About the paper
The paper is commissioned to discuss the dividend policy of German car manufacturer, Volkswagen and analyze whether the past three year dividend payments is in accordance to the dividend policy of the company. As part of this paper, we will also calculate the weighted average cost of capital(WACC) of the company.
About the company
Founded in the year 1946, Volkswagen AG is a german car manufacturer and at present is the second largest automobile manufacturer in the world. The company, together with its subsidiaries, manufactures and sells automobiles in Europe, Americas and Asia-Pacific. In addition to automobile manufacturing, the company has also started financial services as its fourth business segment, which offers leasing, financing and fleet management services to dealers and the customers. Other three business segments of the company include, Passenger Cars, Commercial Vehicles and Power Engineering.
Passenger Cars segment design, develop and sells passenger cars and related auto parts. The Commercial Vehicle segment design, develop and sells commercial vehicles like trucks and busses, and also sells related auto parts.The Power Engineering segment design, develop and produce high-end engineering based products such as diesel engines, turbo compressors,turbines and many other products.
In addition to the passenger and commercial vehicles, the company also offers motorcycles under the brand name of Ducati. The company also has an agreement with Daimler AG to produce delivery vans. The company is headquartered in Wolfsburg, Germany.
Referring to the official website of the company we found that Volkswagen is following growth based dividend strategy with the intent to ensure shareholder participation in the business success. However, while following the growth based dividend policy, the company also ensures that its dividend policy continues to contribute toward the solid business foundation of the company.
Referring to the above table, we can see that the company makes dividend payment to common and preference shares and the amount of dividend payment has been consistently increasing every year. The distribution ratio of the company was 21.2%, which the company targets to increase to 30% in the medium term.
Dividend Growth Rate
For the purpose of calculating the dividend growth rate, we have used geometric mean multiple. Calculation follows:
2013: (Dn /Do)1/n-1
Ordinary Share = (4/3.50)1/1-1
Preference Share= (4.80/4)1/1- 1
2014: (Dn /Do)1/n-1
Ordinary Share = (4.80/3.50)1/2- 1
Preference Share= (4.86/4.06)1/2-1
Comment on dividend policy
Important to note,while the company declared that its dividend payments are made with the intention of sharing the success of the company with that of its shareholders, ironically, during 2014, the net profits of the company were down by 19.55% and despite of pessimistic results, Volkswagen AG continued to increase its dividend payout.
This indicates that despite of poor financial performance, the company is maintaining consistency in dividend growth and payout ratio in order to maintain the confidence of the shareholders in the company. The increased dividend payout is met through increased borrowings and lower proportion of retained earnings, which may also halt the company’s growth potential in the future.
Weighted Average Cost of Capital (WACC)
Weighted average cost of capital(WACC) is the minimum amount of return which an entity must earn for all categories of the investors.The multiple is calculated by weighing debt and equity against their respective costs.
WACC: Weight of Debt* Cost of Debt (1-tax rate) + Weight of equity* Cost of equity
= 0.6338* .0208*(1-0.2519)+ .3662* .1161
= .0098+ 0.0425
Components used:i) Weight of debt: The weight of debt(short-term and long-term) is calculated as part of total capital(debt+ equity)
ii) Cost of debt: Cost of debt is calculated as average YTM of all the bonds issued by the company.
iii) Weight of equity: The weight of equity (short-term and long-term) is calculated as part of total capital (debt+ equity)
iv) Cost of equity: We have used the CAPM model for calculating the cost of equity of the company. Below is the expression used under CAPM model:
Cost of equity: Risk free rate+ beta*( Equity Risk premium)
-Risk free rate: 10-year yield of German treasury bonds
-Beta: Volatility of stock to the market index
-Equity Risk premium: Excess of market index return over risk-free rate in Germany
i) Market Value of Debt: Short-term debt+ long-term debt
= 41777+ 67074
= €108851 million
ii) Market Value of equity: Common stock outstanding* share price
= 2380* 26.42
iii) Total Capital: Debt+ Equity
= 108851+ 62879.60
iv) Weight of Debt: Debt/ Total Capital
v) Weight of Equity: Equity/ Total Capital
vi) Cost of debt: 2.08% (Average YTM of all the bonds issued by the company)
vii) Cost of Equity: RFR+ Beta (Equity Risk Preium)
= 0.33+ 1.88(6)
Damodaran, A. (n.d.). Equity Risk Premium. Retrieved October 27, 2015, from http://pages.stern.nyu.edu/~adamodar/
Germany Generic Govt 10Y Yield. (n.d.). Retrieved January 31, 2015, from Bloomberg: http://www.bloomberg.com/quote/GDBR10:IND
Key Statistics: Volkswagen AF. (n.d.). Retrieved January 31, 2015, from Yahoo Finance: https://in.finance.yahoo.com/q/ks?s=VLKAY
Volkswagen AG. (2014). Annual Report 2014. Volkswagen AG.
Volkswagen Inc. (n.d.). Dividend Policy. Retrieved January 31, 2015, from http://www.volkswagenag.com/content/vwcorp/content/en/investor_relations/Warum_Volkswagen/Dividend_Policy.html
Weighted Average Cost of Capital (WACC). (n.d.). Retrieved October 10, 2015, from http://www.efinancemanagement.com/investment-decisions/weighted-average-cost-of-capital-wacc