ratio of the company reflects that company becomes more strong and due to this reason it reduce its dependency on debt for financing its operations. In case of Volkswagen, number of shares issued is increased in each and every mentioned financial year. Economic conditions are not good and company is also not performing well. Vodafone economic condition is also not good and this happens due to i lack of control on indirect expenses.Poor economic conditions worldwide is also main reason behind huge decline in net profit in FY 2013 and 2014 relative to 2012. (Gill, Biger and Mathur, 2011). Due to anticipation of degradation in economic health of global economy, weakness in currencies, possible deduction in slow down in world economic growth rate its profitability eroded. Hence it has less money to finance its operations form internal sources. Thus, this is the main reason due to which it increase share of debt in its capital structure .
By looking at point change row in a table it can be seen that in two years that are FY 2013 this ratio declined followed by FY 2014. Company profitability get declined and it also reduce proportion of debt in its capital structure. This reflects that management of Vodafone follows a cautious approach. They know that if further sales declines they will have less money to pay debt back to the creditors. However, this decision was correct because in these years condition of Europe was not good and Greece and remaining nations of mentioned continent were entangled in economic problems (Madan, 2007). These problems were very high and due to these economic problems unemployment rate skyrocketing in Europe and GDP growth rate get shrink. Means that currencies devaluation and fluctuate takes place to large extent. Thus, it can be said that Vodafone takes correct decision on time and due to these foresighted decisions it manage to maintain strong financial position.
Dividend policy if an organization plays an important role in attracting investment from the investors. Declaration of dividend is symbol of good earning by an organization. In other words it can also be said that an organization declares a dividend when it earns a profit. If firm is giving dividend continuously then it creates positive sentiments among investors regarding investment. There are many kinds of dividend policies like constant, regular, irregular and no dividend policy. Constant dividend policy indicates that a company is paying fixed amount of dividend every year when it declares a dividend (Platanitis and Strganac, 2005). Regular dividend policy indicates that a company is paying dividend every year. This policy can be followed only when company fundamentals are strong and it receives substantial amount of cash inflows. Irregular dividend policy is a policy in which dividends are not paid regularly and amount is also not fixed. This policy is followed by most of the companies because business environment is uncertain especially economic environment. No one knows when any negative news will comes from one of the largest economies. Turmoil in these economies affects other nations economies (Kumar, 2009). Thus, this affects companies’ performance. Hence, companies can not afford to pay dividend regularly and at fixed rate
No dividend policy is a totally different policy under which company does not declared any sort of dividend. This happens because company is not earning any sort of profit or it is earning profit which very small in amount. In such a situation declaration of dividend may break backbone of an organization. These above mentioned dividends are paid annually, but some companies also pay dividend on half yearly basis. This is done when company earns a huge amount of profit. However, declaration of dividend may also create a problem for an organization. Suppose, the company declares and pays dividend after some months economic conditions of UK become poor (Petreski, 2006). Then, company will earn a low amount of profit and due to payment of interim dividend its economic condition become very weak. Ultimately, company will face a lot of problem in running its business. Hence, firms must declare a dividend by considering lots of factors especially economic factors and company financial position.
Barclay is following a constant dividend policy under which it declares dividend at constant value that is 6.50p. This reflects that company financial position is strong and it is following this policy from FY 2012, 13 and 14.
Table 2: Dividend payment by Volkswagen in Euro
From facts it is clear that Vodafone is paying regular dividend from FY 2012, 13 and 14. Along with this, it is also clear from facts that company is paying dividend to its shareholders consistently. Hence, this indicates that company is taking care of its shareholders and even its profitability get reduced it is consistently paying dividend to its shareholders (Vodafone half year results for the six months ended 30 September 2015. 2015).
There are many theories on dividend polices and these policies can be divided in to two parts relevant and irrelevant theories. Relevant theories state that dividend affects value of the company shares. On other hand, irrelevant theories states that there is no relevance in dividend and company shares values (DeAngelo, DeAngelo and Stulz, 2006). Walter gives a theory on dividend and his theory is also known as Walter model. In his theory he states that dividend and company shares value are closely interlinked to each other and declaration of dividend certainly affects shares price. On other hand, Modigliani miller gives a theory on dividend policy which falls in category of irrelevant theory. In his theory he states that there is no relevance of dividend and shares price. Rise and fall in shares price totally depends on investment policy of the company and its profitability (Denis, D. J. and Osobov, 2008). Hence, no matter what these theory says because these theories produce results on the basis of certain assumptions.
It is already mentioned above that on the basis of model investment decisions cannot be taken because these models are based on assumptions that may fulfill or not fulfill. Investors must analyze dividend payment performance of the company and its gearing ratio in order to ensure that investment is made in right company.
On the basis of above discussion it is concluded that an investor must not make investment merely on the basis of chart patterns. They must look after company fundamentals in order to make sure that company is financially sound. In respect to this, investors can use gearing ratio. By using this ratio, company capital structure can be assessed and lots of information can be gathered about its performance. Apart from this, value of this ratio also indicates company policy to run its business. Like in above discussion it is made clear that company is following a cautious approach on the basis of consistent decline in ratio performance. Dividend policy plays a very important role in retaining shareholders in a company. In other words, it can also be said that this policy helps in preventing sell off shares of the company in secondary market. Hence, companies must make an attempt to pay dividend on a regular basis with fluctuating dividend rate. It is also recommended that a company must abstain from paying interim dividend especially when economic environment is uncertain. At last, stress in put on fact that retail investor must consider dividend policy and gearing ratio in order to make investment in the best company.
- DeAngelo, H., DeAngelo, L. and Stulz, R. M., 2006. Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory. Journal of Financial economics. 81(2). pp. 227-254.
- Denis, D. J. and Osobov, I., 2008. Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial economics. 89(1). pp. 62-82.
- Gill, A., Biger, N. and Mathur, N., 2011. The effect of capital structure on profitability: Evidence from the United States. International Journal of Management. 28(4). pp. 3.
- Kumar, A., 2009. Global financial crisis and government intervention: surplus generation, gearing ratio, asymmetry of financial multiplier and other considerations. Accountancy Business and the Public Interest. 8(1). pp. 1-24.
- Madan, K., 2007. An analysis of the debt-equity structure of leading hotel chains in India. International Journal of Contemporary Hospitality Management. 19(5). pp. 397-414.
- Muradoglu, G., Bakke, M. and Kvernes, G. L., 2005. An investment strategy based on gearing ratio. Applied Economics Letters. 12(13). pp. 801-804.
- Petreski, M., 2006. The impact of International Accounting Standards on firms. AAA.