Page 25 - CIMA SCS Workbook August 2018 - Day 2 Suggested Solutions

CIMA AUGUST 2018 – STRATEGIC CASE STUDY

FNG’s current dividend policy
Over the last few years FNG’s operating profits and dividends have been:

Operating profit (B$m) Dividends (B$m)
2013 60 43
2014 40 27
2015 33 22

2016 14 8
2017 8 4

2018 3 3
All figures are approximate, and taken from FNG’s “Key Performance Graphs“

The above information looks at operating profit rather than bottom line profit (no information is
presented on this) but even so a clear pattern can be seen. Of the policies identified above, FNG
seems to have been following a (fairly) constant pay-out ratio policy.
From 2013 to 2017, the profit declined dramatically and so the dividend was reduced each year
too. This would have been disappointing for the shareholders, but at least they would have been
able to understand the link between dividend and profit.
In 2018 the profit figure declined again, but for some reason the dividend paid out was kept fairly
stable. Perhaps there was some pressure from shareholders to avoid cutting the dividend too
much, or perhaps the directors were hoping to send a positive signal to the shareholders by
paying out a larger proportion of profit.
The consequence of paying out B$ 3 million (slightly more than the operating profit and
significantly more than the bottom line profit) has been to reduce the reserves in FNG’s statement
of financial position. Despite this, the recent dividend did not cause any problem with FNG’s cash
position. Cash increased by nearly B$ 1.7 million between 2017 and 2018 even with the B$ 3
million paid out, but that was mainly because the level of investment in the year was very low.

Fiona Finch’s concerns

Fiona Finch is understandably unhappy that the dividend has reduced dramatically over the last
few years. She owns 10% of the company’s shares, so in the past the dividend would have given
her a significant amount of annual income. FNG is an unlisted company whose shares are mainly
owned by the Finch family, so the clientele effect doesn’t really apply. However, if the family
shareholders are unhappy at the amount of dividend received, this increases the possibility that
they’ll try to sell their shares, perhaps by selling the whole company.
Given the low profitability of FNG at the moment, it is difficult to imagine being able to pay out a
larger dividend next year that Fiona asks for in her email. Paying out a dividend greater than
bottom line profit seems to suggest that FNG has prioritised the dividend decision ahead of the
investment decision this year. Unless FNG starts to invest in new profitable projects, it is likely to
continue its decline.
I’m afraid we need to explain to Fiona that to protect the long term interests of the company, the
dividends paid to shareholders might have to be cut even further in the short term.

84 KAPLAN PUBLISHING