Using the annual report and other sources such as a 10k or 10q’s, discuss the di
ID: 2383737 • Letter: U
Question
Using the annual report and other sources such as a 10k or 10q’s, discuss the dividend policy of PUMA.
Answer the following questions as part of your response:
1) How would you describe Puma's dividend policy?
2) Why do you believe Puma chose the dividend policy they have in place?
3) Do you agree or disagree that they have selected the best dividend policy for the company?
4) 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.
This link also has all of the other income information on it all in one place... http://about.puma.com/damfiles/default/investor-relations/financial-reports/en/2015/PUMA_ANNUAL_REPORT_2014-d5f36227d1dc936cc9e964bf08998b74.pdf
Please be original and answer all questions. Thank you!
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 equity 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 despite adverse business performance to gain their permanent turst and loyalty so that company Stock's share price does not sharply fall in the stock market. It signals company's financial support to its long-term investors through dividend payout even during adverse times of business [because for many investors with considerable shareholdings, it is a major source of income].
Dividend rate for 2014= Euro 0.50 Dividend per equity share / EPS= (0.50 / 4.29)*100= 0.11655 * 100= 11.65%. It has sharply reduced as compared to that of last year i.e. 2013. Company has now decided to plowback the generated increased business profits of 2014 into busniess instead of increasing Dividend-Payout ratio to increase its retained earnings which in turn will be utilized towards funding future busisness operations without increasing its financial leverage further. It will also help company to improve its internal growth rate and sustainable growth rate which mainly depend on retention ratio of earnings.
Thus, from last two paragraphs, we can deduce that Dividend rate has drastically changed over past two years mainly due to base effect i.e. denominator [i.e. EPS] has drastically increased in 2014 vis-a-vis in 2013, with Dividend Per Share amount remianing exactly the same. Reasons and Rationale for keeping Dividend Per Share amount exactly the same.as that of last year, are already explained above.
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