Comparing Tesco PLC and Admiral Group PLC

- their objectives and strategies under evaluation


Term Paper, 2013
18 Pages

Excerpt

Contents

A. Critically discuss the Primary and Two Secondary Objectives of both companies, reflecting whether each company has achieved these objectives.

B. Use FAME to summarise separately the gearing policies of each company over the past five years and analyse the financial information provided to explain the reasons for the perceived changes in gearing in each company over each year of the five year period.

C. 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.

D. Making specific reference to the academic literature, contrast the main features of the trade-off theory of gearing and the pecking order theory, examine critically the predictions of each approach and the extent to which each is supported by empirical evidence.

E. Bibliography

F. Appendix

A. Critically discuss the Primary and Two Secondary Objectives of both companies, reflecting whether each company has achieved these objectives.

Tesco PLC [1]

Primary: Increase shareholder value/wealth

As shown in Figure 1, Tesco closed at 336.00p in 2012, dropping nearly 17% from 404.50p in the beginning of 2007. Tesco has had a continuous increase of dividend payment from a total 10.90p in 2007 to 14.76p in 2011 (Table 1). Furthermore, the ROFS, as depicted in Figure 2, has dropped from 23.72% (2007) to 21.58% (2011). As this indicates that profit available to the ordinary shareholder has decreased, it represents the third indicator that Tesco has not achieved its primary objective.

Abbildung in dieser Leseprobe nicht enthalten

Table 1 : TESCO - Dividends 2007-2012

Source: based on Tesco (2013); Yahoo Finance (2013); Rateinflation (2013) Secondary 1: to grow the UK Core

Figure 3 shows an increase of 22.81% in UK Turnover. That this can be linked to recently established departments rather than those older than one year is indicated by the like-for-like sales. These have been in decline since 2007, reaching 0% in 2011 (Table 2). The UK trading profit overview (Figure 3) shows a growth of 29.84%, which, in combination with a growing online shopping department (Tesco, 2012), gives more support to the assumption that Tesco has achieved this objective.

Abbildung in dieser Leseprobe nicht enthalten

Table 2: TESCO - UK like-to-like Sales (2007-2012)

Source: Own graphic based on TESCO PLC (2012); TESCO PLC (2007)

Secondary 2: To build our team so that we can create more value

From 2007 to 2011, Tesco has increased the number of employees by 17.00% (444,127 to 519,671). Additionally, Tesco offers benefits such as training and employee share incentives to increase loyalty. The creation of value can be seen in Figure 3, as Tesco raised its profit before taxation from 2,803 £m (2007) to 3,835 £m (2011), representing an increase of 36.82 %.

Admiral Group PLC

Primary: increase shareholder value/wealth

Represented in Figure 5, the stock of the Admiral Group increased by 5.55%, as it went from 1099.00p (2007) to 1160.00p (2012). The dividend payment of the Admiral Group increased from 43.80p to 75.60p in 2011. The return on shareholder funds has slightly decreased for Admiral, as they went from 76.63% to 75.93% (Figure 6) . Nevertheless, as the share price and the dividend payments increased, it can be assumed that the Admiral Group has achieved their primary goal.

Secondary 1: Give all our staff a stake in what they create by making them shareholders

Admiral has awarded 7,334,546 in shares (2011), increasing this programme by 65.21% (4,439,461 in 2007). The achievement of this objective gains further support when looking at the employee share scheme charges, which increased by 526.08 % (Figure 7), reflecting their dedication to the growth of this objective.

Abbildung in dieser Leseprobe nicht enthalten

Table 3: Admiral Group - Dividends 2007-2012

Source: based on Yahoo Finance (2013); Rateinflation (2013)

- Secondary 2: Grow profitably our share of the UK private motor insurance market

The achievement of this objective can be reasoned for with the figures of Premium Revenue UK and the companies profit before tax (Figure 8). Premium revenues soared from 140.20 in 2007£m to 418.60£m in 2011, increasing by 198.57 %. The profit before tax shows similar growth, as it increased by 120.53% (142.20 £m in 2007 to 313.60 £m in 2011).[2]

B. Use FAME to summarise separately the gearing policies of each company over the past five years and analyse the financial information provided to explain the reasons for the perceived changes in gearing in each company over each year of the five year period.

Abbildung in dieser Leseprobe nicht enthalten

Table 4 : Datasheet for Tesco PLC

Source: Altered figure based on Fame (Data update 7320 - 16/01/2013) - © BvD

Tesco was highly geared between 2007 and 2011, peaking at 149.14% in 2008. This can be related to their fixed assets (investments, land and buildings) which were funded through an increase of bank loans by about 6.5£m. It should also be noted here, that the bank overdraft was raised by 1.9 £m. As a result of these actions, Tesco doubled its interest payments, all of which were paid to the bank (Tesco, 2009).

The gearing ratio decreased notably in 2009 as Tesco reduced its long term loans through amortization. Furthermore, Tesco reduced its overdrafts and retained more profits. Gearing went down in 2010, as the company started to pay back larger amounts of their long term loan. The following increase in 2011 can be related to Tesco taking new loans to fund the purchase of tangible assets.

Thus, Tesco kept up or even increased its gearing ratio throughout these five years. Such a strategy of high debts is likely to be aimed at the utilization of tax deductible interest payments. In addition, Tesco serves a market that is largely unaffected by crisis, as people will always buy groceries, even if they switch to no-name products or buy less luxuries goods. As they consider the benefits of both equity and debt by including aspects such as tax reliefs against financial distress, it can be assumed that they are following the trade-off theory as developed by Kraus and Litzenberger (1973).

Abbildung in dieser Leseprobe nicht enthalten

Table 5 : Datasheet for Admiral Group PLC

Source: Altered figure based on Fame (Data update 7320 - 16/01/2013) - © BvD

The Admiral Group had no long-term liabilities in 2007. The sudden increase in the following year to 10,341,000£m can be related to deferred taxes. In the following years, gearing plummeted back down, as the long-term liabilities amounted to 100.000£ in 2009 and 400.000£ in 2010. They soared to a new high of 547£m in 2011, setting the gearing-ratio to 139.17 %. As mentioned in Note 18 of the annual report 2011 (Admiral Group, 2012, pp.7376), this is has to do with the acquisition of reinsurance services.

With profits rising since 2007, the Admiral Group retained only small parts of these, as most were given out to their shareholders in the form of dividends. Financing in this company seems to be primarily drawn from the inside through retained earnings and, to a limited extend, from reserves. Long term debt is rarely used and it can be said that the Admiral group prefers internal over external funding. As a result, one can associate this strategy with the Pecking Order Theory based on Myers (1984), which argues for retained earnings being a better way of financing the company than debt.

C. 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.

The first of three dividend policy theories discussed in the following section is the dividend irrelevancy theorem, published by Miller and Modigliani in 1961. It is based on the idealistic assumptions of a perfect capital market in combination with rational investors. The theory describes that it is irrelevant to an investor if a company either pays dividends or decides to invest the profits. The aspect that influences company value in this theory is future cash flow of its investments. Though it gained support by Miller and Scholes (1978), Bernstein (1996) as well as Hess (1981), the theorem has been hard to test in reality, as pointed out by Ball et al. (1979). This difficulty arises from the fact that a test would have to support the unrealistic assumptions made in the theory. As a result, most studies on testing the theorem started by relaxing one or more of these criteria (Al-Malkawi, et al., 2010).

When applying this theory to Tesco and the Admiral Group, it should be noted, that neither of them exist in the perfect capital market that was assumed by Miller and Modigliani. Indicators for this are stock prices, which should adjust to dividends by the exact amount that is paid. As seen in table 6, this is not the case for either of the two firms.

[...]


[1] Basis for the following evaluations are Figures 1-10 in the appendix and focus on the years 2007-2011. 2012 is included as it brought significant changes to the stock prices. Fluctuation during the economic crisis is not discussed. Most of the data was drawn from the FAME database available at: fame2.bvdep.com (as referenced)

[2] Note: Short term liabilities will not be included in the discussion, although they are included in the gearing ratio calculated by FAME.

Excerpt out of 18 pages

Details

Title
Comparing Tesco PLC and Admiral Group PLC
Subtitle
- their objectives and strategies under evaluation
College
University of Glamorgan  (Faculty of Business & Society)
Course
Financial Management
Author
Year
2013
Pages
18
Catalog Number
V289321
ISBN (eBook)
9783656896456
ISBN (Book)
9783656896463
File size
786 KB
Language
English
Notes
No Grade available
Tags
comparing, tesco, admiral, group
Quote paper
Nils-Carlsson Reineke (Author), 2013, Comparing Tesco PLC and Admiral Group PLC, Munich, GRIN Verlag, https://www.grin.com/document/289321

Comments

  • No comments yet.
Read the ebook
Title: Comparing Tesco PLC and Admiral Group PLC


Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free