The report is being made with the objective to understand the ongoing trend in J Sainsbury Plc from 2009 till 2013. However, to facilitate in-depth analysis, we have bifurcated the report in two parts with Part 1 dealing with trend discussion relating to financial structure, investing decisions and change in dividend payments while ach of the discussion will be validated using the financial notes or through calculation of ratios. On the other hand, Part 2 is related to discussion over the change in remuneration package of the executives since 2009-2013 and how it related to the agency theory.
Part 1: Trend Analysis using Ratios:
Change in Capital Structure: In order to access the changes in the capital structure of the company, we will calculate the solvency ratios that will unearth the composition of the capital structure and if the company has grown their preference for any one source of funding:
i)Debt- Equity Ratio: Debt/ Total Equity
ii)Debt to Total Assets Ratio: Total Debt/ Total Assets
Analyzing the trend:
Referring to the above calculations, we can infer that during the years, the company has more of a balanced capital structure with fair share allocated to equity capital and debt capital. Important to note, that since 2009, although marginally, the company has declined their reliance on debt financing as indicated by Debt-Equity Ratio and Debt to Total Assets Ratios. While the former ratio declined consistently over the years from 0.49 to 0.43, the later ratio also indicated a similar trend. The Debt to Total Assets ratio indicated that over the years, the company has low proportion of assets financed using debt sources as the ratio multiple declined from 23.23% in 2009 to 20.65% in 2013.
Overall, during the period of 5 years, J Sainsbury seems to lower down the proportion of debt financing in their capital structure.
Significant Investments and Disinvestments over the years:
Referring to CFI section of the Cash Flow Statement, we had a comprehensive overview of the investment decisions of the company over the period of five years(2009-2013). Interestingly, each year the company is making heavy expenditure over its plan to purchase more plant and equipments. However, along with making necessary capital expenditure, the company has also been disinvesting its capital assets. Below is the data related to investments and disinvestments held during last five years:
Analyzing the trend:
The above table and graph indicates that from 2009 till 2012, the company had been increasing their capital investment expenditure consistently as the amount surged from $966 million in 2009 to $1252 Million during 2012 and it was only during 2013 we witnessed a fall in the capital expenditure.
As for the disinvestments, the company also had been selling their property, plant and equipment. However, the trend has not been consistent as during 2009, 2011 and 2012, disinvestment worth $390 Million, $282 Million and $314 Million, respectively, was made while during 2013, the proceeds were only worth $205 Million.
Trend in Dividend Payment
The data below indicates the trend in the dividend payment during past 5 years in proportion to the net income of the company:
The above data indicates that during 2009, the company distributed around 76% of their net income in dividends primarily to ensure confidence of the shareholders amid the ongoing financial crisis. However, as the net income increased over the years, the dividend payout ratio was reduced significantly over the years. During 2010 and 2011, the payout ratio was approximately constant at 42%, while the percentage increased to 47.66% and 50.16% during 2012 and 2013, respectively.
Overall, the company has a sustainable dividend payout ratio.
Relationship between finance theories:
i)Referring to the changes in the financial structures of the firm, where we notice that the company is now issuing more equity, it infers that they are following the trade-off theory. As per this theory proposed by Modigliani and Miller, the company keeps on balancing the proportion of debt and equity in their capital structure amid the costs and benefits offered by each of the financing source. Hence, considering the trend in the financial structure of the company, we may infer that the company seems to have reap the benefits out of debt financing and now it is only feasible for it to include more equity capital.
ii)Referring to the changes in the dividend policy of the firm where despite of increase in the net earnings of the company, dividend payments were reduced from 75.43% to 41.20%, it infers that the company is following Modigliani and Miller approach on dividend payments which state that the dividend policy of the company is irrelevant as it does not affect the shareholder wealth as the value of the firm is not dependant on dividend policy but on its investment policy that tends to increase the value of the firm.
iii)Referring to the trend in the capital investments decisions of the firm, we can infer that over the years the company has been increasing their capital base in line with the increase in their profitability. As per the investment theory, a firm can generate maximum value for its shareholders through a sustainable investment policy
Part 2:
Summary of Remuneration Package of the Executive Directors:
About Agency Theory and Executive Remuneration:
The main crux of the agency theory is to resolve problem in an agency relationship, i.e. the problem between principal(shareholders) and agents(the executives). Over the years, the executives are being compensated with big remuneration numbers in the form of base salary, stock options and bonuses, etc. Important to note, in large multinational corporations, agency problems are most likely t exist as the principal(shareholders) has varied interest than the agents(executives) and vice-versa. However, since it is the managers who execute decisions and take decision on new projects, it is quite possible that they use the asset base of the company or accept those projects that satisfy their own personal interests contradictory to the shareholders. Hence, it is the responsibility of the board of directors to adopt measures that solve the existing principal-agent problem. Over the years, it has been found that it is only through remuneration schemes in the form of incentive pay, project related bonuses etcetera, the managers get motivated to work and take decisions that not only increase their remuneration but are also in favor of the shareholders, thus solving the agency problem.
As for J Sainsbury PLC, we have noted that over the years, the remuneration packages of the executives have been on rise indicating that the remuneration committee duly understands the relevancy of solving principal-agent problem. However, the increased remuneration has benefited not only the executive managers but also the shareholders who are being rewarded with constant dividends and sustainable ROE to boost their confidence.
Works Cited
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