Fortescue metals group limited reporting financial

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Fortescue Metals Group Limited -ReportingFinancial Management that dividend policy represents a sub-set of wider issues of financialdecision-making. There is, in fact, a strong inter-relationship between the investment,financing and dividends decision that the firm’s managers have to make. For instance, whenone firm wants expand the investment, needing more funding; it is likely to lower dividendpayment. In contrast, a policy of higher dividend payment possibly leads to greaterdemanding of external funding such as debt.To exercise the dividend payment obligation, one firm can approach several dividend policiessuch as residual dividend, smoothed (target payout) dividend, stable dividend policies or aless formal type of stable policy (low-regular-dividend plus extra policy). The residualdividend policy is the type that treats dividends after the investment decision. That is, anydollars of retained earnings not believed to be invested profitably will be distributed asdividends to stakeholders. This policy apparently will abandon the dividends considerationwhen investment needs exceed the level of earnings. The second one, smoothed dividendpolicy, represents the formal application of the long-term average residual payout policy. Inthis case, the payout ratio or percentage is constant but dividend payment amounts will vary.The last one, stable dividend policy, distributes a constant, and potentially increasing, dollardividend amount each year, with dividend increases based on expected long-term earning.The following table shows the statistic of dividend payments over recent years.2007200820092010201120122013Net income ($m)-68.43-2651.34142.8893.41708.351376.71660.38Dividend paid or declared ($m)000089.23246.3141.24Dividend/share($)00000.070.080.1FIN5FMAPage 13
Fortescue Metals Group Limited -ReportingPayout ratio (%)000012.7618.118.76Given on the information, the corporation FMG did not pay any dividends in the pasts until2008. It can be explained by negative net income after tax during many years. In two years2009 and 2010, despite positive net income FMG also did not distribute any dividends. Inthese years, the whole retained earnings were spent on investments. For example, in 2010 thecorporation has approved plans for an $8.5 billion expansion of its Pilbara iron ore operationsto increase production to 155 million tons per annum. Therefore, it is very likely that FMGadopted the residual dividend policy during many years till 2010. Dividends decision wasonly considered after investment decision had been made.Trend of dividend per share ($)200720082009201020112012201300.020.040.060.080.10.12Dividend/share($)Dividend/share($)From 2011 to 2013, FMG has begun to distribute first dollars of dividends due to theeffective net income increases. The positive business performance from 2010 has beenresulted from the ore price increases and the contribution of the company’s expansionprojects such as Solomon Hub, Herb Elliot Port and Rail Expansion. Although net incomefluctuated, dividends per share increased. However, FMG may not be adopting stabledividend policy because dividend paid varied each year in an unrecognized trend. It is mostFIN5FMAPage 14

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Term
Three
Professor
DUSA
Tags
Corporate Finance, Dividend, Dividend yield, Fortescue Metals Group Limited

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