Dividend Policy of Logica and BP AMOCO

FINANCIAL MANAGEMENT

Dividend Policy of Logica and BP AMOCO

von

Isabell Keil

2003

i) Analyse the policy that each firm has regarding payment of dividends/retention of profits and discuss any trends or relationships that appear to exist between dividends and profits.

ii) Compare and contrast the dividend policies of the two companies.

iii) Prepare a critical review of the theories relating to dividend policy and identify the extent to which, if at all, the dividend policy of each of the two companies can be explained by the theories you have reviewed.

iv) Reflect on the skills that you have developed in completing this assignment.

Initially some words about the companies this paper will analyse. BP p.l.c. is the holding company of one of the world largest petroleum and petrochemicals groups (BP p.l.c., 2003). Logica “provides an all-embracing portfolio of services from strategic consultancy and products to systems integration, solutions delivery and business process outsourcing” (Logica, 2002, front cover inside). It is important to state that Logica Plc and CMG Plc have merged to LogicaCMG on the 30th December 2002 (LogicaCMG, 2003).

i) Analyse the policy that each firm has regarding payment of dividends/retention of profits and discuss any trends or relationships that appear to exist between dividends and profits.

Figure 1: Earnings and dividends per share of BP
Figure 2: Earnings and dividend growth  rate of BP

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Figure 1 and figure 2 illustrate the earnings and dividends that BP has had in the years from 1997 until 2001. The earnings fluctuated greatly in these years and there were growth rates from - 44% (in 1998) to above 100% (in 2000). BP’s earnings have increased over the whole examined period. Most Significant were the changes from 1999 to 2000. In 2000 the earnings doubled and were twice as high as in 1999. During the next year the earnings decreased about 35%. BP paid stable dividends throughout these years in contrast to the volatile earnings, even in years when the company had negative earnings growth rates, as in 1998 and 2001. If the directors would have chosen to pay out a constant percentage of the earnings the dividend would be as volatile as the earnings. The dividends growth rate remained relatively constant compared to the earnings growth rate. This decreased from nearly 10% in 1998 to 1% in 1999 and then slowly increased to 7% in 2001. But during these years BP always had a positive dividends growth rate. When the earnings fell in 1998 and 2001 the directors increased the dividend by a higher percentage than the previous years. This may be interpreted as a positive signal to the market suggesting that the directors look

Figure 3: Payout Ratio of BP

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