Dividend Strategy

In a letter to Berkshire Hathaway Inc shareholders (1984), Warren Buffet makes the following statement:
‘Dividend policy is often reported to shareholders, but seldom explained. A company will say something like, “Our goal is to pay out 40% to 50% of earnings and to increase dividends at a rate at least equal to the rise in the CPI.” And that’s it – no analysis will be supplied as to why that particular policy is best for the owners of the business. Yet, allocation of capital is crucial to business and investment management. Because it is, we believe managers and owners should think hard about the circumstances under which earnings should be retained and under which they should be distributed.’
The Group Task
(Maximum of 3 per group)
Select a company that is listed on the London Stock Exchange from your chosen industry (Each group will draw the industry for investigation from a box). You will be expected to write a report advising on the next financial year dividend pay-out. Your report should outline the following:

1. An analysis of the company’s historical performance.
2. You may choose to go back a few years (a minimum of 3 years).
3. Identify the key success factors and measures of performance, both financial and non-financial.
4. Discuss the links (if any) of these factors to the dividend pay-out.
   (30 marks)
5. A critical discussion of the company’s dividend policy. You will be required to provide supporting evidence.
   (20 marks)
6. A discussion of the company’s next financial year’s forecasted revenue. You are required to demonstrate how you have arrived at this. You may use company and industry related news, analyst forecasts and opinions, government data, economic outlook, and any other information source.
7. Advice giving reasons what the next year’s dividend pay-out should be.
   In all the above you will need to provide supporting finance theory.
8. Presentation, use of grammar, structure and Turnitin result.
   Word Limit: 2,000 words
   (20 marks) (20 marks)
   (10 marks)
   Your report should:
   • •? Be written in a plain style, using subheadings and lists where appropriate.
   • •? Be properly referenced acknowledging all the sources you have used, and only the sources you have used, in
   the body of the text and at the end in a section headed ‘References’.
   • •? Include evidence of locating and reading sources beyond the suggested initial reading.

Sample Solution