Corperate Financial Policy

1.0 Introduction:

Slashing dividend payouts was once perceived as a negative signal by the market about the profitability and stability of a company. However, given the current global economic downturn, a cut in dividends need not necessarily be viewed pessimistically. This report will look at cause and effect of the slashing of dividends by one of Australia’s biggest banks, National Australia Bank (known hereafter as NAB) and how shareholders have altered their views to a cut in dividends in light of the financial crisis.

2.0 Background Information on NAB:

National Australia Bank Group (NABG) is a financial services organization that provides a comprehensive and integrated range of financial products and services [1]. NABG primarily operates in Australia, New Zealand, the UK, and the US [1]. It is Australia’s top lender [2] and is headquartered in Melbourne, Australia employing approximately 39,729 people globally [1].

Dividend history:

NAB introduced its Dividend Reinvestment Plan (DRP) in 1983 [3]. Dividends are usually paid in July and December each year [4]. Shareholders will automatically receive their dividends in cash unless they give notice that they wish to participate in the DRP [4].

If we analyze dividend payments from 1983, there is evidence of the ‘sticky dividend’ policy that companies adopt, where they will only choose to increase dividend payments if it is sustainable. The ‘sticky dividend’ policy is a conservative approach to dividend payout where dividends lag behind earnings. We see a general upward trend from 1983 to present. From July 1992, we see that dividend payment levels continually increase or are maintained (from Dec 2003 to July 2006 at 83¢) until July 2009, where there is a sharp depreciation of 24.7%, from a steady dividend payment of 97¢ per share to 73¢ per share, fully franked [5]. This represents a dividend payout ratio of 67.4% for the half year on a cash earnings basis. These dividends were paid on 9 July 2009...