Financial Strategy of Unilever - Essay Example

UNILEVER’S FINANCIAL STRATEGY Table of contents page...............................................................................................................................1 Table of contents...................................................................................................................2 Introduction........................................................................................................... ...............3 Unilever’s Choice of Sources of Funds Using appropriateTheory..................................................................................................................3 Unilever’s Dividend Plan Using A Suitable Theory.............................................................5 Supplementary assumptions of Dividend significance............................................................................................................................8 A recommendation for an appropriate financial strategy…………………………………..9 Conclusion............................................................................................................................10 References.............................................................................................................................11 Introduction Finance takes up a key role in all areas of Unilever’s business. They make it possible for the firm to transform ambitions and strategies into well sustainable, continuous and excellent performance. Unilevers’ finance team performs a key part in the prosperity of the firm. The company obtained its 4th successive year of speeding up natural sales development from under 0.5% in 2008 to more than 7% truly,. Its technique is always to pay attention to quantity development and building up the aggressive position of the businesss manufacturers while development has bogged down to 4% during 2009, this is still powerful comparative in the market. A firm’s capital structure consist the mix of long term or permanent capital in the firm. This is the mix of various ordinary and preference shares, long term debt and retained earnings. All these sources are found in Unilevers capital structure. Capital structure theories are as discussed below. Dividends are part of the earnings which are distributed to the shareholders for their investment in the company. Dividends policies and decisions involve four critical issues: i.e. when the firm should pay dividends, how much dividend per share should the company pay, how should the company give out dividends and why should the firm pay dividends. Unilever pays dividend quarterly using residual dividend policy where the dividend is paid out of earnings after investment have been financed. The dividend is payable by cash. As to why they pay a dividend, it is explained by the explained theories below. In Aug, CEO John Polman mentioned, “While circumstances remain challenging in many marketplaces, I am motivated by the return to quantity development across all areas and the majority of nations and groups. More of our manufacturers are enhancing again behind strong enhancements, greater customer value improved marketing support, and better performance. We go on repairing quantity development while defending edges and income for the season. ” Unilever’s Choice Of Sources Of Funds Using Appropriate Theory Corporate Life Cycle Theory Organizations go through different life-cycles just like individuals do. For example, individuals go through the beginnings, childhood and early-teenage stages that are recognized by plenty of fast development. People within these stages often do whatever it requires just to remain in existence, for example, eating, looking for protection and resting. Often, these individuals make energetic, extremely sensitive choices based on whatever is going on around them at this time. Start-up companies are like this, too. Often, creators of the company or system and its various associates have to do whatever is necessary just to remain in business. Management creates extremely sensitive choices. The following are the company’s life cycle stages: Stage one: Courtship- Would-be creators concentrate on concepts and upcoming possibilities, making and referring to committed programs. Courtship finishes and the next stage begin when the creators take up risks. Stage two: Infancy- The founders interest changes from concepts and possibilities of results. The need to create revenue pushes this action-oriented, opportunity-driven stage. Nobody will pay much interest to documentation, manages, techniques, or procedures. Founders work 16-hour times, six to seven times per 7 days, trying to do everything by themselves. Stage three: Go. This is often a fast-growth level. Sales are still master. The founders believe they can do no incorrect thing. Because they see everything as a chance, their cockiness outcomes in their companies susceptible to flagrant errors, they organize their organizations around individuals rather than functions; able employees, but to their personnels consternation, the founders continue to create every choice. Stage four: Adolescence There are so many inner disputes; individuals have little time remaining to provide to clients. Companies experience a short-term loss of perspective. Stage five: Prime- With a restored quality of perspective, organizations set up an even balance between management and versatility. Everything comes together. Disciplined yet impressive, organizations continually fulfill their clients needs. New businesses develop up within the company, and all are decentralized so as to provide new life-cycle possibilities. Stage six: Stability- Firm still powerful, but without the passion of their previous levels. They welcome new concepts but with less enjoyment than they did during the increasing levels. The financial individuals begin to encourage controls for short-term outcomes in ways that deal with long-term advancement. The emphasis on marketing and analysis and development subside. Stage seven: Aristocracy. Not creating surf becomes a way of lifestyle. External symptoms of respectability--dress, workplace decorations, and titles--take on tremendous significance. Companies obtain companies rather than incubate startups. Their culture emphasizes how things are done over whats being done and why individuals are doing it. Stage eight: Recrimination. At this level of corrosion, organizations perform witch-hunts to find out who did incorrectly rather than try to find what went incorrect and how to fix it. Cost discount rates take priority over initiatives that could increase revenues. Back stabbing and business infighting concept. Professionals battle to protect their pitch, identifying themselves from their other executives. Petty jealousies concept superior. Stage nine: Bureaucracy. If organizations do not die in the last stage--maybe they are in a controlled atmosphere where the crucial aspect for achievements is not how they fulfill clients but whether they are politically a resource or a liability--they become bureaucratic. Process guides become thick, paperwork abounds, and guidelines and guidelines jam-packed advancement and creativeness. Even customers--forsaken and forgotten--find they need to develop elaborate strategies to get anyones interest. Stage ten: Death. This last level may find their way up over several years, or may arrive instantly, with one large strike. Companies fall apart when they cannot generate the cash they need; the output lastly exhausts any influx. Unilever’s Dividend Plan Using A Suitable Theory Schemes used to explain the basis and key arguments concerning to settlement of dividends by companies are referred to as Dividend policy theories. Most of the time companies are indifferent between settling shares or profit reinvestment on their business. A fixed formula for calculating dividend payment ratio seldom lacks for even potential companies which pay dividend. Dividends are paid periodically to shareholders and the proceeds from investments are the investment gains. Therefore the main agenda for investors to make a decision on certain equity to invest in is the dividends and higher capital gain. The following theories have been put across to explain dividend settlement actions for the firms. Main Schools of thinking: There are two different dividend policy assumptions: One part assumes that regardless of whether the dividends are paid or not does not affect the stock price computation and therefore capital costs determine firm’s market price. Apart from this, the firm which periodically pays its shares is bound to get both market and stock prices which are high. These two sides of an argument led to a research to be carried out. According to (Black 1976) there is consensus for dividend policy assumption “If dividend framework is looked upon as being complicated, then it becomes a problem” Discipline of Dividend insignificance According to them, their main agenda is the dividend payment According to (Modigliani 1961) together with Millers Approach, the outstanding assumption of dividends theories concerning the dividend are not relevant. School of Dividend significance Those who supported this theory complained that dividend irrelevance proposers made unrealistic assumptions because they did not consider operating costs and taxes thus the assumption lacking the meaning. Therefore, weighted average capital cost, firm’s stock price and market price are impacted positively by the periodic dividend payment. The two schools of thought were made stronger by (Lintner 1962) and (Walter and Gordon 1963). The following are additional hypotheses to support the dividend relevance notion: the preference assumption of tax, the Agency theory, The Clientele outcome Hypothesis, and the Hypothesis of Signaling Dividend Irrelevance hypothesis: 1. The Miller and Modigliani Theorem These two writers used a publication from a corporate finance institution in their work which included: share valuation, expansion and dividend policy. They came up with new views concerning dividend in the computation of a firm’s future value. Thus, they proposed that investors ought to be indifferent regardless of firms paying dividends or is not paying. The 1961 and 1958 had the same argument that firms capital structure are not relevant in determining future forecast factor. The researcher’s theorem assumes that dividend, capital gains, and proceeds are the same for an investor. Therefore, the investment strategy impacts directly on the firm’s value. Basing on whether investment plan is known, information is needed by investors in order to have a quality investment decision The theory also enlightens that shareholder can make their personal cash inflows through stocks basing on cash requirements regardless of stock which on whether or not have been offering dividends. If a shareholder in a dividend paying reserve doesn’t need to currently use money generated by a given stock’s dividend, simply he invests it again in the stock, and also the converse is true. Hypothesis of the Modigliani plus Miller model Miller and Modigliani identified certain situations that must be real for their theory to be applied; which include: They assumed that the capital markets should be ideal, i.e. investors act logically, information is liberally accessible to all financiers, transaction and floatation expenses are absent, and lastly, no shareholder is large enough to affect the cost of a share. They also stipulated that taxes also are absent and that there is no disparity in the tax charges appropriate to equally dividends together with capital gains. The company has a preset investment policy. No uncertainty exists concerning the company’s potential prospects, and thus every investor is able to predict potential prices plus dividends with confidence and thus one discount price is suitable for every security over all times. Critique The soundness of the Miller and Modigliani hypothesis is greatly reliant on two significant theories, which unluckily are not acceptable in the actual world. The hypothesis assumes a world where transaction taxes and costs are absent but this in actual sense it’s not possible to have an economy where these two key aspects don’t exist. 2. The residual theory It goes that dividends offered by companies are residual, after the company has retained money for all desirable and available NPV projects. The general idea of the theory is that the payment of dividends has no meaning as an alternative in determining the firm’s market value in future. Therefore the firm should not fail to undertake intended projects at the expense of issuing dividends. Investors who believe in this theory are not interested in knowing whether the dividends are paid or not their main concern is the future prospects of the business cash flows which could amount more dividend payouts and appreciation of capital in their stocks. The residual theory further states that dividends paid by Critique The residual theory lacks empirical support and has been criticized on this ground, it’s however just a demonstration of logic quite obvious to makers of corporate decisions. Firms have a tendency of meeting financial requirements suitable for growth plans before paying the shareholders and so any theory stating that would be stating the expected. Dividend Significance Theories: 1. The Theory of Lintner and Gordon It was proposed by (Gordon 1963) and (Lintner 1962) independently, says that, the worth of a Company may be determined by dividends. In a trendy common stock assessment model that was developed by Gordon, The dividends a firm is supposed to pay in perpetuity, are the determinants of the worth of a company’s equity financing cost, the anticipated yearly growth rate of additional benefits and the firm’s existing price of the stock. Now here, k stands for the gains on equity to investors in equity d1 is the expected end of year dividend paid out. p means standing stock price of the company. g means anticipated future yearly growth rate of dividends. The yield from dividends and future prospective dividend growth gives the equity investors total return. This model emphasizes that yield from dividend is crucial measure of total return to the investor of equity more than the prospective dividend growth rate (the point at which the firm’s capital gains and net earnings will appreciate at in the future). The future rate of growth and consequently capital gains cannot be accurately estimated and aren’t guaranteed since the firm may lose its total market value and even be declared bankrupt. Therefore if a firm fails to pay dividends, its expected market value gets critically affected by the unforeseen environment surrounding chances of the investors to never book capital gains again. Assumptions of this theory It is based on different assumptions, as specified below: 1. The firm should be completely Equity Company, meaning that it has no debts within its capital structure. 2. It’s not financed from external sources and therefore retained benefits are used in financing the firm’s expansion. 3. There is constant income that ignores reducing marginal investment efficiency. 4. Constant capital cost is incurred by the firm. 2. Walter Model: In 1963, Walter hypothesized a model which assumes that the worth of the company is relevantly determined by dividend. The model assumes that when the shareholders are paid dividends, they reinvest to gain greater revenues. This is called opportunity cost i.e. cost of capital, for the firm, this is because the firms could use the dividends as capital if it was not paid to the shareholders. Another likely condition is where the dividends are not paid out by the firm, and they spend the funds in other profitable businesses to gain returns. Rate of return for the company must be equal to the capital. If this occurs, it means returns of the company equals earnings of the shareholder supposing dividends weren’t paid. Therefore it’s obvious that if returns, exceed the capital cost, then return the shareholders receive are less than return gained from investment. Walter’s model states that if returns < capital it the company should divide the profits as dividends to give shareholders bigger returns. Nevertheless, if returns > capital the investment prospects get better returns and hence, the firm is supposed to put in the reserved remunerations. The relationship between return and capital are very important in defining the dividend strategy. Analysis of Walter’s Hypotheses 1. The theory of no outside financing separate from kept earnings, intended for the company to make more investments is actually not adhered to in the actual world. 2. When a business invests more, its risks change, therefore, the constants r and ke  rarely exist in actual life Supplementary assumptions of Dividend significance 3. Tax-Preference Theory Assumptions by Modigliani plus Miller state that there is actually no disparity in tax handling involving dividends as well as capital gains. Conversely, a significant effect on the worth of the Company and dividend policy the taxes exist in the real world. Usually, there is always a disparity in tax handling involving dividends plus capital gains, and, since the majority investors are concerned with the after - tax return, the weight of levies may influence their interest for dividends. Low dividend payment ratios put down the outlay of capital while increasing the stock price as suggested by the tax-preference hypothesis. However, low dividend payment ratios add to increasing the company’s value since dividends are usually taxed higher rates compared to capital gains and also dividends are levied instantly not as capital gains which are delayed till the inventory is sold. Due to this many investors do favor capital gains to dividends since capital gains have favorable tax treatment. One more significant tax concern is that of an estate circumstance; where an inheritor is allowed to shares following the death of a supporter, there are no capital gains duties due from the successor in such a condition.  The Agency theory There are no disagreements of ideas among shareholders and managers basing on the theory of dividend irrelevance which assumes a perfect capital market. However, in practice this hypothesis is questionable in situations where the proprietors of the company are different from its administration. In this scenario, managers are at all times imperfect mediators of managers’ and shareholders since managers views are not essentially similar as those of shareholders’ hence failing to act in favor of the shareholder. As (Rozeff 1982) puts it, shareholders incur (agency) costs linked with examining managers’ manners, and therefore, these agency expenses are a hidden cost resulting from the probable disagreements of interest between shareholders plus corporate managers. Payment of dividends may serve to bring into line the views and lessen the agency troubles among managers plus shareholders, by dipping the optional funds accessible to managers. A recommendation for an appropriate financial strategy for Unilever to be followed over the next 3 years Innovative Business Partnering (IBP) —Update abilities to better allow the fund group to increase direct worth to the company and impact Unilever’s strategy. The force here contains creating a practical tool set for decision assistance and targeted on fund professionals who labor with manufacturers and customers explicitly. People and Organization—Individuals and Organization—Create a leading-edge fund group to target alterations needed in actions, design and apply a learning plan; make a powerful career undertaking to entice and maintain the best skills. Vibrant Performance Organization— Institute BP to the companys structure. This force concentrates on the predicting procedures and creating comparative performance goals, moving predictions, and pattern confirming. World-Class Economical Developments—Streamline financial procedures and enhance actual deal handling, bookkeeping, and information control by developing distributed fund services as well as enterprise-wide monetary systems. Economic Flexibility— Improve tax, fund, and legal components to offer funds for development and enhance the efficiency and visibility of exterior dialogues with traders and value development. These ideal thrusts generate the plan for the fund group and help structure their goals in a regular manner to generate change in every Unilever Service. Conclusion Unilever is no exception. At every stage the company must incur costs and hence it is essential for firms to devise various ways of financing such costs. In perfect capital markets, M&M asserted that the firm’s worth is independent of its dividend policy. However, various market imperfections exist (taxes, transaction costs, information asymmetry, agency problems, etc) and these market imperfections have provided the basis for the development of various theories of dividend policy including tax-preference, clientele effects, signaling, and agency costs. The paper also presented the basic argument and M&M proof of dividend irrelevancy. The paper then explored the main theories that counter the irrelevancy proposition. 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