Free Accounting Dissertations - 6p To 2.0p. Appendix 4 Also Shows The Dividend Payout Ratio. The Formula Used
6p to 2.0p.
Appendix 4 also shows the dividend payout ratio. The formula used for dividend payout ratio is
Dividend payout ratio = Dividend / Earning before goodwill amortisation and exceptional items
The % decrease in the payout ratio was more than the % decrease in earnings before goodwill amortisation and exceptional items. The ratio initially declined from 66% to 33% before rising again to 50% in 2004. Normally companies don’t like to change dividend if they feel that decline in earnings is only for a short period. The rapid initial decline shows that, going forward, the company wasn’t sure about its earning potential.
Companies normally have a dividend policy and most of the companies follow a constant increase policy. BT’s has now adopted a different policy of centring on dividend payout ratio. BT’s policy is to increase dividend payout ratio to be around 60% for the financial year 2006 (BT, 2004). 60% is a very high number. It shows that the company doesn’t have much capital intensive growth plans relative to its size, its business has stabilised and it is more like a mature company.
Constant payout ratio as opposed to constant dividend growth policy implicitly conveys that the company is not very sure of its ability to increase earnings each year. Yet the company also doesn’t see a threat to the fundamental business and can easily repay its commitments. This is also evident from the high amount of loans retired in the last three years.
2.c PE ratio
BT Group’s price to earning ratio, as taken from Financial Times, was 12.2 on 15th March 2005 (Financial Times). This multiple is based on a share price of 200 p and an earning per share of 16.4 p.
Price to earning ratio = Share price / Basic earning per share
= 200 / 16.4 = 12.2
Price to earning ratio of 12.2 signifies the mature nature of the business. The average earning per share over the last five yeas was 12.3p, which results in a price to earning ratio of 16.3.
BT’s price to earning ratio with respect to last year’s earning is near market average but on the lower side. Even the price to earning ratio based on last five year’s average is not high. Higher price to earning ratio are mostly associated with growing companies or companies undergoing turnarounds. BT doesn’t fall into either of the two categories.
Another way to analyse a company’s life stage is to look at its dividend yield.
Dividend yield = Dividend / share price
On 2004 dividend of 8.5p, the dividend yield is 4.25%. The average dividend over the last five years was 8.7p, which translates to a dividend yield of 4.35% at current share price of 200p. The below average price to earning ratios and high dividend yields reflects market opinion that BT is more like a mature company with steady or modestly growing earnings.
2.d
It is difficult to compare BT Group’s PE ratio with that of the sector based on the last years basic earning per shares.
