Financial Management Questions
Q5. Putting yourself in the position of an existing shareholder(investor) of your company, using both the annual corporate report and the information about your company’s share price in the Financial Times, provide a recommendation (with reasons) whether you rate your company’s shares as Buy, Hold or Sell. There are a wide range of factors that affect share price.
These include interest rates, inflation, the performance of the industry/sector the company is in, the performance of the company itself, and the market supply and demand for the companies’ shares.
The following graph shows Marks and Spencer’s share price over the last 12 months. http://corporate. marksandspencer. com/investors/shareprice/chart Accessed: 05/12/11 By viewing the graph, we can see that there have been numerous fluctuations in share price over the last 12 months. At the start of the year share price was at around 370 pence per share and dropped down to around 330 pence per share after 3 months. There was then a surge in share price which reached over 400 pence per share at its peak in May.
It then fell to its lowest point, just above 300 pence per share in September and there have since been small fluctuations in share price. Its current share price is at 329. 00 but we expect it to continue to fluctuate slightly before finally increasing again into the New Year, as share prices do generally remain low over the Christmas period. The following table is share information that was published in The Financial Times weekly update on Monday 5th December 2011. | |Price |Wks% Chg | Div |Div Cov |Mcap ? | Last xd | |Marks&Sp |330. 10 |+7. 3 |17 |2. 3 |5,233. 3 |16. 11 | Using the data available from this table and information published in the annual company report, we can work out dividend yield and dividend cover. “Dividend yield tells you the percentage cash return on the investment, and can be directly compared with interest rates and other investment opportunities. It expresses the dividend per share as a percentage of the current share price” (McKenzie, 2010:385).
It is therefore worked out by dividing the dividend per share which is 17 pence, by the current price by share, which is 330. 10, and then multiplying the answer by 100. The dividend yield can then be worked out as 5. 17%. This would therefore be a worthwhile investment considering many interest rates for banks are less than 1%. The dividend cover “measures how many times the dividend could be paid from the available profits” (McKenzie, 2010:384). The financial times reveal that the dividend cover is 2. 3, and therefore the dividend could be paid 2. 3 times out of Marks and Spencer’s available profits.
This shows that Marks and Spencer are using quite a substantial amount of profit to pay out dividends, nearly half. This may be rewarding for a shareholder looking for a quick return, however, shareholders who are looking to invest in Marks and Spencer in the long run may find it more beneficial if Marks and Spencer’s reinvested their profits into the business. Taking everything into account, we would recommend a shareholder to hold their shares, as we believe that there will be a rise in share price in the coming months, so they will therefore make a better return if they do wish to sale in the future.
The dividend yield shows that Marks and Spencer offer a good return on investment, compared with other alternatives such as bank interest rates. And also they use a considerable amount of their profits to pay shareholders dividends, so we believe it would be worthwhile holding onto the shares for the time being at least. Financial Times, Monday December 5 2011, p. 26 McKenzie, W. (2010) Using and Interpreting Company Accounts. FT Prentice Hall. p. 384-385