Air New Zealand’s Financial Performance, Dividend Policy and Applicability of Agency Theory to its Status

ANZ Performance

ANZ performance was evaluated according to profitability, investment return, liquidity and market analysis using ratio analysis. Based on profitability analysis, the return on Assets (ROA) for ANZ declined in 2009 then followed a constant trend in 2010 and 2011 (Appendix, fig 1). However, when the results for free cash flows to the firm (FCFF) are considered, ANZ profitability is shown to have been on a consistent sharp decline from 2008 to 2011. By 2010, the FCFF estimates indicated that there were no free cash flows available to the firm as indicated by the entry of the FCFF line graph into negative values (Appendix fig. 1).

The performance indicated by FCFF is confirmed by evaluating the entity’s liquidity over the period. As indicated by the current ratio, the entity’s liquidity has been on a constant decline from a high of 1.23 in 2008 to a low of 0.81 in 2011 (Appendix fig. 1; values for graph are in percentages). Considering other measures of performance, e.g. investment return as evaluated via ROE (Helfert 2001, p. 98), ANZ’s investment return declined in 2009 then assumed a constant trend in 2010 and 2011 (Appendix fig. 1). Such a finding reinforces the finding on profitability delineated by ROA. Finally, the results of the market performance, assessed via Price-earnings (p/E) ratio (Helfert 2001, p. 98), indicate that the amount that investors were willing to pay for $1 dollar earnings in ANZ rose in 2009 then dropped to a relatively constant level for the 2010 and 2011 financial years (Appendix fig. 1).  Such findings on market performance is in contrast to the findings on the investment return, assessed by ROE (Heifert 2001, p.98), which indicated a sharp drop in investment return in 2009. Since there was only a comparable increase in the outstanding shares to increases in the other years (2010 and 2011), such unfavourable investment return would be expected to dissuade investors from purchasing the entity’s stock. However, such declines in investment return occurred on the background of increase in the entity’s liquidity, as evaluated via the current ratio, a factor that could have led to a favourable appraisal of the entity by potential investors.

Relationship between ANZ Dividend Policy and Performance

Evaluation of the performance of the entity against their dividend policy indicates that ANZ’s dividend policy is not influenced by the entity’s performance greatly. Such a conclusion is evident from the relationship between dividend policy (assessed as the dividend payout ratio as per Anil & Kapoor 2008; Denis & Osbov 2008; Lintner 1956), and the indicators of performance evaluated.

From the Correlation matrix (appendix table 1), it is for instance noted that ANZ’s dividend policy (DPR) has a poor relationship with profitability indicators used. For instance, the DPR has a negative relationship with ROA (appendix, table 1), despite studies indicating that profitability to have a positive relationship with dividend policy (Anil & Kapoor 2008; Denis & Osbov 2008; Lintner 1956). Secondly, even on evaluating profitability on the basis of FCFF, the relationship between DPR and per share FCFF is weak. Calculating the coefficient of determination (r2) for the relationship between DPR and per share FCFF, indicates that only 2.3 per cent of the variations in DPR are explained by variations in per share FCFF (appendix table 2).

Evaluations based on liquidity also indicate a weak relationship between ANZ’s dividend policy to the entity’s liquidity status. This is despite studies showing liquidity to be a core consideration for the amounts of dividends paid, especially where the law requires such payment to be in cash (Anil & Kapoor 2008; Lentner 1956). Although other performance indicators (ROA and ROE) have favourable relationship with ANZ’s dividend policy, only market performance (P/E) appears to have considerable effect on the determination of the dividend paid. For instance, variations in ROA and current ratio explain only 55.82 per cent and 52.87 per cent variations in ANZ’s DPR respectively (appendix, table 2). However, P/E ratio explains up to 98.43 variations in the entity’s dividend policy (appendix, table 2). Such favourable valuation of the entity as indicated by P/E ratio could indicate the perception of low risk with respect to the entity thus encouraging investors to purchase the entity’s stock (Helfert 2001, p. 124). Such confidence could have resulted from the support the entity receives from the government, as exemplified by the Government willingness to inject more capital into the company in 2002 (Air New Zealand 2012a).

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