Question

Choose a mature firm from stocks on the ASX1 and make sure that the firm pays a dividend. (MUST use academic references)

1. Explain and justify the criteria that you used to identify the mature firm and the growth firm.

2. Calculate the dividend yields and dividend payout ratios of the firm in the last five years.

3. Explain how the ratios are calculated

4. Determine whether there has been a major change in the company’s dividend policy in the last five years and discuss the possible reasons why there is/isn’t a major change.

Thanks for help in advance!

Answer 1

Part 1

A company's growth tends to go through phases that might include:

• Idea phase
• Start-up or emerging
• Growth or expansion
• Maturity
• Decline

A mature firm is a company that is well established in its industry, with a well-known product and loyal customer following. Mature firms are categorized by their business stage, in which they typically exhibit slow and steady growth.

Mature companies also tend to have several equally well-established competitors, making price competition a significant factor in their ability to increase profits.

Mature firms have been around for many years and sell products that consumers and businesses use on a regular basis. However, mature companies usually face ongoing and significant competition.

Companies in the start-up and expansion phases tend to experience significant growth that exceeds the growth rate in the economy. As a company ages and matures, its growth rate slows and trends with the growth in the overall economy. Companies in the decline phase tend to underperform the expansion rate in the economy.

Characterestics of a Mature Firm :

1. Steady-to-Slow Revenue Growth

2. Earnings Through Cost Effectiveness

3. Cash and Dividends

4. Efficiency

Whereas, a growth company is any company whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders opting instead to put most or all of its profits back into its expanding business.

Growth companies create value by continuing to expand above-average earnings, free cash flow, and spending on research and development. Growth investors are less worried about the dividend growth, high price-to-earnings ratios, and high price-to-book ratios that growth companies face because the focus is on sales growth and maintaining industry leadership. Overall, growth stocks pay lower dividends than value stocks because profits are reinvested in the business to drive earnings growth.

Real-World Examples of Mature Firms

Apple Inc. (AAPL) is one of the most innovative technology companies in the world today. As a mature company, Apple has had to adjust to slow and steady revenue growth. However, the company tends to produce higher growth than most mature companies given its industry and loyal client base.

Revenue or sales for 2019 is expected to be $257 billion while for 2020, the company is expected to generate $269 billion. Those numbers would be approximately 4.6% growth in revenue from year-to-year.

PART 2

In the current question we have assumed example of APPLE Inc so the Dividend yields and divided payouts of last 5 years are as follows :

Ex-Div Date	Amount	Type	Yield	Change	Decl. Date	Rec. Date	Pay. Date
08-05-2020	$0.82	Quarter	1.10%	6.50%	30-04-2020	11-05-2020	14-05-2020
07-02-2020	$0.77	Quarter	1%	N/A	28-01-2020	10-02-2020	13-02-2020
07-11-2019	$0.77	Quarter	1.20%	N/A	30-10-2019	11-11-2019	14-11-2019
09-08-2019	$0.77	Quarter	1.50%	N/A	30-07-2019	12-08-2019	15-08-2019
10-05-2019	$0.77	Quarter	1.60%	5.50%	30-04-2019	13-05-2019	16-05-2019
08-02-2019	$0.73	Quarter	1.70%	N/A	29-01-2019	11-02-2019	14-02-2019
08-11-2018	$0.73	Quarter	1.40%	N/A	01-11-2018	12-11-2018	15-11-2018
10-08-2018	$0.73	Quarter	1.40%	N/A	31-07-2018	13-08-2018	16-08-2018
11-05-2018	$0.73	Quarter	1.50%	15.90%	01-05-2018	14-05-2018	17-05-2018
09-02-2018	$0.63	Quarter	1.60%	N/A	01-02-2018	12-02-2018	15-02-2018
09-11-2017	$0.63	Quarter	1.40%	N/A	02-11-2017	13-11-2017	16-11-2017
10-08-2017	$0.63	Quarter	1.60%	N/A	01-08-2017	14-08-2017	17-08-2017
11-05-2017	$0.63	Quarter	1.60%	10.50%	02-05-2017	15-05-2017	18-05-2017
09-02-2017	$0.57	Quarter	1.70%	N/A	31-01-2017	13-02-2017	16-02-2017
03-11-2016	$0.57	Quarter	2.10%	N/A	25-10-2016	07-11-2016	10-11-2016
04-08-2016	$0.57	Quarter	2.20%	N/A	26-07-2016	08-08-2016	11-08-2016
05-05-2016	$0.57	Quarter	2.40%	9.60%	26-04-2016	09-05-2016	12-05-2016
04-02-2016	$0.52	Quarter	2.20%	N/A	26-01-2016	08-02-2016	11-02-2016
05-11-2015	$0.52	Quarter	1.70%	N/A	27-10-2015	09-11-2015	12-11-2015
06-08-2015	$0.52	Quarter	1.80%	N/A	21-07-2015	10-08-2015	13-08-2015
07-05-2015	$0.52	Quarter	1.70%	10.60%	27-04-2015	11-05-2015	14-05-2015
05-02-2015	$0.47	Quarter	1.60%	N/A	27-01-2015	09-02-2015	12-02-2015
06-11-2014	$0.47	Quarter	1.70%	N/A	20-10-2014	10-11-2014	13-11-2014
07-08-2014	$0.47	Quarter	2%	N/A	22-07-2014	11-08-2014	14-08-2014
08-05-2014	$3.29	Quarter	4.20%	7.90%	23-04-2014	12-05-2014	15-05-2014
06-02-2014	$3.05	Quarter	2.40%	N/A	27-01-2014	10-02-2014	13-02-2014

PART 3

Financial ratios are created with the use of numerical values taken from financial statements to gain meaningful information about a company. The numbers found on a company’s financial statements – balance sheet, income statement, and cash flow statement – are used to perform quantitative analysis and assess a company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.

Financial ratios are grouped into the following categories:

• Liquidity ratios
• Leverage ratios
• Efficiency ratios
• Profitability ratios
• Market value ratios

Liquidity Ratios

Liquidity ratios are financial ratios that measure a company’s ability to repay both short- and long-term obligations. Common liquidity ratios include the following:

The current ratio measures a company’s ability to pay off short-term liabilities with current assets:

Current ratio = Current assets / Current liabilities

The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets:

Acid-test ratio = Current assets – Inventories / Current liabilities

The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash equivalents:

Cash ratio = Cash and Cash equivalents / Current Liabilities

The operating cash flow ratio is a measure of the number of times a company can pay off current liabilities with the cash generated in a given period:

Operating cash flow ratio = Operating cash flow / Current liabilities

Leverage Financial Ratios

Leverage ratios measure the amount of capital that comes from debt. In other words, leverage financial ratios are used to evaluate a company’s debt levels. Common leverage ratios include the following:

The debt ratio measures the relative amount of a company’s assets that are provided from debt:

Debt ratio = Total liabilities / Total assets

The debt to equity ratio calculates the weight of total debt and financial liabilities against shareholders’ equity:

Debt to equity ratio = Total liabilities / Shareholder’s equity

The interest coverage ratio shows how easily a company can pay its interest expenses:

Interest coverage ratio = Operating income / Interest expenses

The debt service coverage ratio reveals how easily a company can pay its debt obligations:

Debt service coverage ratio = Operating income / Total debt service

Efficiency Ratios

Efficiency ratios, also known as activity financial ratios, are used to measure how well a company is utilizing its assets and resources. Common efficiency ratios include:

The asset turnover ratio measures a company’s ability to generate sales from assets:

Asset turnover ratio = Net sales / Total assets

The inventory turnover ratio measures how many times a company’s inventory is sold and replaced over a given period:

Inventory turnover ratio = Cost of goods sold / Average inventory

The accounts receivable turnover ratio measures how many times a company can turn receivables into cash over a given period:

Receivables turnover ratio = Net credit sales / Average accounts receivable

The days sales in inventory ratio measures the average number of days that a company holds on to inventory before selling it to customers:

Days sales in inventory ratio = 365 days / Inventory turnover ratio

Profitability Ratios

Profitability ratios measure a company’s ability to generate income relative to revenue, balance sheet assets, operating costs, and equity. Common profitability financial ratios include the following:

The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying its cost of goods sold:

Gross margin ratio = Gross profit / Net sales

The operating margin ratio compares the operating income of a company to its net sales to determine operating efficiency:

Operating margin ratio = Operating income / Net sales

The return on assets ratio measures how efficiently a company is using its assets to generate profit:

Return on assets ratio = Net income / Total assets

The return on equity ratio measures how efficiently a company is using its equity to generate profit:

Return on equity ratio = Net income / Shareholder’s equity

Market Value Ratios

Market value ratios are used to evaluate the share price of a company’s stock. Common market value ratios include the following:

The book value per share ratio calculates the per-share value of a company based on equity available to shareholders:

Book value per share ratio = Shareholder’s equity / Total shares outstanding

The dividend yield ratio measures the amount of dividends attributed to shareholders relative to the market value per share:

Dividend yield ratio = Dividend per share / Share price

The earnings per share ratio measures the amount of net income earned for each share outstanding:

Earnings per share ratio = Net earnings / Total shares outstanding

The price-earnings ratio compares a company’s share price to its earnings per share:

Price-earnings ratio = Share price / Earnings per share

Following are the ratios of APPLE Inc

Apple Inc. Liquidity Ratios 2019
Ratios	2019	2018
Current Ratio	1.54	1.12
Cash Ratio	0.46	0.22
Quick Ratio	1.50	1.09
Net Working Capital	29,640	(35,520)
Apple Inc. Asset Utilization 2019
Ratios	2019	2018
Total Asset Turnover	0.77	0.73
Fixed Asset Turnover	6.96	6.43
Days Sales Outstanding	32.16	31.86
Inventory Turnover	63.36	67.14
Accounts Receivable Turnover	11.35	11.45
Working Capital Turnover	8.78	(7.48)
AP Turnover	5.63	4.75
Average Days Inventory	0.17	0.18
Average Days Payable	0.02	0.01
Apple Inc. Profitability Ratios 2019
Ratios	2019	2018
Return on Assets	16.32%	16.28%
Return on Equity	61.06%	55.56%
Net Profit Margin	21.24%	22.41%
Gross Profit Margin	37.82%	38.34%
Operating Profit Margin	24.57%	26.69%
Basic Earning Power	18.89%	19.39%
ROCE	27.46%	28.49%
Capital Employed	232,798	248,859
ROIC	80.18%	978.92%

PART 4

Apple Inc. (NASDAQ: AAPL) resumed its dividend payments in 2012 after a 17-year hiatus. At the end of its fiscal year 2011, it had accumulated, from its early success of the iPhone and iPad, an enormous amount of cash and other cash equivalent holdings of over $25 billion. Since then, Apple has seen a continued rise in revenue and earnings each year through 2015, allowing it to increase annual dividends for the three years following the initial quarterly dividend payment in 2012. For the six months from Dec. 27, 2015, to June 25, 2016, or the company's fiscal Q2 and Q3 of 2016, the AAPL dividend continued to grow at an even higher rate.

Apple's gross dividends totaled $5.996 billion for the six months that encompassed the company's fiscal Q2 and Q3 of 2016, seemingly surpassing past dividend payments from any other two continuous quarters since it reinstituted quarterly dividends in 2012. The combined net income for Q2 and Q3 of 2016 was $18.321 billion, which put the dividend payout ratio at 32.7% for those six months. This compares to the average dividend payout ratio of 25.9% for the three years between 2013 and 2015.

The higher dividend payout ratio for the past six months rests on the fact that Apple's revenue and earnings have been growing continuously for the previous five years, with a total accumulated equity capital of $119.4 billion as recorded on Sept. 26, 2015, the end of Apple's fiscal year 2015. This compared to a holding of $41.6 billion in cash, cash equivalents and short-term investments on the same date. With the amount of idle cash at 34.8% of Apple's equity capital, shareholders were surely better off as Apple considered to return potentially more of its capital back to shareholders for their own uses in 2016.

While dividend payout is a measure of financial strength often used in fundamental analysis of stock investments, dividend yield is more useful for investors with an overwhelming goal of receiving investment dividends. For dividend investors, a stock's capital appreciation is secondary to the dividend income that the stock can provide. A stock's dividend yield compares the amount of annual dividend as a percentage of the stock's market price. For individual investors, their own purchase prices on a stock may lift or lower their dividend yields, given how much the stock pays in dividends.

Apple's dividend on a trailing 12-month basis was $2.13 per share annually as of June 25, 2016. Using the stock's closing price of $107.57 on Aug. 25, 2016, the dividend yield from investing in Apple stock was 1.98%. Even though the annual AAPL dividend has consistently increased in the years after the company's 2012 dividend reinstatement, Apple stock has at times risen at much faster rates, potentially resulting in its dividend yield being less competitive for new investors buying the stock at premium prices. If Apple is committed to a strong and growing dividend policy, existing dividend investors will see further improvements in their dividend yields.

For most companies, a dividend cut is an exception, rather than the norm. Companies would like to grow their dividends over time, depending on the growth of their revenue and earnings, as well as cash flow from operations. The AAPL dividend for the six months from Dec. 27, 2015, to June 25, 2016, totaled $5.996 billion, a slight increase of 2.5% over the amount of dividend paid during the prior six months. Annual dividend growth averaged 4.6% for the three years from 2013 to 2015, assuming annualized dividend payments of $10 billion in 2012 based on the quarterly dividend of $2.5 billion, a partial-year payment in that year. In comparison, the dividend growth rate for the six months that included Apple's Q2 and Q3 of 2016 was slightly higher than the company's historical dividend growth rate.