Statoil's dividend policy, a reason for investors to stay optimistic?

'Statoil ASA is "highly committed" to its dividend policy even amid uncertainty over oil Prices'

(Bloomberg, 2015).

Despite Statoil's reporting an overall loss -for the first time since it listed in 2001 (within Q4 2014 a loss of £0.74bn was recorded due to the plummet in oil and gas prices) the group has continued to protect its dividend policy, intending "to maintain a flat dividend for the first three quarters of 2015", whilst cutting expected investment for 2015 from US$20bn to 18bn (Financial Times, 2015). Watson & Head (2013) state that due to the asymmetry of information existing between shareholders and managers, shareholders see dividend decisions as conveying new information about the company and its prospects; with a dividend increase usually seen by the market as conveying good news, meaning that the company has favourable prospects, while a dividend decrease is usually seen as bad news, indicating a gloomy future for the company. Thus when we take the market (investors) view upon dividend decision perhaps they will remain optimistic about the businesses prospects, where despite falls in profits the choice to maintain a flat dividend doesn't indicate 'a gloomy future'.Through the application of Miller and Modigliani Model, depicted in Figure 1- still widely used today to analyse dividend structure by authors such as Arnold (2013) and Watson & Head (2013)- the author will evaluate whether the continued dividend policy suggests a bright future for Statoil ASA.

Before considering the influence of decreased oil price upon Statoil's internal rate of return of investments, it appears that perhaps the decisions is trying to obtain our market confidence by continuing its dividend policy through the neglect of investments with positive Net Present Value (NPV). With Statoil expecting investment capital of 0 to EP they would have anticipated to invest between 0 to A into investment options with a positive NPV, whilst releasing A to EP to dividends as no more projects with positive NPV are available. So when StatOil instead obtained AP well below EP it would be expected that dividends would decrease due to the capital from 0 to AP being invested in all projects with a positive NPV to achieve 'optimal investment policy' (Watson & Head, 2013). Perhaps this is what the management wished the market to believe, that they are not obtaining 'optimal investment policy', due to their commitment of fulfilling the desires of some shareholders which 'prefer a dividend pattern which matches their desired consumption pattern' even though the company still has desirable prospects (Arnold, 2013). I fear that the truth is far bleaker.

(Source: Self creation for elaboration)

I believe that the decrease in oil prices would have resulted in a major decrease upon the internal rate of return from investment options available to them, as depicted in Figure 2. The fact that the company made a loss for the first time in 14 years displays to me that the businesses is unable to gain a positive NPV on current investments due to the lower oil prices, thus I expect that future investments rate of return are to have also decreased due to this factor. Consequently I believe the steady dividend is 'due to a shortage of attractive investments, implying that growth prospects for the company and its dividends are poor' in the current climate (Watson & Head, 2013).

(Source: Self creation for elaboration)

In conclusion I believe that the lack of attractive investments means that despite lower AP, there is still available capital to pay shareholders in dividends after investing in options with positive NPV, displayed in Figure 2 from A to AP. Growth aspects in the current climate are poor, and investors should be wary that unless the oil and gas prices market changes, the prospects for Statoil remain bleak, no matter what the dividend policy is deemed to suggest by the market.

References

Arnold, G. (2013). Dividend Policy. In G. Arnold, Essentials of Corporate Financial Management. (2nd ed., pp.435-458). Harlow: Pearson

Blomberg (2015). Statoil CEO says 'Highly Committed' to Dividend Policy. Retrieved from http://www.bloomberg.com/news/videos/2015-02-06/statoil-ceo-says-highly-committed-to-dividend-policy

Financial Times (2015). Statoil Q4 profit misses expectations on plunging oil. Retrieved from http://www.ft.com/fastft/274331/statoil-q4-profit-misses-expectations-on-plunging-oil

Watson, D. & Head, A. (2013). Dividend Policy. In A. Head & D. Watson, Corporate Finance Principles & Practice. (6th ed., pp.302-330). London: Pearson.

 

Behavioural Finance and the Rise of ‘The  Herzfeld Carribean Basin Fu (CUBA)’ Shareprices

Investors in a tiny American fund have received an extraordinary windfall, apparently as a result of the four-letter symbol used to identify the fund on the US stock market.The fund, called Herzfeld Caribbean Basin, has stakes in a number of companies that could benefit from last week’s decision by Barack Obama to restore relations with Cuba. But the bulk of the rise in the fund’s share price seems to be due to investors being drawn to its four-letter code or “ticker” symbol: CUBA.

(Worstall, 2014).

Whilst partly amused, I am amazed at investors failure  to research appropriate information into the company before risking their capital in a firm based on the ticker symbol ‘CUBA’. Such an anomilie in terms of share price behaviour in a supossedly efficient  market could be put down to ‘behavioral finance’ identified by Wastson & Head (2010) , which suggests: 

‘that investors do not appear in practice to be consistently able to make decisions that have as their objective the maximisation of their own wealth.’

When analysing the change in The Herzfeld Carribean Basin Fu shock price it can be clearly demonstrated the dramatic effect that US restored relations with Cuba initially had upon its perceived worth (Figure 1). However as research by Sam & Smith (2007) found ‘once given creditable signals regarding a securtiy’s value they quickly adjust their beliefs and correction occurs’ (Figure 1). Even though the value of shares in the company is still higher than before the Obama announcement, this could be a more accurate and credible valuation the company’s ‘stakes in a number of companies that could benefit from… [the] … decision by Barack Obama to restore relations with Cuba’.

(Adapted from: Yahoo Finance, 2015).

Despite the fact the market appeared to move rapidly from a state of irrationality to a state of rationality, I find it interesting that in an age where so much pressure is put on companies to deliver accurate information to investors regarding their stock’s worth, and thus helping to achieve stronger market efficiency, that ‘behavioural finance’ can still produce such large - although brief - failures in the current stock market.

References

BBC (2014, December 17). Obama hails 'new chapter' in US-Cuba ties. BBC. Retrieved from http://www.bbc.co.uk/

Small, K. & Smith, J. (2007). The hot stock tip from Debbie: implications for market efficiency. The Journal of Behavioural Finance (8)4, 191-197.

Watson, D. & Head, A. (2010). Capital market efficiency in Watson, D. & Head, A. (Ed.5) Corporate Finance Principles and Practice. (pp.36-42).

Worstall, T. (2014, December 24). Cuba Shows That The Efficient Markets Hypothesis Is Wrong. Forbes. Retrieved from http://www.forbes.com

Yahoo Finance (2015). The Herzfeld Caribbean Basin Fu (CUBA). Retrieved from https://uk.finance.yahoo.com