By definition a dividend policy is “a company's approach to distributing profits back to its owners or stockholders” (Chegg.com, 2015). Whether or not a company chooses to pay dividends can say a lot about the value a firm and is an important fact to consider when assessing a company. If a firm does give dividends, the way in which they give them (amount and frequency of dividends) is also significant. Foot Locker’s current share price is €66.65. Their dividend yield (the value of a dividend over the value of a share) is 1.69% which means that for each share, Foot Locker pay a dividend of €1.10 annually, although they actually pay dividends quarterly. These figures on their own are insignificant but if we compare them to the practices of other firms then we can begin to assess Foot Locker’s dividend policy.
Nike, a close competitor of Foot Locker has a share price of €64.90 and a dividend yield of 1.02% which means they pay 64 cents per share. From this we see that Foot Locker’s dividend policy is considerably higher and may be considered to be a large figure. Compared to the markets as a whole however, a dividend yield which would be generally accepted as high would be 3% (Nasdaq.com, 2015). Following on from this, if we look at the S&P 500, an American stock market index, the average dividend yield for all companies is 1.77%. With Foot Locker being relatively close to this average, we feel that it is fair to assume that the company’s dividend amount can be considered as average. We will now consider what this means in terms of our assessment of the company’s value. Growth companies (whose share price is rapidly growing in value), often choose to reinvest all profits back into the company in order to increase the value of the company and reward investors by increasing the value of the shares that they hold (Investopedia, 2014). In contrast, companies that pay high dividends often tend to be mature and stable companies who do not experience rapid growth. They aim to reward investors with these cash payments in order to keep them interested despite the lack of growth in the stock price. Foot Locker’s growth over the last 5 years has been relatively constant, without any notable rapid growth and although they do not pay extremely large dividends, because of the fact that they pay dividends at all means …show more content…
The model involves calculating the present value of expected future dividends from a company. The figure is calculated by dividing the current dividend value by the discount rate minus the expected growth rate of dividends. If the present value of the future dividends is greater than the current market value of the stock then the company is undervalued (Investopedia, 2014). The discount rate in this scenario is the rate of return expected by the investor. For Foot Locker, with a dividend value of €1.10, using an average dividend growth rate over the last 5 years of 8.5% and a discount rate of 12% we can calculate that the present value of future dividends is €31.43 which is less than the current stock value of 66.65. This model has its limitations given the fact that predicting dividend growth rate may not be accurate, however the model shows that Foot Locker is in fact over-valued and thus would not be recommended to buy if the investor was looking for a 12%
Nike, a close competitor of Foot Locker has a share price of €64.90 and a dividend yield of 1.02% which means they pay 64 cents per share. From this we see that Foot Locker’s dividend policy is considerably higher and may be considered to be a large figure. Compared to the markets as a whole however, a dividend yield which would be generally accepted as high would be 3% (Nasdaq.com, 2015). Following on from this, if we look at the S&P 500, an American stock market index, the average dividend yield for all companies is 1.77%. With Foot Locker being relatively close to this average, we feel that it is fair to assume that the company’s dividend amount can be considered as average. We will now consider what this means in terms of our assessment of the company’s value. Growth companies (whose share price is rapidly growing in value), often choose to reinvest all profits back into the company in order to increase the value of the company and reward investors by increasing the value of the shares that they hold (Investopedia, 2014). In contrast, companies that pay high dividends often tend to be mature and stable companies who do not experience rapid growth. They aim to reward investors with these cash payments in order to keep them interested despite the lack of growth in the stock price. Foot Locker’s growth over the last 5 years has been relatively constant, without any notable rapid growth and although they do not pay extremely large dividends, because of the fact that they pay dividends at all means …show more content…
The model involves calculating the present value of expected future dividends from a company. The figure is calculated by dividing the current dividend value by the discount rate minus the expected growth rate of dividends. If the present value of the future dividends is greater than the current market value of the stock then the company is undervalued (Investopedia, 2014). The discount rate in this scenario is the rate of return expected by the investor. For Foot Locker, with a dividend value of €1.10, using an average dividend growth rate over the last 5 years of 8.5% and a discount rate of 12% we can calculate that the present value of future dividends is €31.43 which is less than the current stock value of 66.65. This model has its limitations given the fact that predicting dividend growth rate may not be accurate, however the model shows that Foot Locker is in fact over-valued and thus would not be recommended to buy if the investor was looking for a 12%