Dividend Policy

Copyright 2013Jason Cates and Ravi Patel

Contents1. Debenhams2. Overview3. M&M (& assumptions)4. Signalling Effect5. Clientele Effect6. Management Incentives7. Business Life Cycle8. Conclusion9. References

Debenhams Plc. British retailer operating department stores with

franchises on a global scale. Philippines, Cyprus, Denmark

First store open in London in1778 by William Flint

In 1813, William Debenham invested in the firm

Returned to the LSE in May 2006 after being acquired by Baroness Retail Ltd in 2003.

2008 2009 2010 2011 2012-£10

£40

£90

£140

£190

Profits Cash Level

Valu

e (

£M

illion

)

2008 2009 2010 2011 2012-£0.01

£0.00

£0.01

£0.02

£0.03

£0.04

£0.05 Dividend Per Share

Valu

e (

GB

P)

(Debenhams, 2008 - 2012)(Debenhams, 2013a)(LSE, 2013)

Dividend PolicyM&M

Why does dividend irrelevancy exist? Paying out dividends vs. investing in new

business opportunities

Effect on Debenhams share price Higher Dividend = Lower Capital Growth

Debenhams finances: Investment Opportunities funded by Debt

& Equity Dividend funded by Retained Earnings

(Cash)

(Watson & Head, 2010)

Dividend PolicyM&M Assumptions Tax Shield and Transaction costs

Clientele Effect High income individuals

Higher income tax rate, prefer capital growth.

Low income individuals Lower income tax rate, prefer dividends.

Bankruptcy risk – Debenhams High Gearing in 2008 Increased bankruptcy risk, cancelled

dividend to repay debt (25% by 2011)(Debenhams, 2008)(Barrett, 2011)(Watson & Head, 2010)

Dividends & Buy backsSignalling Effect

(Debenhams, 2012)(Watson & Head, 2010)

Change in Level of Dividends more important than absolute level of dividends.

Asymmetry of Information Actions speak louder than words.

Residual Theory (Share Buy Back) Business Life Cycle – Lack of Positive

NPV’s to invest in.

Dividend PolicyClientele Effect

Tax considerations for individuals and their cash position Capital Gains tax lower than Income Tax Share buybacks preferred by Short Term Investors

Pensions want steady incomes. LT Mutual Fund

18.4% Shareholding (2011 – 15.56%)

High Income Individuals prefer Capital Growth. ST Investment Funds

57.98% Shareholding (2011 – 58.41%)

(Debenhams, 2013b)(Watson & Head, 2010)(Grullon & Michaely, 2002)

Share Buy Back Management Incentives

CEO - Michael Sharpe 2,456,836 Shares & Share Options

CFO – Simon Herrick 647,127 Shares & Share Options

Reduces the cost of maintaining dividend. Research suggests that dividends and

share buy backs are substitutes No effect on long term shareholder return

(Debenhams, 2012)(Watson & Head, 2010) )(Grullon & Michaely, 2002)

Dividends & Buy backsBusiness Life Cycle Fewer Investment Opportunities

High dividends/Share Buy Back £40m Buy Back in 2011-2012

Declining Business ?(10% fall in UK profits) No positive NPV’s to invest in? To Maintain or Increase Share Price?

More Investment Opportunities Lower or No Dividends (2008-2010) Increasing Cash Levels & Lowering Debt

(Debenhams, 2008 - 2012)(Barrett, 2011)(Watson & Head, 2010) (Vernon, 1966, cited in Proxim Group, 2013)

ConclusionsShare Buy Backs vs. Dividends Share Buy Backs provides shareholder

return in the form of capital growth. Can be used to improve share price. Used by declining companies?

Dividends provides smaller, but more stable share holder return. Attracts long-term shareholders, reducing

share price volatility. Used by mature stable companies

(Watson & Head, 2010) )(Grullon & Michaely, 2002)

References Barrett C., (2011) ‘Debenhams rises 7% over buy-back plan’,

Financial Times, 21st October 2011 Debenhams (2008) Annual report 2008. [Online] Available at: http://

media.corporate-ir.net/media_files/IROL/19/196805/reports/ar2008_new.pdf [Accessed: 11th February 2013]

Debenhams (2009) Annual report 2009. [Online] Available at: http://media.corporate-ir.net/media_files/IROL/19/196805/reports/ar2009_new.pdf [Accessed: 11th February 2013]

Debenhams (2010) Annual report 2010. [Online] Available at: http://media.corporate-ir.net/media_files/IROL/19/196805/agm2010/ar2010.pdf [Accessed: 11th February 2013]

Debenhams (2011) Annual report 2011. [Online] Available at: http://media.corporate-ir.net/media_files/IROL/19/196805/agm2011/ar2011.pdf [Accessed: 11th February 2013]

Debenhams (2012) Annual report 2012. [Online] Available at: http://media.corporate-ir.net/media_files/IROL/19/196805/agm2012/ar2012.pdf [Accessed: 11th February 2013]

References Debenhams (2013a) History. Available at: http://

www.debenhamsplc.com/phoenix.zhtml?c=196805&p=history [Accessed: 20th February 2013]

Debenhams (2013b) Ownership Summary. Available at: http://www.debenhamsplc.com/phoenix.zhtml?c=196805&p=irol-ownershipSummary [Accessed: 13th February 2013]

Grullon G. and Michaely R. (2002) Dividends, Share Repurchases, and the Substitution Hypothesis. The Journal of Finance, Volume 57, Issue 4, pp1649 – 1684

London Stock Exchange (2012) Debenhams Plc. Available at: http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary.html?fourWayKey=GB00B126KH97GBGBXSTMM [Accessed: 13th February 2013]

(Vernon, 1966, cited in Proxim Group, 2013) The Business Life Cycle. Available at: http://www.proximgroup.com.au/Understanding-The-Business-Life-Cycle-Is-Important-To-Improving-Your-Small-Business-Success.php [Accessed: 23rd February 2013]

Watson, D. & Head, A. (2010) Corporate Finance: Principles and Practice. 5th edn. Harlow: Prentice Hall.