FINA6000 | Analysis of the Stocks for Amaysim Australia
Select two companies in the same industry/sector from the list of companies available from the Australian Securities Exchange (ASX) and collect information on the share price, treasury bond yields, capital structure and dividends for the three most recent financial years of the companies. Your sources of information are: yahoo finance (https://au.finance.yahoo.com/), the Reserve Bank of Australia (RBA)’s website (www.rba.gov.au) and the company’s annual reports on the company’s websites.
Daily share price and daily market index data should be collected over the three year period. Ensure you select an appropriate market index to compare with the share price data. Regarding treasury bond yields, collect information on 10 year commonwealth bonds. With respect to capital structure and dividends, extract from the financial statements information on the various sources of capital, the amounts and the terms if present and dividend payments over the three year period.
You are expected to prepare and submit individually a 2000 Word report which addresses the following:
(a) Calculate daily stock price returns and market index returns over the three year period.
(b) Determine the total risk, systematic risk and unsystematic risk of the companies’ stocks over the each of the years.
(c) Calculate the weighted average cost of capital (WACC) for each of the years for the two companies. Provide an explanation why there is a difference in the costs of capital.
(d) Compare and contrast the dividend policy of the two companies over the three year period by calculating dividend payout ratios, identifying the dividend policy if any followed by each of the companies and checking how the share price of the companies have reacted to dividend announcements during the period. Drawing from dividend theory, suggest dividend theory/theories that could explain the you have identified.
(e) With $10 million that you inherited from your late aunt, which company’s shares would you purchase? Use relevant information from the calculations above to support your decision.
Answer:
Introduction
The procedure of evaluating and examining the stocks and instruments of a particular company is known as stock analysis. The process is employed by the analyst who are interested in knowing the past movements in the stock prices and market performance. Furthermore, the analysis is helpful for many investors and traders as their decisions of buying and selling the shares depends upon the results of the analysis. Critical examination of the past movements help in predicting the future performance and trends in a stock and market index (Edwards, Magee & Bassetti, 2012).
This report contains the analysis of the stocks for Amaysim Australia Limited and Telstra Corporation Limited, compared with the market index ASX S&P 200. It includes the calculation of systematic and unsystematic risk by figuring out the daily returns of companies’ stock and the market. In addition, the report also discusses the WACC and dividend policy of both the companies, reflecting their performance in past three years that are 2015, 2016 and 2017. In the later part, recommendation is been provided regarding the purchase of shares of one of the two companies, followed by conclusion.
Systematic and Unsystematic risks
Note: Please find the attached excel file for the calculation performed in the r
eport.
Weighted average cost of capital
WACC represents the cost of capital of the firm comprises of the debt and equity elements, proportionately weighted. It is been calculated by identifying the cost of equity and cost of debt of the firm. Usually, the operations of an organization are financed through debt and equity that make up to the total capital of that corporation. It is very important for the entities to maintain a preferred and optimal capital structure to remain profitable in long run. However, calculation of WACC is important for the investors and lenders to figure out the returns, they are expected to receive on their investment (Fernandes, 2014). The weighted average cost of capital of a company increase as and when the amount of its beta factor and return on equity rises. Such upsurge in the cost of capital reflects high risk and low valuation. However, there are many reasons for the fluctuations and differences in the companies’ WACC.
|
|
2015 |
2016 |
2017 | ||||||
|
|
Weights (A) |
Cost of capital (B) |
A*B |
Weights (A) |
Cost of capital (B) |
A*B |
Weights (A) |
Cost of capital (B) |
A*B |
|
Equity |
- 1.92 |
2.7% |
- 0.0523 |
0.69 |
6.7% |
0.0467 |
0.48 |
2.6% |
0.0123 |
|
Debt |
2.92 |
2.2% |
0.0633 |
0.31 |
8.5% |
0.0263 |
0.52 |
2.9% |
0.0151 |
|
WACC |
|
|
1.10% |
|
|
7.30% |
|
|
2.74% |
In case of Amaysim Australia Limited, the WACC of the company increases from 1.10% to 2.74% over the period of past three years. This was basically due to a significant upsurge in its debt component from $3,973,000 to $82,558,000. However, when compared between 2016 and 2017, the WACC reduces from 7.30% to 2.74%. This change was due to the reduction in company’s cost of debt and cost of equity. The reason for this reduction is the fluctuations in the value of beta of AYS which affected its cost of equity over the past three years (Amaysim Australia Limited. 2017). In 2016, company’s beta was 0.93 which turns negative to -0.02 in 2017. This brings the firm’s cost of equity to 2.6% from 6.7%. Considering the cost of debt, the changes in pre-tax cost affected the after tax cost of debt. Fluctuations in interest expense and total debt of the company results in the changes in overall cost of debt of AYS. However, in the given calculation the risk free rate and market return is kept same for three years but variation in them can also cause changes in company’s WACC.
|
|
2015 |
2016 |
2017 | ||||||
|
|
Weights (A) |
Cost of capital (B) |
A*B |
Weights (A) |
Cost of capital (B) |
A*B |
Weights (A) |
Cost of capital (B) |
A*B |
|
Equity |
0.52 |
2.8% |
0.0144 |
0.56 |
5.0% |
0.0283 |
0.49 |
2.7% |
0.0132 |
|
Debt |
0.48 |
4% |
0.0174 |
0.44 |
4.4% |
0.0191 |
0.51 |
2.7% |
0.0136 |
|
WACC |
|
|
3.17% |
|
|
4.74% |
|
|
2.68% |
The same trend is been followed in case of Telstra Corporation Limited. Its WACC has also reduced over the past three years. However, in 2016 it increased to 4.74% as compare to 2015 but again reduces to 2.68% in 2017. Such reduction was due to the overall decrease in company’s cost of equity and cost of debt after tax. The beta of Telstra reduces from 0.54 to 0.0042 which makes the cost of equity to fall from 5% to 2.7%. The pre-tax cost of debt of the company also reduces from 5.70% to 3.87% in 2017 due to a significant reduction in Telstra’s interest expense (Telstra. 2015). However, in that year, the debt component of the firm increases, covering 51% of Telstra’s total capital. With such upsurge, the financial risk taken by the corporation also rises as its borrowings increased during the year. So, here also the reasons are same for the changes in working capital.
Furthermore, the market return and risk free rate also fluctuates from time to time which results in the variations in cost of capital of the companies. Here, both the rates are kept same and only the changes in beta and interest rate are noticed.
Dividend policy
The policies of dividend are the guidelines framed and followed by the companies for deciding and declaring the amount of dividend to pay out in a particular fiscal year. As per some facts and researches it is observed that dividend policy is irrelevant for some investors as they can easily buy and sell their shares as and when they require cash. However, irrespective of this, it is noted that the policy of dividend do impact the share prices of the company (Baker, 2009). Generally, when a company pay out some dividends, its stock prices rises as payment of dividends generate income to the investors. Therefore, firms paying regular dividends attract more investors as compare to the ones who pay irregular or no dividends to their stakeholders. As a result, the profitability and stock prices are highly influenced and impacted. In order to decide the amount of dividend and study the dividend policy of a company, analysts evaluates and examines the dividend pay-out ratios of the firms. DPR measures the total dividends paid by the company to its investors against its net income during a particular financial year. It is calculated by dividing the dividend per share with the earnings per share of the organization (Frankfurter, Wood & Wansley, 2003).
|
|
2015 |
2016 |
2017 |
|
Dividend per share (in cents) |
0 |
8.3 |
9.1 |
|
Earnings per share (in cents) |
14.5 |
6.9 |
6.1 |
|
DPR |
0.00% |
120.29% |
149.18% |
From the above table, it can be interpreted that Amaysim follows an irregular dividend policy as the company has not declared any sort of dividends before 2016. However, its DPR has increased from 120.29% to 149.18% in 2017. This is due to the increase in the amount of company’s dividend from 8.3 cents per share to 9.1 cents per share. The declaration of dividends has impacted the stock prices to AYS to some extent (Amaysim Australia Limited. 2017).
(Source: Yahoo Finance. 2018).
The above chart shows the fluctuations in share prices of the company from 2016 to mid of 2018. This period is taken because the dividends are declared after 2015 only. Prior to that, the company has not paid out any sort of dividends to its shareholders. According to the data available on Yahoo finance, initially when AYS declared 0.053 dividend in September 2016, its share price tends to reduce till February 2017 (Amaysim Australia Limited. 2016). After that company paid a dividend of 0.04 cents due to which its share price increases during the year. High amount of dividend attracted more investors which brings an upsurge in AYS’s stocks. Later on the price tends to fall and the stock is current trading at $1.06.
|
|
2015 |
2016 |
2017 |
|
Dividend per share (in cents) |
30 |
31 |
31 |
|
Earnings per share (in cents) |
34.5 |
31.6 |
32.5 |
|
DPR |
86.96% |
98.10% |
95.38% |
Talking about Telstra Corporation, the company has paid regular dividends from the past three years. Moreover, it has almost stable rate of dividends which can be seen from the above table. In addition, the DPR of Telstra has been increased from 86.96% to 95.38% in the past years. Therefore, it can be said that company follows a regular dividend policy (Telstra. 2017).
(Source: Yahoo Finance. 2018).
From the above chart, it can be observed that the share price of Telstra Corporation has been reduced over the past years and are significantly impacted by the dividends declared by the company. Telstra paid dividend on August 2015, at a rate of 0.155 due to which its share price reduces till February 2016. In March and August 2016, the company again declared the dividends on the same rate which further reduces the price till January 2018. In February 2018, Telstra paid dividend of 0.075 cents which again results in the decline of stock prices. Overall, it can be said that the dividends has a negative impact on the stock prices of Telstra Corporation Limited.
In the above cases, the payment of dividends has affected the prices of company’s stock and their profitability. As far as dividend policies are concerned, Amaysim Australia Limited follow irregular dividend policy and Telstra follows a regular dividend policy. Relevant theories provided by Walter and Gordon applies to the above patterns noticed for both the companies. Their payment of dividends and polices are very much relevant as they have affected the share prices respectively. Moreover, they had paid dividends from their retained earnings which impact their profitability also.
Share purchase
From the above analysis, it is recommended that the shares of Telstra Corporation should be purchased with the amount of $10 million. Reason being, the organization offer regular dividends to its stakeholders and has 49% of equity. Moreover, its WACC has reduced over the years and its DPR has increased. Telstra has paid stable amount of dividends for a long time to its shareholders and investors. So, it will be better to purchase the shares of Telstra as investors can generate a regular income in form of company’s dividends. Though its share price has shown an overall reduction during the past three years but the company continues to improve and increase its earnings per share along with the amount of dividend. Therefore, it will be advised to invest the amount in Telstra rather than investing it in Amaysim Australia Limited.
Conclusion
The above report concludes that stock analysis is very important for the investors to conduct, so that they can clearly understand the position and performance of the company in a market. The analysis helps to study the movements in the stock prices of the company along with the changes in market return. In addition, calculation of WACC and evaluation of dividend policies provide a clear picture of the performance of company’s stocks during the past three years. Overall, such analysis helps in taking better investment related decisions such as purchasing or selling the shares of a particular entity. Thus, it can be said that before making any kind of investment the investors should properly analyse its stocks and their performance.
References
Amaysim Australia Limited. (2017). Annual report 2017. Retrieved from: https://investor.amaysim.com.au/irm/PDF/1418_0/FullyearresultsAppendix4EandAnnualReport
Amaysim Australia Limited. (2016). Annual report 2016. Retrieved from: https://investor.amaysim.com.au/irm/PDF/1218_0/AnnualReporttoshareholders
Baker, H. K. (Ed.). (2009). Dividends and dividend policy (Vol. 1). John Wiley & Sons.
Edwards, R. D., Magee, J., & Bassetti, W. H. C. (2012). Technical analysis of stock trends. 2nd ed. Boca Raton: CRC Press.
Fernandes, N. (2014). Finance for Executives: A practical guide for managers. NPVPublishing.
Frankfurter, G., Wood, B. G., & Wansley, J. (2003). Dividend policy: Theory and practice. Elsevier.
Telstra. (2015). Telstra Annual Report 2015. Retrieved from: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20D/telstra-annual-report-2015.pdf
Telstra. (2017). Telstra Annual Report 2017 . Retrieved from: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-2017.PDF
Yahoo Finance. (2018). Amaysim Australia Limited (AYS.AX) Retrieved from: https://finance.yahoo.com/quote/AYS.AX/history?p=AYS.AX
Yahoo Finance. (2018). Telstra Corporation Limited (TLS.AX). Retrieved from: https://finance.yahoo.com/quote/TLS.AX/history?period1=1435689000&period2=1530297000&interval=1mo&filter=history&frequency=1mo
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