Recently Apple Corporation has been heavily criticised for its dividend policy and lack of pay-outs despite having huge amounts of Cash at their disposal.
There are a few reasons why they may not have paid out any extra;
Firstly, there could be legal constraints such as the need to protect creditors. Considering the amount of cash that Apple has on hand however, suggests that they have more than enough to cover any loan covenants that may exist on loans.
Secondly, this also covers any liquidity constraints that they may have. Apple does not have a significantly high level of debt and does not face any earnings problems that could impact on interest payments.
In a recent press release from Apple, the changes to their dividend policy were announced: "the Board has approved a 15% increase in the Company’s quarterly dividend and
today has declared a dividend of $3.05 per common share, payable on May 16, 2013
to shareholders of record as of the close of business on May 13, 2013. Apple is
among the largest dividend payers in the world, with annual payments of about
$11 billion."
To me this suggests that Apple is actually making very large payments every year and in relation to Porter's (1955) theory regarding the acceptability of dividend policies, should be considered as very generous.
Porter argued that a dividend policy would only maximise shareholders wealth if the new share price plus the dividend were more than the previous share price.
Apple may be holding on to the cash so that they have the necessary capital to invest in any +NPV (Net Present Value) projects which would increase shareholder wealth in the longer term. Should Apple really be criticised for actually paying out decent dividends while holding on to Cash that may be used in the future for further investment and expansion.
The reason this strategy has been criticised is because they have been hoarding cash for a few years now, with no significant investment introduced and currently no plans to do so.
This may be why, along with the increase to dividends, Apple intends to spend $60bn on a share buyback scheme; the "largest single share repurchase authorisation in history".
Modigliani and Millar (1961) would support the view taken by investors requesting a pay-out; they argue that dividends should be a residual payment: any funds left over after all +NPV opportunities have been invested in should be paid out as a dividend.
It is actually in the Shareholders interest for Apple to reinvest the Cash as this would add more shareholder wealth than an increased dividend would.
Apple's share price has been falling as it faces stronger and stronger competition from Android and increasingly Samsung. When the increase to dividends was announced the share price rose 5.5%, which is a point in favour of simply paying out dividends in order to keep investors happy and not damage their market value any further. This action is representative of dividend relevance as a company that pays more dividends is likely to be valued higher than one with lower pay-outs.
Apple's criticism for not returning Capital also stems from not giving a reason for their actions. If they were to say they had it earmarked for a particular investment then it may have reduced the growing public feeling of Apples selfishness.
Sunday, 28 April 2013
Sunday, 21 April 2013
Capital Structure
The capital structure of a company can have a huge effect on the perceived success of that company by impacting on risk and return. While debt finance is cheaper than equity, it carries more risk due to constant nature of interest payments. If more debt is to be taken on by Shareholders then they are going to require a better rate of return to offset the risk.
Over the past three years Murray International Holdings (MIH), former owner of Rangers Football Club, has restructured twice. Both times has been to reduce the level of debt it holds. The company has been struggling in recent years and has been making a loss. With the amount of debt that it has (£370m down from £637m the previous year) the risk to the returns of the shareholders is still very high, and as such they require a high rate of return. Additionally, this high level of debt increases the amount of interest payments required, which reduces the profits (or increases the losses in this case) that can be used to pay out dividends to shareholders.
The second restructuring involved a deal with Lloyds Banking Group to reduce £118m of debt with them in return for a similar amount of share capital and premiums.
MIH has to reduce the debt to a point where the risk is low enough to encourage shareholders and reassure the market about their position which will increase the market value of the shares.
There is a traditional view that there is a balancing point between the amount of Equity and debt capital required (gearing level) that is considered to be the optimal capital structure. A little debt helps to increase the share value and dividend payouts to investors but too much debt will increase the risk beyond a point that investors are happy to accept and as a result will require a higher rate of return.
However, Modigliani and Miller (1958, 1963), disagreed that there was an optimal capital structure. They believed that a company's value depends entirely on business risk and that the total market value of any company is independent of its capital structure. The volatility of the MIH's earnings is what increases the risk under their theory.
These two theories both agreed that extreme positions, i.e. all debt or highly geared, were to be avoided as the benefits provided by the other form of finance would be lost to the company. Therefore a compromise between the two extremes was to be sought regardless of whether there was an opitmal capital structure or not.
In the case of MIH, the amount of restructuring and the type (reduction of debt in the first instance and exchange of debt for equity in the second) leads to the conclusion that MIH has not decided what the level of gearing it requires is. The changing conditions and health of the company give rise to fears regarding its ability to pay interest and the lack of dividends poor market value of the company is a cause for concern for shareholders.
Over the past three years Murray International Holdings (MIH), former owner of Rangers Football Club, has restructured twice. Both times has been to reduce the level of debt it holds. The company has been struggling in recent years and has been making a loss. With the amount of debt that it has (£370m down from £637m the previous year) the risk to the returns of the shareholders is still very high, and as such they require a high rate of return. Additionally, this high level of debt increases the amount of interest payments required, which reduces the profits (or increases the losses in this case) that can be used to pay out dividends to shareholders.
The second restructuring involved a deal with Lloyds Banking Group to reduce £118m of debt with them in return for a similar amount of share capital and premiums.
MIH has to reduce the debt to a point where the risk is low enough to encourage shareholders and reassure the market about their position which will increase the market value of the shares.
There is a traditional view that there is a balancing point between the amount of Equity and debt capital required (gearing level) that is considered to be the optimal capital structure. A little debt helps to increase the share value and dividend payouts to investors but too much debt will increase the risk beyond a point that investors are happy to accept and as a result will require a higher rate of return.
However, Modigliani and Miller (1958, 1963), disagreed that there was an optimal capital structure. They believed that a company's value depends entirely on business risk and that the total market value of any company is independent of its capital structure. The volatility of the MIH's earnings is what increases the risk under their theory.
These two theories both agreed that extreme positions, i.e. all debt or highly geared, were to be avoided as the benefits provided by the other form of finance would be lost to the company. Therefore a compromise between the two extremes was to be sought regardless of whether there was an opitmal capital structure or not.
In the case of MIH, the amount of restructuring and the type (reduction of debt in the first instance and exchange of debt for equity in the second) leads to the conclusion that MIH has not decided what the level of gearing it requires is. The changing conditions and health of the company give rise to fears regarding its ability to pay interest and the lack of dividends poor market value of the company is a cause for concern for shareholders.
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