Finance

HSBC is expected to have cut back on their dividend pay-out since their banking sector is one of the most heavily hit by the recent economic crisis. The kind of effect on them is a little different with Vodafone and Glaxo however. Vodafone is more or less not as badly hit by the crisis since they are in the telecoms industry as well as GlaxoSmithKline company which belongs to the pharmaceutical industry.

It can be noted that HSBC has been very aggressive in the dividend that it doles out to its shareholders. Although in normal situations, this would have been perceived as a sign of strength, in this case it is not. The payment of dividends signifies that the company is not planning to invest on anything soon. The company is only paying their shareholders, because they might think that there are no better investment opportunities for their business.

Vodafone, on the other hand, has significantly lowered its dividend pay-out to its shareholders. Although they are indeed affected by the current economic crisis like everyone, they are not badly hit as the financial sector. Owing to the nature of their business, they need to invest in their infrastructure very often. The fast development of telecommunications technology requires this firm to stay abreast of what is the current development in their field. The reduction in dividend clearly indicates that the company is going to need it and they are most likely planning to invest in new technology infrastructure to improve their current operations capability. This is advantageous for the shareholders despite the fact that their earnings are curtailed for awhile. The reinvestment of Vodafone into their own business would mean bigger returns in the future as well as increased competitiveness in their respective field.

GlaxoSmithKline on the other hand considerably reduced their capacity for the dividend payments of their shareholder. Their sector is also greatly hit by the financial crisis but the demand for their product and services are not slowing down. The advent of the internet however meant that the company take the beating of their stock by market forces. The withdrawal of the company from giving out such huge amounts of money shows that they might be trying to survive as well as planning to invest in substantial new drugs and research. In any of these cases, the company has no other way to be able to compete effectively but to invest in their related technology and areas of research for potential pockets of profit opportunities.

There have not been any drastic changes in the dividend policy of HSBC despite the ongoing financial crisis. The dividend has actually remained the same from previous years even though the earnings have already dropped considerably. Vodafone on the other hand has an erratic dividend policy within the last five years. It started low on 2005 and then swings upward and comes back low again on 2008. The financial crisis however has surprisingly increased the earnings per share of the company that is why they are able to increase their dividend payments to shareholders as well. GlaxoSmith on the other hand does not have any significant effects felt because of the economic crisis. The nature of their products which are life saving drugs would always be in demand despite people having lost their regular means of income. Their company actually posted a higher earnings compared to the years that the financial crisis was just building up.

The selection of these three companies is based on the fact that they are all operating on different industries or sectors of the economy. The relationship between their share prices as well as the dividends paid to the shareholders is analyzed for the connection between dividend policy and the resulting share prices.

Share Prices20092008200720062005
HSBC5580938880
VodaFone1930332224
GlaxoSmithKline3848525547
The resulting graphs show that there is no relationship between the share prices of the company with their dividend policy. The data does not even come close to having a correlation factor close to 1 or even remotely close to it. This is to be expected since the dividend policy simply indicates the relative strength or weakness of a company and not exactly the fundamental truth behind the scenes. If we are to evaluate this using the null hypothesis testing, the null hypothesis would be whether the increase in share prices would correspond to increase in dividend yield as well. The data that resulted were all lesser than the 0.5 confidence factor. The hypothesis therefore is false. There is no connection between share prices and dividend yield. This can be easily explained by the fact that the companies with high earnings do not necessarily give out dividends to their shareholders. The executives might decide that they need the money for further expansion or to gear up for an advertising battle with a rival company.