1. Choice of Growth Stock and Mature Stock
Growth Stock:
Company Background (ASX: CSL): CSL Limited is a specialty bio therapeutics Organization that advances and delivers innovative biotherapies that saves lives, and helps people with serious medical conditions (CSL Limited 2017 (a)). The company has major operations in the U.S, the U.K, Europe and Australia. Areas of expertise include, Plasma products, Vaccine and Pharmaceuticals and Research and Development (CSL Limited 2017 (a)).
Growth Prospects for the CSL: According the Australian (2017), CSL limited is the only growth stock in the ASX20. “In CSL limited improved financial results and net profit after tax climbed 35.97%, to $748.1 million. Basic EPS also climbed 14.1%, to $1.768 per share” (money morning 2017). However, buying CSL shares in today’s market is high and currently are traded at 30 times projected earnings and as a result there is a great amount of risk involved (The Australian, 2017). Furthermore, looking at the stock price history (refer to Appendix 1 (a)) for the last five years it is see that the stock price trend is increasing which is an indication that CSL Limited is a Growth stock.
Mature Stock:
Company Background (ASX: ANZ): Australia and New Zealand Bank also called ANZ is the fourth biggest bank by market capitalization in Australia. ANZ operates in 34 markets which include Australia, New Zealand, Asia, Pacific, Europe, America and the Middle east. The company has employed over 46,000 Employees. (ANZ 2017)
Growth prospects for ANZ: ANZ (Australia and New Zealand Bank) is a mature stock since ANZ has one of the largest grossed-up dividends of all the shares on the ASX (the Australian 2017). The size of the company prevents it from growing at a market-beating rate but the grossed-up yield of 7.77% more than makes up for the slowed down growth (Motley fool, 2017) It is possible that ANZ may work out how to convert their remarkable customer data bases into growth but there are few signs of it and ANZ is distributing far too much of their earnings in dividends to propel growth as shareholders have come to depend on those distributions (the Australian, 2017). Also, looking at the five-year history of the shares there is no radical increase or decrease in the stocks trend and as a result the company has matured (Appendix 1 (b)). Furthermore, ANZ and its close competitors are moving at a relatively similar pace (refer to Appendix 2 and Appendix 1 (b)) which is further evidence that the industry has matured and hence ANZ is a mature stock.
Dividend Yield history of CSL Limited and ANZ
Dividend Yield is a financial ratio that indicates the amount of dividend paid by a company with respect to its share price
Dividend Yield = Annual Dividend1 / Price of stock0
Reasons why there is a difference:
1. A high dividend paying stock is a company that has reached its maximum growth potential in a market and its real growth (that is after adjustment of inflation) is same as the growth of the industry. These companies generally make a lot of cash but has nowhere to really invest the earning. As a result, a higher dividend is paid out. If an investor invests in these stocks, the investor can expect lower growth but greater dividend. These types of companies are also regarded as defensive type of companies. In this case ANZ is has a high Dividend yield which is due to the company reaching maturity and as a result give away most of the earning as Dividends.
2) Growth stocks on the other hand are the stocks that are operating in a market that is witnessing rapid growth. These companies have high growth potential but have no produced a substantial income as the profits are re-invested to support the growth of the company. As a result, lower dividends are paid by the company. These companies tend to grow at a faster pace than the economy and provide real return. In this case CSL is providing lower dividends and is projected to grow.
2. Dividend Payout Information of CSL Limited
a) CSL Limited pays dividends twice a year – an interim dividend in early April and a final dividend in early October. (CSL limited 2017 (b))
b) The amount of dividend paid by CSL Limited in the last 2 financial years:
2017: Interim Dividend – 83.78c; Final Dividend – 91.53c
2016: Interim Dividend – 81.47c; Final Dividend – 88.67c
c) In order to be eligible to get a dividend a stock must be registered at least one day prior to the Ex-Dividend date. The date by which the share must be registered is: 15 March 2017, 12 September 2017, 23 March 2016, 13 September 2016
d) The dividends are approximately paid four weeks after the record date. (CSL Limited 2017 (b))
e) Dividend Pay-out ratio is the amount of earnings paid out as dividends to stock holders which are typically expressed in a percentage. It is computed by
Dividend pay-out ratio = Dividends / Net Income
Dividend pay-out ratio (per share) = Dividend per share / Earning per share
Yearly dividend paid in the year 2017 = 1.75 and the earnings per share = 3.75. By applying the formula, we get a value 45.9%.
Similarly, yearly dividend paid in the year 2016 = 1.701 and the earning per share = 3.10. By applying the formula, we get a value of 54.83%
4 (A). To what extent is the dividend franked?
Looking into the data for the last five years CSL dividends are Franked at 0% (Yahoo Finance (a), 2017) also (Refer to Appendix 4)
Franking credit:
Franking credit is essentially a type of tax benefit that allows for local companies to pass on taxes that have already been paid for in corporate profits. The stock holder receiving stock dividends will also get a quantity of franking credits in proportion to the overall tax rate of the company per dollar in profits. Companies in Australia must frank dividends if it has credits in its imputation account.
4.b. Compute dividend yield adjusted for franking and explain your calculations?
Ans. Dividend Yield is unchanged since CSL stock pays 0 Franking credits. Picked CSL Stock (CSL 2017 (b)).
4.c. Provide an estimate of next year’s dividend and justify the estimate?
Since there is no 100% accurate means to predict the amount of dividend given in the future, an estimate on the dividend amount will be provided by looking into the historical data of CSL limited
Dividend growth can be calculated by: Dividend Growth = Year X Dividend / (Year X – 1 Dividend) – 1 by taking the average for two years we get a dividend growth rate of 3.075%
Therefore, by computing Dividend Growth and using historical data it can be estimated that the next year’s dividend would be 1.80$.
4.d. provide an estimate of the level of franking for next year and justify the estimate?
Since there is no 100% accurate means to predict the level of franking in the future, an estimate on the level of franking credit will be provided by looking into the historical data of the company. CSL limited, over the last five years, has provided Zero franking credits (0% Franking credit) and as a result it can be estimated that the
company will continue to pay Zero percent franking credits (CSL 2017 (b)).
5. How big was the price difference relative to the movement?
In order to analyze the price difference relative to the dividend amount price before and after ex-dividend date must be used to construct price change (Refer to the table below). Furthermore, by utilizing the Elton and Gruber model (1970) to find the effective dividend tax rate we utilize the formula:
followed by
Ex-Dividend date Price changes Price changes/gross dividend d
08 May 2015 .66 .76 .65
09 Nov 2015 .68 .78 .62
9 May 2016 .76 .69 .52
14 Nov 2016 .41 .85 .75
Research by Whitworth & Rao. 2010, suggests that there are a lot of factors with regards to Elton and Gruber Model that have yet to be uncovered and as a result it is not perfect. The formula uses closing price of the stock before Ex dividend and Ex-Dividend dates so the accuracy is greatly reduced because there could be a lot of factors such as the ASX performing extremely well, market psychology, or competitors not faring as well as ANZ leading investors to invest more in ANZ, are some factors that has caused the value to be what it is. More importantly, Elton and Gruber (1970) also suggest that stock holders in higher tax brackets tend to prefer capital gains over dividend payments than those in the lower tax brackets since dividends are taxable income. Finally, it is also worth mentioning that, some investors maybe unfazed by the increasing or decreasing dividend Yields since the same stock may not be a growth stock and their purpose of purchasing stock might be for an entirely different reason.
Ex-dividend price movement
Looking at ANZ’s Ex- Dividend Price movement it is seen that the price does drop during the Ex-dividend date (Refer to Appendix 3). There is a fluctuation because of factors like a company’s declaration of higher or lower amount of dividend, which can cause a fluctuation in the stock price. When a dividend is issued, the money that makes up the dividend payment, is not part of the company. Instead, this is transferred to the stock owners. Furthermore, on the day of the Ex Dividend, the price of the stock is reduced by the dividend amount so that the potential investor would not have to pay a premium (Scottrade 2017)
6. Price movement at the time of the dividend announcement.
ANZ ex dividend, Pay date and dividends data for 2015 and 2016 (Yahoo Finance (b) 2017)
Announcement Date Ex-Dividend Date Dividend received (Franked)
2015
Tuesday 5 May 2015 (Interim) 08 May 2015 86 Cents
Thursday October 29, 2015 (Final) 06 Nov 2015 95 Cents
2016
Tuesday May 3, 2016 9 May 2016 80
November 3, 2016 14 Nov 2016 80
Looking at Appendix 3, it can be seen that as the dividends are announced the price of the stock for ANZ slowly starts to rise as the Ex-dividend date approaches (from observation, more specifically during the final Dividend period of 2015 and 2016) (Refer to Appendix 3(B)). After the dividends are declared by the company, the stock price usually increases. This is due to the affirmation of a dividend which gives investors encouragement to buy shares (Investopedia 2015). This encouragement is led by the premise that if they purchase stock before the ex-Dividend date then they would receive a dividend as a result they are not fazed by the idea of having to pay a premium. Due to which, the price of the share goes up in the days moving toward the ex-Dividend date. As a result, during the Ex-Dividend date, the stock exchange reduces the price of the share by the sum of the dividend to offset the fact that new investors are unable to receive any dividends and would be disinclined to pay the premium (Investopedia 2015). Despite this, the price increases leading up to the Ex- Dividend date, maybe greater than the actual dividend amount being given, which results in an increase despite the reduction. However, it is also worth mentioning that because a dividend raises the number of shares outstanding without actually increasing the value of the company, it dilutes the book value per share which ultimately results in a reduction in the stock price (Investopedia 2015).