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.