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Evaluate Sainsbury plc's financial strategy - Essay Example

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Evaluate Sainsbury plc's financial strategy

Being the crown of United Kingdom grocer retail stores, there has been a lot of endless speculation on its financial performance. In spite of these speculations, it has risen to be the leader for the last two decades. Sainsbury has relied heavily on equity capital to finance its operations in the recent past. The management consists of the contributors of the needed capital. Being a company based in United Kingdom, where a company with more than 50% of its capital is considered highly geared, the management made a move in the year 2006 to incorporate high level gearing for the following reasons: It acknowledges the tax benefits associated with gearing in that tax is deductible; hence it does not pay tax on the borrowed finance. The shareholders of Sainsbury, who are the providers of equity finance, are not willing to accommodate new members thus debt finance was there ultimate option. Debt finance played a vital role in enhancing their operations in the year 2007 which was characterized by economic hardships globally. Dividend reinvestment plan This is another significant source of funds for Sainsbury Company. This dividend reinvestment plan allows stakeholders to reinvest their cash dividends through purchasing more shares in the market through a significant prearranged share dealing service. No new shares are allotted under this plan. It involves adding more value to the existing ones through a systematic way in order to achieve a balanced portfolio. The price and value of these shares fluctuate in response to the market waves. Stakeholders are fore warned of this possibility because the reinvested dividends in the form of shares may end up with a value or price that is less than the anticipated. Shareholders may then end up getting less than what they invested. Past performance is a guide to clear shareholders doubts and for those who are not sophisticated enough to understand the fir past performance are advised to seek the assistance of professional financial advisors. Dividend Policy Theories To aid in understanding of Sainsbury dividend policy, this paper acknowledges the importance of reviewing theories on dividend policies. With empirical research continuously being conducted by scholars on dividend policy, no consensus has ever emerged has scholars continuously keep disagreeing about the same empirical evidence. They all agree that dividend policy refers to management practices in making decisions on the criteria and amount of dividends to be paid to shareholders overtime. However, three dividend policy theories have emerged overtime; they are dividend irrelevance theory, low dividend theory and high dividend theory. These theories highly contradict each other, which leaves firms to decide which theory best suites their vision and thus incorporate it in their divided payment. Dividend debate is not limited to these theories. There are other minor approaches in advocated for by scholars. Dividend irrelevance approach Proponents of this theory argue that in a perfect market, dividend policy has no effects on the value of a firm or its cost of capital. Similarly, shareholders ...Show more

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Name…………………………………………………………………….xxxxx Institution……………………………………………………………….xxxx Professor…………………………………………………………………xxxxx Course…………………………………………………………………….xxxx @2012 Evaluate Sainsbury plc’s financial strategy Introduction The core focus of financial strategies is on the financial aspects of strategic decisions…
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Evaluate Sainsbury plcs financial strategy essay example
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