FACULTY OF BUSINESS AND MANAGEMENT

JANUARY SEMESTER 2011

BBPW3203

FINANCIAL MANAGEMENT II

ASSIGNMENT

Name : Alexander Yang Yee Chuan @ Richard

Matrix Number : 731102125021001

NRIC : 731101-12-5021

Telephone number : 013-8569072

E-mail address : sipitang@oum.edu.com.my

Learning Centre: Keningau

Overview of Dividend policy

Once a company makes a profit, they must decide on what to do with those profits. They could
continue to retain the profits within the company, or they could pay out the profits to the owners
of the firm in the form of dividends. Once the company decides on whether to pay dividends,
they may establish a somewhat permanent dividend policy, which may in turn impact on
investors and perceptions of the company in the financial markets. What they decide depends on
the situation of the company now and in the future. It also depends on the preferences of
investors and potential investors.

A company's dividend policy is the company's usual practice when deciding how big a dividend
payment to make. Dividend policy may be explicitly stated, or investors may infer it from the
dividend payments a company has made in the past. If a company states a dividend policy it
usually takes the form of a target pay-out ratio.

If a company has not stated a dividend policy then investors will infer it. Assumptions that
investors are likely to make are:

* The DPS will be maintained at least the previous year's level (excluding special dividends)
— unless dividend cover is very low or the company has warned that a dividend cut is possible

* If the payout ratio has been maintained at a roughly constant level in the past, the same will
be done in the future

* Any other pattern of dividend growth will continue as long as the cover does not fall too
low.

Companies do not normally increase dividends unless they are confident that the increase is
sustainable. This means that increasing the dividend is a way in which the management of a
company can signal investors that they are confident.

A dividend is a usually distributed in cash form to stock holders of a corporation approved by the
board of director. It may also include stock dividend or other forms of payment. A stock
dividend represents a distribution of additional shares to common
stockholders. Dividends are only cash payments regularly made by corporations to their
stockholders.

There are two metrics which are commonly used to gauge the sustainability of a firm's dividend
policy. Payout ratio is calculated by dividing the company's dividend by the earnings per share.
A payout ratio of more than 1 means the company is paying out more in dividends for the year
than it earned. Dividend cover is calculated by dividing the company's cash flow from
operations by the dividend. This ratio is apparently popular with analysts of income trusts in
Canada.
Literature Review

The Relationship Between Dividend Policy and Value

The question of whether dividend policy affects the value of the firm has puzzled researchers and
corporate managers for many years. Dividend policy is one of the most widely researched topics
in finance. Yet, researchers have different views about whether the percentage of earnings that a
firm pays out in dividends materially affects its long-term share price. Some empirical studies
appear to support Miller and Modigliani's (1961) classic dividend irrelevance proposition [e.g.,
Black and Scholes (1974), Miller and Scholes (1978), Jose and Stevens (1989)]; others do not
[e.g., Long (1978), Sterk and Vandenberg (1990)]. In addition, survey research by Farrelly,
Baker, and Edelman (1985) shows that corporate managers typically believe that dividend policy
affects a firm's value and that an optimal level of dividend payout exists. In practice, most firms
pay cash dividends, although paying dividends is costly in various ways. Thus, empirical
evidence on whether dividend policy affects a firm's value offers contradictory advice to
corporate managers. Today, many academicians and corporate managers still debate whether
dividend policy matters.

Another possible reason for paying dividends is the use of dividend policy to communicate
information about a firm's future prospects to investors. Miller and Modigliani (1961) realize that
in the real world a change in the market price often follows a change in the dividend rate.
According to the information content of dividends or signaling explanation, cash dividends
announcements convey valuable information about management's assessment of a firm's future
profitability that other means cannot fully communicate. Information asymmetry suggests that
corporate managers have an information advantage over outside investors. If managers have
information that investors do not have, managers may use a change in dividends as a way to
signal this private information and thus reduce information asymmetry. In turn, investors may
use dividend announcements as information to assess a firm's stock price. On balance, much
empirical evidence supports the view of dividends as a signaling device. Several empirical
studies provide support for the agency explanation for dividends. For example, Rozeff (1982)
finds support for the role of dividends in resolving agency costs in minority-manager-controlled
firms. His analysis shows a negative relationship between dividend payout and the percentage of
insiders. Given a lower percentage of outsiders, less need exists to pay dividends to reduce
agency costs. Crutchley and Hansen (1989) and Moh'd, Perry, and Rimbey (1995) conclude that
managers make financial policy tradeoffs such as paying dividends to control agency costs.

Dividend policy issues

Clientele Effect: Investors needing current income will be drawn to firms with high payout
ratios. Investors preferring to avoid taxes will be drawn to firms with lower payout ratios. (i.e.,
firms draw a given clientele, given their stated dividend policy). Therefore, firms should avoid
making drastic changes in their dividend policy.

Information Content: Changes in dividend policy may be signals concerning the firm’s financial
condition. A dividend increase may signal good future earnings. A dividend decrease may signal
poor future earnings.
Dividend payment history of firms listed on the Bursa Malaysia

1. KFC Holdings (Malaysia) Berhad - Dividend History

This Report provides Dividends history for KFC Holdings (Malaysia) Berhad. Tabular results
include up to a four-year history of dividend payout from 2007 to 2011.

KFC Holdings (Malaysia) Bhd is a Malaysia-based investment holding company. Through its
subsidiaries, the Company operates in three segments, namely restaurants, integrated poultry and
ancillary. Its integrated poultry operations include breeder farms and hatchery, feed mills,
poultry farms, contract broiler farming, and processing and further processing plants. Its
ancillary support system encompasses sauce manufacturing, as well as bakery and commissary
operations. As of December 31, 2009, the Company operated 475 restaurants across Malaysia,
77 stores in Singapore, nine restaurants in Brunei and 72 restaurants in India. In 2009, the
Company had a total of 43 RasaMas restaurants in Malaysia and Brunei and 35 Kedai Ayamas
stores across Malaysia. On December 15, 2009, the Company had acquired the entire issued and
paid-up capital of Rasamas Terminal Larkin Sdn Bhd and Rasamas Melaka Sdn Bhd.

Prices
Date Open High Low Close Volume Adj Close*
Sep 8, 2010 2: 1 Stock Split
Sep 7, 2010 0.10 Dividend
May 4, 2010 0.16 Dividend
Sep 9, 2009 0.08 Dividend
May 5, 2009 0.14 Dividend
Sep 17, 2008 0.08 Dividend
May 5, 2008 0.12 Dividend
Sep 13, 2007 0.08 Dividend
Jun 14, 2007 0.14 Dividend
* Close price adjusted for dividends and splits.

2. Gamuda Berhad – Dividend History

This Report provides Dividends history for KFC Holdings (Malaysia) Berhad. Tabular results
include up to a four-year history of dividend payout from 2007 to 2011.
Gamuda Berhad is a Malaysia-based investment holding company engaged in civil engineering
construction. The Company operates in three business segments: engineering and construction,
which is engaged in the construction of highways and bridges, airfield facilities, railway, water
treatment plants, dams and general and trading services related to construction activities;
property development and club operations, which is engaged in the development of residential
and commercial properties and club operations, and water and expressway concessions, which is
engaged in the management of water supply and the management and tolling of highway
operations. Its subsidiaries include Gammau Construction Sdn. Bhd. and Gamuda Engineering
Sdn. Bhd. The Company operates in Malaysia, Taiwan, Republic of China, Mauritius, Qatar,
Bahrain and Vietnam.

Prices
Date Open High Low Close Volume Adj Close*
Aug 4, 2010 0.06 Dividend
Jan 26, 2010 0.06 Dividend
Aug 4, 2009 0.04 Dividend
Jan 13, 2009 0.04 Dividend
Jul 16, 2008 0.125 Dividend
Jan 14, 2008 0.125 Dividend
Jul 17, 2007 0.23 Dividend
Apr 17, 2007 0.23 Dividend
* Close price adjusted for dividends and splits.

The sectors chosen:-

Aviation Sector

AirAsia Versus Malaysia Airlines (1 Quarter 2008)

Malaysia Airlines (MAS) and AirAsia released contrasting financial results for the fourth quarter
and full year ended 31-Dec-08. The full service carrier shrunk its operation to record its tenth
consecutive quarterly net profit, while the LCC continued its aggressive expansion, but notched
up its second consecutive quarterly net loss. However, AirAsia's quarterly operating result was
outstanding. Free of the hedging contracts that weighed down the second half of 2008, AirAsia
appears set to soar.

MAS cut its capacity by 1.3% in 4Q08, while AirAsia grew its ASKs by 17% (its slowest pace
all year).

Malaysia Airlines and AirAsia passenger numbers growth comparison: 1Q08 to 4Q08

MAS reported a 5% increase in RASK (including fuel surcharges and admin fees) to MYR 21.5
sen, which was outdone by AirAsia's 13% increase in RASK to MYR 16.75 sen.

While MAS has been eking out small net profits, AirAsia lost heavily in the final two quarters of
2008, as it unwound its fuel hedging programme and some of its interest rate swaps.

Malaysia Airlines and AirAsia passenger net profit margin comparison: 1Q08 to 4Q08
But the core operating margins are a better guide of the relative strengths of the two businesses,
and AirAsia's margins exploded in the final quarter. The carrier's fourth quarter operating profit
of MYR194 million was three times higher than Malaysia Airlines' result for the same period and
double AirAsia's result for the same time last year.

AirAsia’s Dividend Policy

AirAsia does not pay dividends nor do we foresee paying dividends in the near future. The
business is in the early stages of development and capital is required to be reinvested for the
future’s well being. We believe this will ultimately yield the most beneficial returns when
viewed on a long-term basis.

No dividend has been paid or declared by the Company since the end of the previous financial
period. The Directors do not recommend the payment of any dividend for the financial year
ended 31 December 2008.

Budget airline AirAsia Bhd said” it has successfully placed out 380 million new shares at
RM1.33 per share, raising gross proceeds of RM505.4 million”
STOCKCODE NAME REF. HIGH LOW LAST CHANGE VOLUME(‘00)
5099 AirAsia 1.380 1.390 1.370 1.370 -0.010 18442

Changes in substantial shareholder’s interest : October 3 2009

Circumstances by reason of which

Change has occurred : Sale of equity, Purchase of share
Nature of interest : Direct and Indirect
Direct(units) : 302’246’900
Direct(%) : 10.96
Indirect/deemed interest (units) : 21’278’300
Indirect/deemed interest (%) : 0.77

MAS’s Dividend Policies

Food and beverage Sector

Campbell Soup versus Starbucks

1) Campbell Soup Company
Dec-04 Dec-03 Dec-02 Dec-01 Dec-00
Dividend Paid 259 259 286 374 384
Stock Buyback 56 24 5 681 394
Total Cash to 315 283 291 992 778
Shareholders
Dividend Yield % 2.44% 2.60% 3.14% 2.85% 3.08%
Dividend Payout % 43.5% 54.5% 57.6% 53.8% 53.3%

Averages: Dividend Yield = 2.91%

Dividend Payout = 41.34%

2) Starbucks Company
Dec-04 Dec-03 Dec-02 Dec-01 Dec-00
Dividend Paid - - - - -
Stock Buyback 203.4 75.7 52.2 49.7 203.4
Total Cash to
203.4 75.7 52.2 49.7 203.4
Shareholders
Dividend Yield % 0% 0% 0% 0% 0%
Dividend Payout % 0% 0% 0% 0% 0%

Averages: Dividend Yield = 0.00%

Dividend Payout = 0.00%

Affordable Dividend - Free Cash Flow to Equity (FCFE) and Dividends/Stock Buybacks

Company Average Ave. dividend and stocks difference Dividend +

FCFE buyback buyback / FCFE
Campbell 560.67 531.80 28.87 60.52%
 Starbucks 152.5 76.2 76.3 50%

We determined the amount that our selected companies could have paid in dividends by first
calculating the average Free Cash Flow to Equity (FCFE) for each company as
follows:

Net Income
- (Cap Ex – Depreciation)*(1-Debt Ratio)
- Change in Working Capital * (1-Debt Ratio)
Free Cash Flow to Equity (FCFE)

As a second step, we compared the average FCFE for each company to the cash returned to
stockholders (over the last 5 years), either through dividends, or stock buybacks, or both.

Campbell Soup Starbucks

Dividend Yield (D/Y)
2.44% 0%
% Average
Industry Average D/Y 0.73% 0.21%
Dividend Payout (D/P)*
43.50% 35.04%
% Average
Industry Average D/P 20.34% 11.88%

Campbell Soups had high and fairly steady earnings, and the projects it has undertaken have
been within their core businesses. Consequently, this company could afford to pay high
dividends. In fact, Campbell Soup has utilized debt to pay higher dividends, which has helped it
increase its debt ratio. It may be mentioned that it has a debt ratio of less than 10% while its
optimal debt ratio is 40%.

Starbucks need financial flexibility for future growth and therefore should ideally have a low
financial leverage. Indeed, this company needs flexibility to invest in new projects and products
that have an extremely high variability in terms of success or failure. In that regard, the
companies should be careful with its dividend policy so as to have cash available to continue
investing in good projects.
Finally, stock prices have traditionally not been affected by the firms’ dividend policies, but
rather by macroeconomic trends. Stockholder expectations on the firms are driven by
expectations of future growth from investments rather than by the dividend policies of the
companies in this sector. Similarly, future cash flows to the firms are more related to
expectations of investment in good projects. Consequently, dividend policy is not always the
means used to signal financial markets. At the same time, initiation of dividend payout can at
times signal that the company no longer has good investment projects on its plate and hence
future growth is expected to slow down. That may be taken as a negative signal by the stock
markets.

Automobiles Sector

Proton Berhad

Investor Ratios

There are several ratios commonly used by investors to assess the performance of a business as
an investment:

Year 2001,2002, 2003, 2004, 2005

Dividend per share 0.06, 0.14, 0.16, 0.17, 0.25

Dividend payout ratio10.99% ,6.7%, 7.93%, 18.28%, 16.95%

Dividend yield ratio------1.88%, 3.2%

Earnings per share(EPS) ---- 0.52., 162.0, 20.93, 1.47

Price earnings(P/E) ratio------9.6, 5.3

Dividend per share:

The dividend per share is depending on the dividends announced during a period to the number
of shares on issue during that period. In essence, the ratio reflect an investor receive cash from
holding share in the company. It is influencing by profit available for distribution, future
investments of company and shareholder's expectation regarding dividends. The figure from
2001 to 2005 almost base on the same dividends announced during a period, it represents a
increase trend, therefore, it will have be a expectant future in PROTON.

Dividend payout ratio:

The dividend payout ratio measures the proportion of earning that a company pays out to
shareholders in the form of dividends. This ratio influences by net profit in annual, it is showing
in the form, from 10.99% in 2001 decrease to 6.7% in 2002,then a little increase to 7.93% in
2003,after that, it enhance most in 2004 to 18.28%,finally,it fallen slightly in 2005.It depends on
net profit and dividends announced for that year. From this figure, a higher proportion of earning
was paid out as dividends year by year.

Dividend yield ratio:

Dividends are most important to some shareholder, but a secondary factor to others. Some
stockholder invests primarily to receive regular cash income, while others invest in stocks
principally with the expectation of rising market prices. It indicates the cash return from a share
to its current market value or a measure of cash return on investor's investment. In this form, it
show the dividend yield ratio is increase from 1.88% to 3.2% in 2005.Hence, the cash return is
higher in 2005, it cause of more dividend per share in 2005, it is a good information for the
investors who hold the share of PROTON.

Earning per share (EPS):

This is, perhaps, the fundamental investor ratio: EPS measures the overall profit generated for
each share in existence over a particular period. PROTON EPS has increased by 1.66 ringgit in
2002 but decrease 0.14 ringgit in 2003, and continue decrease to 0.93 ringgit in 2004, at least, it
enhances to 1.47 ringgit. An increase of 0.54 ringgit in 2005 because of higher profit generated
in 2005.

Price - Earnings Ratio (P/E Ratio):

P/E ratio of a stock is used to measure how cheap or expensive share prices are. For PROTON,
the current P/E ratio is 5.3. This means that we are paying RM 5.3 for RM1 of earnings which is
quite high and overvalued. One perspective is that 1/5.3 is only about 18.87% return on money,
so if the risk-free interest rate is at or above this level there is little point in investing in a stock at
a 5.3 P/E. Conversely, however, under the new management, PROTON has some future growth
potential.

UMW Holding Berhad

Dividends

Amount Net Dividend Per Share

2005 2004 2005 2004
RM’000 RM’000 RM’000 RM’000
In respect of the financial year
ended 31 December 2003
- Final dividend of 9.0% - 30,733 - 6.5
less 28% taxation
In respect of the financial year
ended 31 December 2004
- Interim dividend of 11.0%
less 28% taxation
- 37,663 - 7.9
- Final dividend of 10.0%
36,468 - 7.2 -
less 28% taxation
In respect of the financial year
ended 31 December 2005
- Interim dividend of 12.5%
less 28% taxation 45,626 - 9.0 -
- Special Interim dividend
of 5.0% less 28%
18,251 - 3.6 -
taxation
100,345 68,396 19.8 14.4

Amount Net Dividend Per Share

At the forthcoming Annual General Meeting, a final dividend in respect of the current financial
year ended 31 December 2005, of 20.5%, less 28% taxation, amounting to a total net dividend of
approximately RM74,830,000 (14.8 sen net per share) will be proposed for shareholders'
approval.

The financial statements for the current financial year do not reflect this proposed dividend. Such
dividend, if approved by the shareholders, will be accounted for in the shareholders' equity as an
appropriation of retained profits in the next financial year ending 31 December 2006.

(3144 words)
References

1. Wikipedia. (2007). Dividends. Available: http://en.wikipedia.org/wiki/Dividend. Last

accessed 18 October 2007.

2. Miller, Merton H. and Franco Modigliani (1961), Dividend Policy, Growth, and the
valuation of shares, the Journal of Business, 34, 411-433.

3. Malaysia Airline, Returns & Profits. (2010).

http://www.eturbonews.com/1442/malaysian-airline-returns-profit-2007-exceeds
Accessed: 22 Feb 2011.

4. http://en.wikipedia.org/wiki/Dividend

5. "What Are Dividends?". New York Life.

http://www.newyorklife.com/cda/0,3254,10542,00.html.

6. Easterbrook, F. H. (1984). Two agency-cost explanations of dividends. American

Economic Review. September, 650-659.

7. Baker, H. K. and Smith, D. M. (2006). In search of a residual dividend policy.

Review of Financial Economics, 15(1), 1-18.
8. Annuar, M. N. & Shamsher, M. (1993). Earnings and Dividend Behaviour. Journal
of Social Science and Humanities 1 (2): 171–177.