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This report will incorporate an analysis of Blackmores LTD including, the level of leverage and the companys capital structure; the dividend policy and the amount of dividends paid to the shareholder; and finally, a valuation analysis on Blackmore

Extracts from this document...

Introduction

Table of Contents 1 introduction 1 2 2 3 Corporation Background 3 3.1 Organization 3 3.2 Market Position 3 3.3 Government Impact 4 3.4 Description of Competitors 4 4 Capital Structure 6 4.1 Blackmores' Current & Historical Leverage 6 4.1.1 Debt to Equity Ratio 6 4.1.2 Degree of Financial Leverage and Operating Leverage 8 4.2 Capital Expenditure and Financing 9 4.3 Capital Structure Relative to Competitors 10 4.4 Bankruptcy Risk Assessment 11 4.5 Leverage Policy Summary 12 4.6 Is this the Optimal Leverage Policy? 13 5 Dividend Policy 14 5.1 Current and Recent History of Dividend Payment 14 5.2 Dividend policy comparing to comparable firms 14 5.3 Relevant Company Characteristics to its Dividend Policy 16 5.4 Analysis of Company's Dividend Policy and Lintner's Analysis 16 5.5 Optimal Dividend Policy 17 6 Valuation 19 6.1 Assumptions 19 6.2 Valuation Method 20 6.2.1 Determining the Cost of Equity (rS) 20 6.2.2 Determining the Cost of Debt (rb) 22 6.2.3 Weighted Average Cost of Capital (WACC) 22 6.2.4 Estimating the Future Sales Growth Rate 23 6.2.5 Estimating Future Cash Flows 23 6.2.6 Estimating Firm value 24 6.3 Sensitivity Analysis 25 6.3.1 Share price sensitivity to changes in the Sales Growth Rate (2011-2020) 25 6.3.2 Share Price Sensitivity to Change in the Sales Growth Rate (after 2020) 26 6.3.3 Share Price Sensitivity to Changes in WACC 27 6.4 Comparison of the Estimated and Actual Share Price 28 7 Investment Recommendation 29 8 Appendix 30 9 Reference 34 1 Executive Summary Blackmores LTD (BKL) which started in the 1930s is a major player in developing and marketing products and services that deliver a more natural approach to health, based on their expertise in vitamins, minerals, herbs and nutrients. For the year ended 30 June 2010, Blackmores posted a net profit after tax of $24.3 million, an increase of 17% on last year. Group revenue increased by 7% to $214.9 million; earnings before interest, tax, depreciation and amortization (EBITDA) increased by 25%; and earnings per share increased by 15%. ...read more.

Middle

5.2 Dividend policy comparing to comparable firms In parallel to the capital structure comparison the companies chosen to compare the dividend policy include, Vita Life Sciences (VSC), Australian Pharmaceuticals (API) and Sigma Pharmaceuticals (SIP). Due to the higher earnings per share of Blackmores the dividend paid is substantially higher in comparison to the other three companies. Thus BKL presents a favorable dividend. In addition, factoring out the higher dividends paid, BKL portrays a constant growth in its dividend payments. The dividends of API and SIP are fairly volatile and also includes some years were there are no payments to stockholders. VSC has just recently been publicly listed and did not exist on the ASX pre 2007. However Vita Life Sciences did present a dividend per share of 0.5 cents in 2010, a dividend payout ratio of 6%. Figure 6 - Dividends Per Share Comparison Source: Database of Fin Analysis Figure 7 - Dividend Payout Ratio Comparison Source: Database of Fin Analysis with additional ratio analysis The comparison of Divdend Payout Ratio, between the four companies in the health sector, yields more comparable results. As the ratio represents dividends as a proportion of earnings per share, the companies are more consistent with one another. Even though in some years API and SIP have a larger payout ratio in comparison to BKL, BKL is again very consistent with its dividend policy. It can also be noted that a larger payout ratio does not necessarily correspond to a superior policy, as the ratio measures the ability of the company to support the dividend. This factor could be the reason for the fluctuations in the payout ratio for API and SIP. The large ratio of SIP in 2003 and 2010 (negative payout ratio due to a negative EPS and a dividend payment), could be a result of Dividend Signaling Theory and will be discussed further below. In conclusion, the dividend policy of Blackmores is far superior to the three companies, not only because of the higher dividend payments, but the constant growth rate and the ability of Blackmores to support its dividends. ...read more.

Conclusion

-7.64% 1/05/2008 18.07 -3.11% 5773.9 2.07% 1/04/2008 18.65 3.84% 5657 4.57% 3/03/2008 17.96 -6.51% 5409.7 -4.67% 1/02/2008 19.21 -3.56% 5674.7 -0.39% 1/01/2008 19.92 -4.92% 5697 -11.28% 3/12/2007 20.95 -2.01% 6421 -2.62% 1/11/2007 21.38 -1.34% 6593.6 -2.74% 1/10/2007 21.67 2.80% 6779.1 3.01% 3/09/2007 21.08 -1.54% 6580.9 5.32% 1/08/2007 21.41 -2.06% 6248.3 0.98% 2/07/2007 21.86 9.41% 6187.5 -1.95% 1/06/2007 19.98 -8.39% 6310.6 -0.49% 1/05/2007 21.81 -1.85% 6341.8 2.98% 2/04/2007 22.22 3.93% 6158.3 3.00% 1/03/2007 21.38 7.87% 5978.8 2.79% 1/02/2007 19.82 5.15% 5816.5 1.02% 1/01/2007 18.85 7.78% 5757.7 2.01% 1/12/2006 17.49 6.26% 5644.3 3.35% 1/11/2006 16.46 -0.36% 5461.6 2.03% 2/10/2006 16.52 15.85% 5352.9 4.69% 1/09/2006 14.26 2.30% 5113 0.65% 1/08/2006 13.94 10.20% 5079.8 2.48% 3/07/2006 12.65 -6.37% 4957.1 -1.53% 1/06/2006 13.51 -2.45% 5034 1.24% 1/05/2006 13.85 4972.3 Exhibit.2: BKL historical debt to equity ratio from 2001 to 2010(10 years) Year Equity to Debt ratio 2001 73.47% 2002 75.71% 2003 76.23% 2004 29.76% 2005 21.24% 2006 27.18% 2007 35.41% 2008 75.38% 2009 80.86% 2010 65.96% Average 56.12% Sources: Ratio Analysis, Finanalysis Exhibit.3: Income statement forecasting (2011-2020) Exhibit.4: Change in net working capital forecasting (2011-2020) Exhibit.5: Cash flows forecasting (2011-2020) 9 Reference * Australian Stock Exchange, 2011 http://www.asx.com.au/research/dividends/process.htm (Viewed:2011-05-25) * Bennet, M., "Analysts take stock of retail's internet drift", The Australian, 10 December 2010, p.21 * Bishop, S. & Officer, B. 2009, Market Risk Premium Estimate, Value Adviser Associates Pty Ltd, Australia, http://www.erawa.com.au/cproot/8781/2/20100902%20D51418%20Attachment%207%20-%20Value%20Adviser%20Associates%20Pty%20Ltd%20-%20Market%20Risk%20Premium.pdf (viewed:2011-05-21) * Brealey, Myers, Partington & Robinson (2000), Principles of Corporate Finance, Australian edition, McGraw-Hill * Blackmores Limited (BKL.AX), Yahoo Finance, http://finance.yahoo.com/q?s=BKL.AX (access date: 2011-05-20) * Blackmores Homepage, http://www.blackmores.com.au/ (viewed:2011-05-15) * Blackmores Limited, Income Statement, Yahoo Finance , http://finance.yahoo.com/q/is?s=BKL.AX+Income+Statement&annual (viewed: 2011-05-25) * Blackmores Limited, Balance Sheet, Yahoo Finance, http://finance.yahoo.com/q/bs?s=BKL.AX+Balance+Sheet&annual (Viewed: 2011-05-26) * Blackmores Limited, Annual Report 2001-2010, UTS Database * Reserve Bank of Australia, http://www.rba.gov.au, (viewed 2011-04-29) * Ross, Westerfield & Jaffe, Corporate Finance, 9th ed., 2009, McGraw-Hill (RWJ) * Grinblatt & Titman, Financial Markets and Corporate Strategy, 2nd ed., 2002, Irwin/McGraw Hill (GT) * Share Dividends, 2011 http://www.sharedividends.com.au/mts+dividend+history (View: 2011-05-19) ?? ?? ?? ?? 1 ...read more.

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