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Dividend Policy

February 2008

Stylized Facts
 Dividends

are sticky.  Dividends are tied to long-term sustainable earnings and paid by mature companies.  Companies tend to smooth dividends from year to year.  Managers target a long-term payout ratio when determining dividend policy.
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PALTEL Dividend History


Year 2000 2001 2002 2003 2004 2005 2006 Average DPS 0 0 0.07 0.12 0.2 0.2 0.2 # of Shares 66,539,841 66,559,064 67,068,552 67,068,552 67,500,000 101,250,000 131,625,000 Dividends-JD 4,694,799 8,048,226 13,500,000 20,250,000 26,325,000 FCFE-JD (7,636,091) 969,398 2,595,260 7,079,114 20,673,434 23,041,785 6,457,147 DIV/FCFE 1.81 1.14 0.65 0.88 4.08 1.71

Analyzing the Historical Policy


 Two

Approaches used:

Cash Flow approach Peers Comparison Approach

Cash Flow Approach




This approach consists of four steps:


1.

2.

3.

4.

Determining the cash flow available to be retained to shareholders. That is; FCFE. Assessing the quality of the investment policy of the Company. Evaluating the dividend policy on the light of the previous two steps. Interaction with the financing policy.

  

  

  

    



Cash Available to be Distributed

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Quality of Investment Policy

ROIC vs WACC(2004-2007)

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%

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# %% !

Cost of Capital

ROIC

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 %%! $%% !  % %  %   % %   %  % %!  % !  % %  %

Dividend Policy Evaluation

PALTEL

Interaction between the Dividend Policy and the Financing Policy


FCFE vs. Debt ratio 25,000,000 20,000,000 15,000,000 10,000,000 JD 20.0% 5,000,000 15.0% 2000 (5,000,000) (10,000,000) FCFE D/A (BV) 2001 2002 2003 2004 2005 2006 10.0% 5.0% 0.0% 40.0% 35.0% 30.0% 25.0%

032(11 0'5( 4 01 2( 4 0'2(1 053( 6

BA @ 8 8

BA B P 8

Debt/Assets (five year average)

Debt to Assets (book va e base )

QD

071

e ia

0'5( 4

Average

Bate

FED

SA A

BA

10
0''( '3 0''( 51 0''( '1 0''( 5 0')( ' 0''( ' 9 C A 8 G

Conclusion: Cash Flow Approach


 This

analysis leads to us to conclude that PALTEL should not pay more than it can afford to pay and it should keep its eyes on reducing its financial leverage to be in line with it peers.

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Approach 2:Peer Group


Comparison


Peer group consists of five regional telecom operators:


    

Orange (Jordan Telecom) (JTEL) Saudi Telecom (STC) Qatar Telecom (QTel) ahrain Telecommunications Company ( atelco) Emirates Telecommunications Corporation (Etisalat)

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Dividends Behavior
 

1. Every year Companies pay cash dividends. 2. The Companies differ in their dividend policies. Three companies (JTEL, Etisalat, and atelco) follow a constant amount dividend per share (growing every couple of years). The remaining two companies (STC, and QTel) have a growing dividend per share policy on an annual basis. 3. Three of the five companies (Etisalat, atelco, and STC) have distributed stock dividends (bonus shares) and stock split during the past five years.
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Five Year Average


Company STC JTEL QTEL ETISALAT atelco Average Median PALTEL DY 3.88 6.66 4.36 3.55 4.50 4.59 4.36 2.29 POR 67.85 107.92 64.05 47.30 65.87 70.60 65.87 43

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Residual Dividend Model


 To

estimate the maximum amount PALTEL can afford to pay we use the longer-term residual dividend model. Where the residual amount of dividend are averaged over the six years (20072012) and it assumed to be paid equally each year.

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Assumptions

1. 2. 3.

4.

5.

The following are the assumptions used in projecting the dividends: The analysis period cover six years from 2007 till 2012. The results of 2007 are the actual ones. The projected revenues growth rate is 22.72 in 2008 (in conformity with the budget). This rate will decrease during the next five years to reach 17 in 2012. Net operating profit margin (NOPAT margin) is assumed to be 35 in 2008 and we assume that this margin will stabilize at 32 (peer group average). Net income margin is assumed to be 31.45 in 2008. This margin is assumed to settle at 30 in 2012.(peer group average)
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Assumptions
6.

7.

8.

Net new investments (NNI), which is the investment in operating assets (CAPEX and working capital in excess of depreciation) is assumed to be 12 in 2008. This ratio stabilize at 10 for the remaining years. Target capital structure is assumed to reach at 4 in 2012. We assume that PALTEL will converge to its peer average over time. Accordingly, the company will pay down its outstanding debts. The debt payment schedule for the next five years is used to arrive at the free cash flow to equity (FCFE). The Company will take a 10 statutory reserve in 2007 of JD6,553,266 and JD 4,006,302 in 2008. We assume that the Company will stop taking statutory reserves afterwards as it reached it maximum limit of 25 of the subscribed capital.

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Results
Based on the above assumptions, the model predicts the maximum that the Company can afford to pay per share for each year:
Dividends per share (2007-2012)
1.00 0.74 0.80 0.60 0.40 0.20 Avearge 2007A 2008F 2009F 2010F 2011F 2012F 0.52 0.48 0.23 0.17 0.62

0.86

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Continue


The results show that in 2007 PALTEL can afford to pay JD0.23 per share and in 2008 it can afford to pay JD0.17 per share. As mentioned before, we use the longer-term version of the residual dividend model to overcome changing dividends per share from year to year. We do this by taking the average of the six years under analysis to represent our long-term dividend per share. The average long-term DPS is JD0.52. The Companys average dividend payout ratio during the six year period is 59.48 (close to its peer group). In Sum, PALTEL should increase its dividends per share to reach JD0.52 per share in the long term. The question becomes: Should PALTEL increase it dividends starting from 2007 and if so at what amount?

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Recommendation
Our recommendation is to maintain the current dividends policy of paying JD0.20 per share. This recommendation is based on the fact that PALTEL group earns excess return on its invested capital. In other words, the Company has a high quality investment policy.  The resulting payout ratio is 40 and the dividends yield is 4.14 .  If the management decides to pay more than JD0.20 per share it should designate that extra amount as special or extra dividends to convey the fact that this extra amount is for one time.  It is recommended not to distribute stock dividends as this will increase the future dividend burden.

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Appendices

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Projected condensed Income Statement

Currency: JD Revenues NOPAT Net Income EPS EPS Growth rate Dividends payout ratio

2007A 226,197,753 79,624,004 65,532,663 0.498


R

2008F 277,589,882 97,156,459 87,293,979 0.663


R

2009F 335,883,758 114,200,478 104,123,965 0.791


R

2010F 403,060,509 133,009,968 120,918,153 0.919


R

2011F 475,611,401 152,195,648 142,683,420 1.084


R

2012F 556,465,339 178,068,908 166,939,602 1.268


R

16.63

33

19

16

18

17

46.2%

25.9%

60.7%

68%

68%

68%

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Free Cash Flows

Currency: JD Net Income Net New Investment Net debt Issue FCFE before reserves Statutory Reserve Voluntary reserve Cash available to distribution

2007A 65,532,663 6,377,295 22,310,88836,844,480 6,553,266 30,291,214

2008F 87,293,576 33,310,632 27,357,37026,625,574 4,006,302 22,619,272

2009F 104,123,484 33,588,221 7,299,49963,235,764 63,235,764

2010F 120,917,594 40,305,865 1,612,235 82,223,964 82,223,964

2011F 142,682,761 47,560,920 1,902,437 97,024,277 97,024,277

2012F 166,938,830 55,646,277 2,225,851 113,518,405 113,518,405

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Projected Income Statement (2010-2014)


Currency: JOD Revenues Cost of Revenues Gross Profit % Margin SG&A EBITDA % Margin D&A EBIT % Margin Other Expenses and Revenues Income Before tax Income Tax Net Income % Margin 2010F 398,658,406 108,965,237 289,693,170 73% 148,974,295 140,718,875 35% 40,798,570 99,920,305 25% (1,996,315) 97,923,990 (1,386,978) 96,537,011 24% 2011F 441,252,460 115,957,721 325,294,739 74% 163,546,054 161,748,684 37% 41,079,342 120,669,342 27% 209,998 120,879,340 (9,143,451) 111,735,889 25% 2012F 458,468,958 121,695,598 336,773,360 73% 168,335,440 168,437,920 37% 44,408,661 124,029,259 27% 44,444 124,073,703 (9,371,160) 114,702,543 25% 2013F 471,098,916 127,028,076 344,070,840 73% 173,228,741 170,842,099 36% 46,597,693 124,244,406 26% 1,325,148 125,569,554 (9,517,711) 116,051,842 25% 2014F 487,567,317 133,695,770 353,871,547 73% 178,393,403 175,478,144 36% 48,076,545 127,401,599 26% 2,468,848 129,870,447 (9,901,453) 119,968,993 25%

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Thank you

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