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Analysis and Contrast of Dividend Policies of Two Companies over the Last Five Year: BP PLC vs. LogicaCMG PLC

The purpose of the following report is to analyse the dividend policy of Logica PLC and BP PLC over the last five years. Firstly, the dividend policy of BP PLC as well as Logica PLC over the last five years will be analysed. Secondly, based on that analysis, the dividend policies of both companies will be compared. Then the Lintner's model on dividend policy will be reviewed and it will be identified how the dividend policy of both companies can be explained by this model. Moreover, the brief discussion of the skills developed during the project will be done.

1. ANALYSIS OF DIVIDEND POLICY

1.1. British Petroleum PLC (BP PLC)
BP PLC is considered to be the market leader in exploration andproduction, gas, power, refining and marketing chemicals. Explorationand production activities include oil and natural gas exploration andfield development and production (upstream activities); together withpipeline transportation and natural gas processing (midstreamactivities).

Gas and power activities include marketing and trading of naturalgas, liquefied natural gas, and power, the development of internationalopportunities that investigate gas resources and involvement in selectpower projects. The activities of refining and marketing include oilsupply and trading as well as refining and marketing (downstreamactivities).

The British Petroleum PLC pays to its shareholders dividends everythree months, i.e. quarterly, in cash. Due to the fact that LogicaCMGPLC follows a policy of yearly dividend payments, for the comparison ofdividend policy of both companies the annual results for two companieswill be analysed. However, for 2003 year 9 months results will be takenfor analysis for BP PLC.

All figures were obtainedfrom the companies' websites: www.bp.com and www.logicacmg.com

For the more comprehensive analysis the dividend growth rate figure should be calculated, thus:

From the above tables and graph it is obvious that the financial situation in BP PLC compare with last 4 years has been improved. As the BP PLC Chief Executive, Lord Browne, said: " This has been another good quarter and a strong financial result. We continue to invest steadily against a clear set of strategic goals, and to drive hard on operations where there is room for improvement. "

However, to analyse the dividend policy more accurately the Earnings per Share (EPS) as well as Payout Ration should be reviewed.

The EPS figures for 2003 year are not yet publicly available. Nevertheless, from the above figures it is obvious that they are pretty volatile. However, for a more comprehensive result EPS figures should be compared with DPS (Dividends per Share) figures. Thus:

From the table above it can be seen that dividends per share were increased, while EPS were decreased. Such contradiction probably means that the managers of BP PLC prefer stable dividend levels to stable payout ratio:

Because of the decrease of EPS there is a decline in Payout Ratio figure, graphically:

1.2. Logica PLC
LogicaCMG PLC previously known as Logica PLC is a major internationalforce in IT services and wireless telecoms. It provides management andIT consultancy, systems integration and outsourcing services to clientsacross diverse markets including telecoms, financial services, energyand utilities, industry, distribution, transport and the public sector.Formed in December 2002, through the merger of Logica and CMG, thecompany makes its business in 34 countries and has nearly 40 years ofexperience in IT services. Headquartered in Europe, LogicaCMG is listedon both the London and Amsterdam stock exchanges (http://www.logicacmg.com/).

LogicaCMGPLC pays dividends to its shareholders annually in cash. In the tablebelow presented DPS that the company has paid over the last 5 years.The results for 2003 are not yet publicly available, therefore for thisyear 6 month ended at the 30th of June available results will beanalysed:

From the above table it is clear that the DPS of LogicaCMG has beendecreasing over the last 5 years, however, the management of theCompany believes that at the end of 2003 the situation will be improved(http://www.logicacmg.com/).

For the more broad analysis EPS figures will be presented in the table below with DPS figures for comparison:

From the above comparison it can be observed that EPS growth rate is more volatile over the last 5 years, although the DPS growth rate is indeed unstable but as the EPS growth rate.

From the above table and graphs it can be seen that although the DPS in2003 has decreased by more than 23%, the EPS has declined by almost36%.

Such declines have occurred due to the fact that, as alreadymentioned, in December 2002 the Company Logica PLC merged with CMG.Therefore, it can be stated that LogicaCMG PLC focuses its dividendpolicy on paying steady dividends to its shareholders.

However,the payout ratio, or as Lintner named it ‘target ratio’, of the Company shouldbe observed:

Despite the fact that DPS and EPS has declined significantly over the last two years the Target Ratio remains increasing slightly. Such facts also illustrate that the Company follows the stable dividend policy.

Thus, from the above analysis it is obvious that LogicaCMG follows stable dividend policy, although last two years were hard period due to the merger.

2. THE COMPARISON OF THE DIVIDEND POLICIES: BP PLC AND LogicaCMG PLC
The above analysis of the dividend policies of BP PLC and LogicaCMG PLCrevealed that both companies pay dividends to the shareholders in cashevenly. However, the BP PLC pays its dividends quarterly, whereasLogicaCMG PLC pays annually.

Both companies have higher volatility in earnings per sharethan in dividends per share paid, which probably means that steadydividends per share were favoured to steady payout ratio. Suchpreference represents the main basis of both companies’ dividendpolicies. Nevertheless, it should be mentioned here that there aredifferent reasons for the volatility in both companies, although thereasons have the same features. BP PLC has acquired TNK Company inAugust 2003, whereas Logica PLC passed the merger process with CMG in2002. The TNK-BP deal was completed on 29 August: the third quarterresults and production reflect a strong contribution from the jointventure (http://www.bp.com/extendedgenericarticle.do?categoryId=717&contentId=2014697),while the merger process for the LogicaCMG PLC was not so smooth andsuccessful.The table and graph below show that LogicaCMG prefers stabletarget ratio while for BP’s managers steady target ration is not themain issue:

From the above graphs it can be observed again that LogicaCMG PLC has less volatile payout ratio than BP PLC does, and probably that is why Logica’s payout ratio is in general lower that BP’s

3. REVIEW OF THE LITNER’S MODEL OF THE DIVIDEND POLICY
For the comparison ofdividend policies of BP PLC and LogicaCMG PLC Lintner’s Model has been used.
Briefly Lintner’s model canbe outlined in four main issues:

1. “Firms have long-run target dividend payout ratio;
2. Managers focus more on dividend changes than on absolute levels;
3. Dividend changes follow shifts in long-run, sustainable earnings (Managers “smooth” dividends);
4. Managers are reluctant to make dividend changes that might have to be reversed.” (Brealey and Myers, 2000)

Indeed, the above analysisis another empirical evidence of these four points.
As it was observed both companies follow the stable payout ratiopolicy, which proves the first issue of the Lintner’s Model.

Secondlythe dividend changes have shown more clearly results, thus it isobviously better to focus on the change rate than on absolute figures.Moreover, as the second issue states: “paying a $2.00 dividend is animportant financial decision if last year’s dividend was $1.00, but nobig deal if last year’s dividend was $2.00” (Brealey and Myers, 2000).

Thirdly, as analysisrevealed temporary earnings change are unlikely to affect dividend payouts.

Lastly, managers of bothcompanies prefer stable dividends per share payments than rescind a dividendincrease. 

Lintner’s Model simplyexplains dividend payments policy: “Suppose that a firm always stuck to itstarget payout ratio. Then the dividend payment in the coming year (DIV₁)would equal a constant proportion of EPS₁
DIV₁= target dividend = target ratio x EPS₁
The dividend change would equal
DIV₁– DIV₀ = target change = target ratio x EPS₁ – DIV₀” (Brealeyand Myers, 2000)
In general Lintner’sobservation revealed that mangers, however, prefer stable dividends payment tosteady payout ratio. This is can be illustrated by the formula:
DIV₁– DIV₀ = adjustment rate x target change = adjustment rate x (targetratio x EPS₁ – DIV₀)
In other words, the moreconservative dividend policy will lead to the slow move to the target and as aresult the lower adjustment rate.

Certainly, the analysis anddiscussions made in the first section again can be justified by this model. Itwas found that that the payout ratio is highly dependable on the volatility ofthe EPS. Moreover, Logica’s target ratio is more stable than BP’s one, and suchstability (conservatism) reflects in the low dividends payments, while BP’smangers prefer volatile payout ratio and higher dividends payments.

Tosummarise above critical review of the Lintner’s Model it is hard to deny itssimplicity and appropriateness for the dividend policy analysis.

4. DEVELOPED SKILLS DURING THE PROJECT
During the project different skills were developed and improved,particularly now I am more confident in searching financial data ofdifferent companies via Internet and in reading and comprehension thesedata. Certainly, the search, analysis, and comparison of these dataimproved my research skills which indeed will be helpful in furtherhigher education. Surely, all these mentioned skills can be classifiedas general. So, the most important professional skill that wasdeveloped is understanding the main basics of dividend policy, whichindeed will be really useful in future career. At last, but not atleast, the project improved my English, particularly, in academicwriting.

REFERENCES

Books and Articles:
Brealey, R., and Myers, S. (2000).Principals of Corporate Finance, 6th Edition, Irwin McGeaw-Hill, London

Brealey R A (1999) Does dividend policymatter?

WoolridgeJ R and Ghosh C (1998) Dividend cuts: do they always signal bad news?

Web-Sites
http://www.bp.com

http://www.logicacmg.com

http://www.hemscott.com

http://www.sciencedirect.com

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