The selected company is Nick Scali Limited (NCK), have an active dividend policy before 2011 as its management regularly paid semi-annual dividends to ordinary shareholders. Table 1 indicates dividends paid by the company in the last five years.
It is noted that the company paid dividends to its shareholders in the last five years. However, it is pointed out that the growth rate of dividend per share had a declining trend. The company’s dividend was $0.23 in 2016, which was 53% more than it paid in 2015. The growth rate was only 6% in 2019, as indicated in Table 2.
The dividend policy of the selected company can be explained based on the signaling theory, which states that firms pay dividends to shareholders to reflect their financial wellbeing. However, companies may also use their dividend policies to hide their business problems. They do not want shareholders to withdraw their investments, which could have a detrimental effect on their stock prices. The stock price analysis of Nick Scali Limited provided in Table 3 indicates that the current P/E ratio of the company is 17.17. The stock price was $6.48 on June 30, 2020, which increased to $8.93 as of August 18, 2020.
It shows that investors held a positive view of the company, despite a reduction in the dividends growth rate. Shareholders and investors were willing to invest in the company’s stocks to achieve capital gains. It is noted that the company’s dividend payout increased in the last five years, from 71% in 2016 to 91% in 2019. This shows that management was confident that the company would perform strongly in the coming periods. Furthermore, the company’s EPS improved significantly, which motivated the management to distribute earnings to shareholders. The declining trend in the dividend growth rate could also be due to shareholders’ tax preference for capital gains. It implies that they do not like to receive dividends because of higher income taxes than the capital gains tax. In these cases, companies reduce dividends paid to shareholders, and the market focuses on the upside movement of stock prices.