In the last few years, Wal-Mart Stores Inc. paid dividends on a consistent basis. Therefore, it was appropriate to calculate its dividend growth rate based on the last year financial results. The dividend growth rate was calculated by using the following formula:
- ROE = g x (1-p)
- g = ROE x (1-p) (Ehrhardt & Brigham, 2013)
Where
- ROE = Return on Equity which is calculated as Net income / Return on equity;
- p = Payout ratio which indicates the portion of net income paid out as a dividend to the company’s shareholders;
- g = Growth rate of dividends.
Wal-Mart’s financial results for the year ending 2014 were the following.
The company’s dividend growth rate was 12.96%. The growth of the company’s dividends was not equal to the growth of its earnings. It should be noted that the company could pay more dividends even if its earnings were lower than they had been the previous year. The company would pay more dividends in order to retain the confidence of its investors (Ross, Westerfield, & Jaffe, 2013).
Moreover, the calculated growth rate was only relevant to the year ending 2014, and it was not representative of all the previous years. The following table provides dividend growth rates from 2009 to 2014.
The above calculations show variations in dividend growth rates. Such variations suggested that the company’s decisions related to dividends were affected by many factors different from changes in the company income (Baker & Powell, 2009). For example, if the company planed to invest in its future development projects, then it should have reduced its dividend payout.
In order to remove inconsistencies from the dividend growth rate, the arithmetic average of dividend growth rates was calculated. In the given case, the average dividend growth rate was 14.96%. A comparison of yearly growth rates and average growth rates is provided in the following table.
The differences revealed that the average growth rate was closer to the actual dividend growth rate as compared to the growth rate that was calculated by using the financial information of the year ending 2014.
There are certain difficulties in calculating the dividend growth rate, which can distort results. When estimating the dividend growth rate, total dividends paid by the company during the year including interim and final dividends should be considered. In addition to this, the income after tax should be taken into account. Otherwise, the dividend growth rate would be overestimated (Ehrhardt & Brigham, 2013).
To sum everything up, the calculated dividend growth rate was relevant to the company’s dividend payout history. It was also in line with the trend of dividend payments made by the company.
References
Baker, H.K., & Powell, G.E. (2009). Understanding financial management. New Jersey, USA: John Wiley and Sons.
Ehrhardt, M. C., & Brigham, E. F. (2013). Corporate finance: A focused approach. Mason, USA: Cengage Learning.
Ross, S.A., Westerfield, R.W., & Jaffe, J.F. (2013). Corporate finance (10th ed.). New York, USA: Mc-Graw Hill.