Posted: July 7th, 2015

BHP Biliton Dividends and Cash Flow Strains – Analysis

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Corporate Finance for Managers
Individual Assignment 2 (20%)
Trimester 2, 2015
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MARKING
Total marks for this assignment is 20, which forms 20% of the assessment for the unit.
Marks will be awarded on the basis of the learning, critical thinking, and analysis presentation.
Stage 1 – Initial Submission: your understanding and analysis to the news article that addressing the four questions/issues/aspects described below in the assignment section. 12 marks (3 marks for each question).
Stage 2 – Response: Select the Initial Submissions of TWO other students and respond to them. Refer guidance notes below. 8 marks.
DUE DATE AND LODGEMENT
Stage 1 – Initial Submission:
a) The Initial Submission (Word document format) through Turnitin is due 11:59 PM on 19 July 2015; and
b) The Initial Submission to be posted to the Assignment 2 Discussion Forum for Peer Review on Blackboard by 12:00 noon on Monday 20 July 2015 by yourself (fail to do so will occur 30% penalty of the overall marks of this assignment). The Discussion Forum for Peer Review will be open after the deadline of your initial submission.
Stage 2 – Responses: the TWO responses (Word document format) through Turnitin is due 11:59 PM on 26 July 2015.
If you experience any difficulty in uploading your Assignment submission through Turnitin, or if you are in doubt about whether or not it was successfully uploaded, please email your files, as an attachment, to Li Xian Liu at [email protected].
ASSIGNMENT LEARNING OBJECTIVES
1. Understand the dividend payout policy and the reason why companies follow this policy.
2. Understand the argument why payout decisions may have a signal effect to investors.
3. Understand the imputation tax system and explain how behavioral factors may affect dividend policy.
4. The relationship between dividend payout policies and capital structure issue.
FORMAT AND PRESENTATION
Presentation includes formatting and layout considerations, which assist in conveying information to the reader in a manner that is easy to follow. You should ensure that your assignment is well-presented and is as clear and concise as possible. Ensure that you appropriately cross-reference your work. Citations need to follow Chicago referencing style. If you are unfamiliar with referencing, seek the assistance of Library staff. Also, if you draw on
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information from other sources, ensure that you apply an appropriate referencing style consistently.
Your assignment must be word-processed, on one side of the page, using the Times New Roman/Arial font size 12 (or equivalent). The line spacing must be at least a line and a half and there must be a minimum page margin 2.5 cm on all sides. Round figures to 4 decimal points where necessary. Please use the Assignment Cover Sheet (available from Blackboard) when submitting your assignment.
Your analysis should be clear, concise and well structured. The total word limit for the initial submission is from 800 to 1,000 words. The word limit is the maximum. Students should not feel compelled to write to the maximum. There is no need for an executive summary. The word limit excludes appendices, headings, calculations, calculation tables imported from Excel, figures, and references. There is no +10% tolerance.
BLACKBOARD – Q&A FACILITY
There is a forum entitled “Assignment 2 Discussion Forum” in the discussion board on Blackboard for asking questions and exchanging information among students. Please use that forum rather than the general forum.
REFERENCES
A large number of references are not required. Quality and relevance is what counts and earns marks.
• Referencing (Internal): If your report refers to item provided in an appendix, the reference details for the item should be sufficiently precise as to enable the reader to locate them quickly and easily. For example, a reference to a text should always include a page number (e.g., p. 22 for a single page reference or pp. 26-28 for a multiple page reference), and a reference to an AASB document or Act of Parliament should include a paragraph or clause number. A reference to an Excel spread sheet should contain the relevant row, column or cell reference (e.g., Row 9; Column A; or Cell D10).
• Referencing (External): All external sources are to be acknowledged and referenced using Chicago 16th edition referencing as instructed in the unit outline. A copy of the Curtin library’s Chicago 16e guide is at: http://libguides.library.curtin.edu.au/content.php?pid=141214
References need not be restricted to academic sources. However, references such as Investopedia, Wikipedia and Anonymous are not acceptable sources as the identities of authors are unknown and hence there is no capability to verify their qualifications and experience to address the subject.
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GENERAL INSTRUCTIONS
Please remember to keep a copy of your completed assignment (including the completed cover page) for your own reference and as insurance in the event that your assignment is misplaced. In the event that a copy of your assignment is requested and you are unable to provide it, you will receive a zero grade for the assignment. You must also retain the original computer file of the assignment for submission on request.
All the necessary information you require to complete this assignment is provided in this document. Should it be necessary to ask a question about the assignment, you should email your question to the lecturer via her email address ([email protected]). She will endeavour to respond to valid questions as soon as possible of receipt of your email.
“TWO RESPONSES” or “DISCUSSIONS” GUIDELINES
 Plan your time to ensure you contribute to the discussion as closely as possible to the commencement date. Last minute contributions are inevitably mediocre.
 Prior to the discussion opening, research the topic and the case, and look for examples of its practical application. Consider the questions that are being asked, make an informed judgment about what would constitute a reasonable answer, and then make your entry.
 Your initial submission is an evidence-based synopsis of your research and your views on that research as they relate to the case. Your comments may also be challenging and thought-provoking for your colleagues where relevant.
 Your responses to other students’ initial contributions should be evidence-based, succinct and to the point. Responses such as: “Bruce you made some great comments and I agree with all of them”, are insufficient to earn any marks. Your responses must be research-based and add value to the topic, such as: “Bruce, you referred to Smith and Jones as saying xxx. Brown and Black agreed with that viewpoint in their document…” or “Grey and Green took a different view, they said yyy”.
 Repeating your initial submission in your responses to the initial submissions of other students will not receive marks. Similarly, defending your initial submission in reply to another student’s response will not receive marks unless it introduces new research.
 If the initial contribution of another student causes you to change your mind, feel free to say so, being sure to state why you have been so convinced. Although personal experiences are a welcome addition to complement your research effort, they are not a substitute for it.
 The reasons for the emphasis on quality and being succinct are that entries can become too long, convoluted and distract from the key points trying to be brought out in the discussion. Keep your entries focused on the questions and your contributions. Avoid generalised comments.
 You are welcome to make more than two responses. If you do so, please mark clearly the two responses that you want assessed by writing “For Assessment” at the top of the page.
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 The review will flow far better if you keep to a limit of 600 words for both of the reviews (each review for 300 words average). Formal in- text referencing is not required however you should still include a bibliography (not counted for word limit).
—End of the assignment information, please move to the next page for your article–
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S&P cuts BHP Billiton outlook to negative over dividend, cash flow strain
The Australian Financial Review
May 4 2015 at 3:25 PM by Amanda Saunders
Ratings agency Standard & Poor’s has cut BHP Billiton’s outlook to negative from stable, citing pressure from its so-called “progressive” dividend on its financial flexibility, and the weak outlook for prices of its two biggest earners – iron ore and oil.
But S&P on Monday affirmed the mining giant’s A+ credit rating, and the A-/A-2 credit ratings on Rio Tinto.
S&P said its revision of BHP’s outlook “reflects our concerns that continued weakness in commodity prices, combined with BHP’s commitment to a progressive dividend payment, may weaken the company’s key financial metrics to below our expectations for the ‘A+’ rating without offsetting measures by the company”.
“BHP Billiton’s commitment to a progressive dividend policy reduces the company’s financial flexibility in times of deteriorating market conditions. The policy also constrains the company’s ability to maintain its key financial ratios at a level commensurate with the A+ rating level.”
However, even if BHP’s rating was cut, it would still sit within the board’s target of a “solid A” credit rating.
May Zhong, credit analyst at S&P, said BHP had more scope to cut operating costs and capital expenditure to conserve cash amid lower earnings.
“We would expect the company to generate positive free operating cash flow after capital expenditure, even if commodity prices remain weak over the period.”
But BHP’s commitment to its dividend policy – which cost about $US6.4 billion ($8.18 billion) last financial year – was “likely to see its discretionary cash flow become negative over the next two years (compared to about US$2 billion positive discretionary cash flows in 2014), causing its adjusted net debt to increase and cash flow/leverage measures to worsen”.
The mining giant was one of eight iron ore miners that S&P said last month could have their credit rating downgraded, as the ratings agency made dramatic cuts to its price forecasts for iron ore over the next few years.
BHP shareholder Nikko Asset Management told The Australian Financial Review last month that its commitment to constantly maintain or increase its dividend was a “travesty” and a “bear trap” by one of its shareholders.
Brad Potter, head of Australian equities at Nikko Asset Management, said the dividend policy was a “travesty”.
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“It wouldn’t surprise me if they accepted a credit downgrade instead of cutting the dividend,” Mr Potter said.
The miner had got itself caught in a progressive dividend “bear trap” but it was unlikely to be able to scrap the policy until the next mining boom, because a backflip would be “embarrassing”.
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Questions
1. How do managers use dividend policy to convey information to the marketplace? Why is dividend policy, instead of a press release, used to communicate information?
2. In the above article, it is suggested that “BHP’s commitment to its dividend policy – which cost about $US6.4 billion ($8.18 billion) last financial year – was “likely to see its discretionary cash flow become negative over the next two years (compared to about US$2 billion positive discretionary cash flows in 2014), causing its adjusted net debt to increase and cash flow/leverage measures to worsen”, carefully examine this statement.
3. There is evidence to suggest that dividends have a more stable pattern than earnings. Why Mr Potter said that “It wouldn’t surprise me if they accepted a credit downgrade instead of cutting the dividend”.
4. A company’s payout policy can be expected to change over time as the company moves through its life cycle. Explain this statement.
Note: If you wish to use share price data and dividend payout data to support your argument, please go to Google finance or Yahoo finance finding the related information.
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