AF4320 Corporate Finance Semester 1, 2013-2014 Individual Written Assignment
This essay will trace the dividend payouts of three public companies in the last consecutive fifteen years and find the key factors which affect a company’s payout policy. The three public companies, namely Hutchison Whampoa Limited (HWL), CLP Holdings Limited (CLP), and The Bank of East Asia (BEA), are all the constituent stocks of the Hang Seng Index.

HWL  Dividend Payout History over Last Fifteen Years
Figure 1.1

A glance at the figure provided reveals changes in HWL’s dividend payout in the last consecutive fifteen years. During this period, HWL’s dividends per share (DPS) climbed steadily from $1.16 to $2.08, with only four changes, while the company’s earnings per share (EPS), an indicator valuating a company’s financial performance in terms of how much earnings made for equity holders, fluctuated greatly, ranging from a low of $1.72 to a peak of $27.65. It should be noted with great attention that HWL’s DPS had remained unchanged at $1.73 for ten consecutive years before it rose again to $1.92 in 2010.  Dividend Policy As one of the biggest corporations in Hong Kong, HWL has long been dedicated to providing stably increasing returns to its investors (HWL, Annual Report 2012). The actual dividend payouts follow quite consistent with the company’s statement: four moderate rises without any decrease, as demonstrated by the above figure.
Figure 1.2

The dramatic difference between the standard deviation of EPS (6.66) and the standard deviation of DPS (0.22) also indicate that HWL’s dividend payouts have kept stable regardless the company’s income levels. This pattern could be called dividend smoothing.

 Associated Factors Discussion HWL is a large multinational corporation that operates a variety of businesses in 52 countries across the world. Its operations consist of: ports and related services, property and hotels, retail, infrastructure, energy, and telecommunications. Considering the scope and nature of the business, a long-term target level of dividend is of great importance in maintaining the HWL’s recognition and also fulfilling the

company’s commitment. Thus it is reasonable to expect HWL to alter dividend payout levels conservatively. In fact, except the increase in 1999, all three other increases in dividend payouts accomplished with higher average EPS (as shown in Figure 1.2). It is very likely that HWL generally set dividends at a level it expect to be able to maintain based on the company’s earning prospects. CLP  Dividend Payout History over Last Fifteen Years
Figure 2.1

Given is a figure illustrating CLP’s dividend payouts from 1998 to 2012. Except for 2002, the company’s dividends grew continuously from $1.81 to $2.57 within the period. This change is steady, given that the standard deviation of DPS is only 0.28.  Dividend Policy

Figure 2.2

CLP is committed to creating value for its shareholders in the form of dividends and share price appreciation. The company distributes cash dividends four times throughout every single year. The virtually constant increase in payout level, together with the low standard deviation of DPS (0.28), implies that CLP is acting comply with its articulated policy.  Associated Factors Discussion Unlike HWL which decides to raise the payout level only if it seems that the company would anticipate higher EPS continually in the future, CLP increases dividends without much consideration on its earnings. As shown in the figure, even though the EPS in recent two years drops, the DPS still increases slightly. Considering that CLP is an energy company that provides daily utilities, its profitability is very likely to maintain stable whatever the economic condition is (the standard deviation of EPS for CLP is only 0.72, with a low coefficient at only 20.23%). Thus the company has the ability to smooth dividend payouts. Figure 2.3 Source : Google Finance, 2013

In addition, since the dividend serves as an important factor determining the share price, CLP may choose to pay more dividends when it tends to raise its share price. A historical data on stock price of CLP clearly demonstrates that, as DPS rose from $1.88 to $2.48, the stock price climbed from around $32 up to over $50. From 2007 to 2010, when DPS was restricted to $2.48, the share price did not change much, excluding a considerable increase and a following plunge during 2008, which was largely due to the outbreak of global financial crisis. As the DPS resumed the slight increase since 2011, the share price began to rise to over $60. It can be concluded that such payout policy may be explained by the company’s commitment to its shareholders and the dividend serves as signal on the company’s future prospects. BEA  Dividend Payout History over Last Fifteen Years
Figure 3.1

BEA’s dividends vary from year to year, with a standard deviation of 0.41. Compared with the figures of HWL and CLP, BEA’s payouts are more uncertain, given that the coefficient of the company’s DPS is much higher than the others. After reaching to a peak of $1.66, the DPS slumped to a bottom of $0.23 during the economic downturn.

Then the ratio rebounded in the following years.  Dividend Policy

Figure 3.2

For each financial year, BEA declares interim dividend in August and announces final dividend in coming year’s March. The company arranges its dividend scheme according to its earning level and manages to pay what it declares, though each year’s amount vary greatly. Given that BEA has a less fluctuated EPS in terms of the coefficient (49%) between mean and standard deviation than HWL (107.72%) but a much volatile DPS, BEA’s dividend payouts are more exposed to external environment.  Associated Factors Discussion The company’s payouts largely depend on its earnings made. As a commercial bank, cash is of great significance to BEA’s operations. Thus the liquidity of the company also stands out concerning dividend payouts. The company’s need for cash should much more urgent than HWL and CLP during the financial crisis. The company, however, still paid at least some cash dividends when the EPS was nearly zero. This may be explained by the fact that during that time, the company disposed its entire collateralized debt obligation portfolio (BEA, Annual Report 2008) and lacked investment opportunities. When the shareholders’ value become sluggish in a company, it is reasonable for the company to pay dividends. Key Factors The above discussion points out some important factors that affect a company’s payouts. Generally, earnings and commitments are the two factors that the company must consider when paying dividends. For firms conducting dividend smoothing, they decide dividends at the level seemed to be achievable in a foreseeable future. For firms that favor high share price, they tend to pay dividends with sustained growth to maintain the investors’ confidence. In addition, the recognition of the company, the nature of the business, and the change of investment opportunities in external environment may also exert influence on the company’s dividend policy.

References: Brealey, Richard A., Myers, Stewart C., and Allen, Franklin (2014) Principles of Corporate Finance. 11th Global Edition, McGraw-Hill Education. CLP Holdings Limited (2013) Annual Report 2012 CLP Holdings Limited (2008) Annual Report 2007 CLP Holdings Limited (2003) Annual Report 2002 Hutchison Whampoa Limited (2013) Annual Report 2012 Hutchison Whampoa Limited (2008) Annual Report 2007 The Bank of East Asia (2013) Annual Report 2012 The Bank of East Asia (2008) Annual Report 2007 The Bank of East Asia (2003) Annual Report 2002