Comprehensive Financial Analysis of GSK Plc's Dividend Policy

This report undertakes a detailed analysis of dividend policies, commencing with an introduction to their significance in enhancing shareholder wealth. Part A explores the dividend irrelevance theory, including its assumptions and implications, contrasting it with the dividend relevance theory and its various models, such as the Walter model, and the Signal and Clientele Effect theories. A comparative summary of these theories is provided. Part B focuses on the financial performance of GlaxoSmithKline (GSK) Plc, employing key financial indicators to evaluate profitability, liquidity, and solvency over a five-year period. The report assesses GSK's debt capacity and identifies financial and business risks. It culminates in recommendations for an optimal mix of debt and equity for GSK Plc. The report concludes with a synthesis of the findings and references cited.

Dividend Policy and Financial
Analysis

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART A ..........................................................................................................................................3
A. Explaining the dividend irrelevancy theory and its assumption............................................3
B. Explaining the dividend relevant theory.................................................................................4
C. Summary based on comparison among theories....................................................................6
PART B............................................................................................................................................7
A) Financial performance of company using indicators.............................................................7
B) Assessing debt capacity of organisation..............................................................................11
C) Financial and business risks of organization........................................................................13
(D) Recommendation for purpose of optimal mix for GSK Plc...............................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Dividend policies are to be implemented in effective manner so that shareholders' wealth
can be increased. Present report deals with various dividend theory such as irrelevance and
relevance theory and models are discussed. On the other part, GSK Plc's financial performance
over last five years is analysed and ratio analysis is conducted. Moreover, capital structure of
organisation is made and mix of debt and equity is analysed. Recommendations to improve
capital structure are also provided along with business and financial risks are evaluated in a
better way. Hence, complete financial health analysis of company is done in effective manner.
PART A
A. Explaining the dividend irrelevancy theory and its assumption
It is a theory in which investors have no worry whether adequate dividend policy is
implemented by the company or not. It is because option is provided to them to sell off shares
held by them and as a result, cash is provided. This dividend policy is useful the firm as price
and cost of capital is not affected. This theory identifies that dividend policy is independent on
value and market price of shares. Assumption is made by the theory that markets are perfect and
stockholders' can build their policy by selling or purchasing stock in the markets (Jabbouri and
Attar, 2018). The theory indicates that if shareholders need the cash they can sell their shares,
and if they do not want in cash they can hold up their share with them. Brokerage fees are
exempted and the same is treated if capital gains are involved in this irrelevance theory.
Modigliani and Miller proposed that the dividend policy implemented by organization is
independent and do not influence share prices of organization. In this irrelevance theory of the
dividend MM proposed that when a shareholder attains dividend in excess than he has the option
to again invest the company's share in relation to cash flow (Kaur and Saraf, 2014). On contrary
to this, if dividend is small, it can be sold. In both the cases, investors are relevance. In both the
cases it is irrelevant because investors are creating their own cash.
Assumptions of the dividend irrelevant theory are as-
 All sort of taxes is ignored (personal taxes, corporate taxes)
 There is no flotation cost or transaction cost at the time when company is taking decision
of cost.
 There is no impact on dividend policy, when a firm decides in capital budgeting.
 All the investors have all the information about firm’s future

 Zero impact of leverage has on the cost of capital of the company (Baker and Jabbouri,
2016).
Argument in favor of the dividend irrelevant theory
This theory allows the perfect markets as it believes existence of it. Kaur and Saraf,
(2014) stated that investors behave rationally and as such, complete access with relation to
information is provided. Furthermore, flotation costs do not prevail. Both capital gains and
dividends are taxed at same rate due to absence of tax. In addressing this, investment policy is
fixed and no changes are made in it. Shareholders are certain regarding market price of shares in
the future. However, Jabbouri and Attar, (2018) argued that perfect market do not exist.
According to them in this theory, no difference is observed in between external and internal
funding. Therefore, it is uncertain to consider the flotation cost of new issues. They argued that
this theory believes that the wealth of company's shareholder does not affect dividends.
However, there are flotation cost prevails in relation to sell of shares to generate cash inflow.
They also object the no certainty is unrealistic. The theory holds mix empirical evidences and
proper conclusions are not drawn yet. This is because in real business scenario, organization
makes budget by taking into account dividends to be paid in more or less same manner which
they do for cash outflow like capital expenses, future need of cash, requirements for debt
services etc. Hence, constructive conclusions are yet to be drawn.
B. Explaining the dividend relevant theory
The Walter models
In accordance with the approaches based on this theory it can be said that there are no
differences in the dividend and investment policies. It identifies a clear relationship among the
cost of capital, internal rate of return and the return on investments. Therefore, it has the impacts
over the overall performance in firm as well as impacts over the market value.
Following are the assumption of Walter model:
 There will be funding through retained earning expect various other external sources.
 There will be consistency in the rate of return and the costs of capital in any investment. Consistency in various asset value of firm such as EPS and DPS.
Argument in favor of the dividend relevant theory
As per the views of Rafique and Javaid, (2017), Organization develops the policies and
procedure of making payments of dividends among the shareholders of the firm. Therefore, the

payment made by an organization to its shareholders will be in the form of cash. Therefore, these
are the plans which will be based on making the payments to investors on the basis of money
kept in firm and being used later. Similarly, as per analyzing the issues relevant with the facts
which insists that there have been changes in the dividend policies which in tur have the impacts
over the valuations. Thus, the investors do not find company profitable as the dividend payable
by them is not up to the satisfactory level. According to Ardalan, (2017), there have been
variations in the valuation as well as capital structure of the firm which will be balanced and
managed by the professionals in terms of making appropriate operational changes.
Signal and Clientele Effect theories:
This theory is based on variation in the market value of the organization with
consideration of the reforms held in taxation policies. Thus, the demands and aims of
shareholders will be based in the changing policies by government in relation with taxation.
Impacts of reforms in the company policies will have impacts over the changes in investors
perception and phenomenon regarding stock holdings, purchase and sale of the assets.
On the other side, analyzing assumption-based ion signaling theory which insists that the
dividends act as signal to perform the transactional activities in the industry and the in the capital
market (Hartanto, Paramita and Fathoni, 2018). However, the changes in the tax rates and
addition of various new policies will have impacts over the investors perception and thinking
relevant with the projects. Considering the impacts of Signaling theory which states that the rise
in the payout ratio of firm which benefits in estimating the rise in performance as well as the
value of common stock in the future. Reciprocate, if the reduction in the payouts which indicates
the downfall of performance and stock value as well. For example, Fisher Investments had been
affected in respect with fall in the dividend payouts which has created the market risk regarding
investment of stock (John, Okelo and Chesang, 2017).
Similarly, Clientele effects had been seen by organization Winn-Dixie Stores Inc. which
announces to slash its 1.02 annual dividends. Therefore, there are various impacts incurred which
creates the changes in the operations.
Assumptions of Signal and Clientele Effect:
 It has been assumed here that the government variation in the taxation polices will have
impacts on the market value of firm.

 There will be variation in the investors’ perceptions regarding company’s dividend
policies.
Gordon Model
Bird in the hand theory is provided by Gorden / Lintner which states that dividend and
organization's value are interdependent. It means that value of firm is affected when lower
dividends are paid and vice-versa. He postulated that cost of equity which is financed by
organization is nothing but has to be paid to shareholders on perpetuity basis. Annual increment
of dividends and share price on current basis.
Assumptions of theory are as follows-
 The firm has no debt in its capital structure.
 To finance any expansion of the business, consequently retained earnings are used and no
external information is available. Investment's marginal efficiency does not take into account constant return on
investment.
Argument in favour of the dividend relevant theory
Oyinlola and Ajeigbe, (2014) assessed in their study that the relevance theory has the
benefits as this theory restricts the debt. The theory assumes that the company is an all equity
company, with no proportion of debt in the capital structure. In this no external finance is
required all the investment made with the help of retained earnings, it provides the constant
internal rate of return by ignoring the diminishing marginal efficiency of the investment. The
cost of capital is also constant. The relevant theory provides the perpetual earnings. Rafique and
Javaid, (2017) criticized that the constant internal rate of return, they say that this model is
inaccurate in assuming that r and k always remain constant. Constant of rate means in that the
wealth of the shareholders is not optimized. They also argued for the no external financing, as
they believed that this reflects the sub-optimum investment and dividend policies.
C. Summary based on comparison among theories
Comparing both the theories such as relevance and irrelevance theories on dividend
policies on which it can be said that in irrelevant theories there will be appropriate ascertainment
of the operations which are consists of the thinking is that there is no affect of dividend polices
ion the decision making of the professionals as well as resining the market share of entity. On the

other side, as per considering the relevant theories where the Walter model insist that there will
be impacts over firm’s value as per the plans and polices planned by the professionals.
PART B
A) Financial performance of company using indicators
Company background:
Analysing the financial performance of the organisation on which analysing its various
efficiencies based on profitability, liquidity, efficiencies and solvency will be addressed. Glaxo
Smith Kline is the most successful pharmaceutical business of UK which serves and produces
various medicines or drugs that helps patients in overcoming with the life-threatening diseases. It
has the net income as per the survey 2017 as 2.169 billion pounds (Qiu and Scrivens, 2018). It
served the drugs all over the world which brings the suitable revenue generation to the entity. It
will be helpful or attractive to investors as per analysing the financial stability of the organisation
in the due period.
RATIOS 2017
£
2016
£
2015
£
2014
£
2013
£
Net Profit
Margin
Net
Profit/Revenu
e
percentage
2,169/
30186
7.19%
1,062/
27889
3.80%
8,372/
23,923
35.0%
2,832/
23,006
12.31%
5,628/
26,505
21.23%
Current Ratio
Current
Assets/Curren
t Liabilities
15,907/
26569
0.60
16,711/
19,001
0.88
16,587/
13,417
1.24
14,678/
13,295
1.10
15,227/
13,667
1.11
Inventory
Turnover
Ratio
Cost of
Sales/Average
Inventory
10,342/
(5102+5557)/
2
1.9 times
9,290/
(4716+5102)/
2
1.89 times
8,853/
(4231+4716)/
2
1.98 times
7,323/
(3900+4231)/
2
1.80 times
8,585/
(3969+3900)/
2
2.18 times

EPS (Taken
from GSK
Annual
Report)
31.40 18.80 174.30 57.30 112.50
Debt to Equity
Ratio
Total
Debt/Equity
52,897/
3,489
15.16:1
54,118/
4,963
10.90:1
44,568/
8,878
5.02:1
35,715/
4,936
7.24:1
34,274/
7,812
4.39:1
Interest Cover
Ratio
Operating
Profit/Interest
Expense
4,087/
669
5.9 times
2,598/
664
4 times
10,322/
653
16 times
3,597/
659
5.5 times
7,028/
706
10 times
The above financial ratios are computed showing financial performance of GSK Plc in
the past financial years such as 2013, 2014, 2015, 2016 and 2017. Ratios are computed for
analysing profitability, liquidity, efficiency, investment in effective manner. These are required
to be computed so as to evaluate overall health of GSK Plc in the best possible manner ( Hamid
and Akhi, 2016).
Net profit margin-
Illustration 1: Net profit margin

It can be analysed that profitability aspect such as net profit margin was 21.23% in 2013,
it decreased in 2014 as it came to 12.31%. However, trend in 2015 was good because net profit
increased to 35.0% which was all time for organization. It was high in 2015 because net profit
was much higher in the year as compared to other years. Furthermore, operational and non-
operational expenses are alleviated which had increased net profit and ratio was increased as
well. It significantly decreased in 2016 to 3.80% and furthermore, increased to 7.19% in 2017. It
can be interpreted that firm need to initiate control on operating and non-operating expenditures
so as to maximise earnings (Annual Report GSK. 2017).
Current ratio-
Illustration 2: Current ratio
Current ratio in 2013 was 1.11 and continued in 2014 as 1.10 as well. It increased in 2015
to 1.24 and again decreased to 0.88 in next year. Moreover, again alleviation was found in 2017
as it reached to 0.60. This highlights that firm will face difficulty in paying short-term liabilities
from current assets because it is reduced quite significantly.
Inventory turnover ratio-

Illustration 3: Inventory turnover ratio
Efficiency ratio such as inventory ratio was 2.18 in 2013, decreased to 1.8 in next year.
On the other side, it increased to 1.98 and again declined to 1.89 in 2016 and reached 1.94 in
recent financial year. This means that firm's inventory turnover ratio is improved. Efficiency
position is overall improved.
EPS-

Illustration 4: EPS
Investment ratios like EPS is calculated for GSK Plc. It was 112.50 in 2013 which
decreased to 57.30 in 2014. However, it increased quite effectually to 174.30 in 2015. After that,
EPS reduced to 18.80 in 2016 and reached to 31.40 in 2017. This means that firm's EPS is low
but has increased in recent year.
B) Assessing debt capacity of organisation
The capacity of debt had been assessing specific amount of money which is directly
owned by organization or any particular individual who could repay in the given duration.
Usually it helps in reflecting ability of organization for borrowing money. On the basis of
various industries and sector its level is different. It is totally dependent on its kind, composition
and particular nature of assets along with cash flow. The debt of organization is considered as
desirable on basis of value of equity of shareholder which is higher than financing cost. The
mode of operating and expanding could be performed when the ratio of debt equity is approx 1 :
1 or 2 : 1 (Debt vs Equity, 2018).
Gearing ratio = Long term liabilities / Capital employed

2013 2014 2015 2016 2017
-250.00
-200.00
-150.00
-100.00
-50.00
0.00
50.00
Illustration 5: Debt equity ratio of GSK pharmaceuticals 2013 - 2017
Interpretation: The above graph is depicting specific amount of debt of GSK Plc, as
compared to its all assets. In the year 2014 its debt equity is 4.39:1 which is raising to 7.24;1 in
next year. From the year 2013 to 2015 it is giving stable outcome but due to huge long-term debt
and less equity it had given outcome as 13.01. It could be interpreted that GSK Plc is operating
in huge debt and most attracting scenario is of 2017 whose equity is in negative aspect as -68 so
it is directly impacting its gearing ratio and implicated that it is operating on huge debt (Schipani,
Lui and Xu, 2016).
Interest coverage ratio

2013 2014 2015 2016 2017
0
2
4
6
8
10
12
14
16
18
Interes t c ov erage ratio
Illustration 6: Interest coverage ratio of GSK Plc 2013 -
2017
Interpretation: It is also a profitability and debt ratio which helps in identifying ability of
GSK Plc for paying its expenses and interest on context of debt which is outstanding. The above
graph is depicting interest coverage ratio of GSK Plc which has huge fluctuations. It could be
interpreted by considering earnings of organization before taxes and interest by organization's
interest expense for specified duration. As it had many fluctuations but it is at good position, but
in year 2013 and 2015 it was at peak position. The specific ratio is measuring ability of
organization that how many times it could repay its debts which are outstanding with
applicability of its earning. From year 2015, GSK started optimising its resources but then too in
year 2017 GSK was having capability of 5.9 times to repay its debt as it does not have any debt
burden (Nagarkar and Rao, 2017).
C) Financial and business risks of organization
There are various types of risk in the business which needs to be evaluated so as to take
measures to overcome them and attain uninterrupted operations. This is required so that risk can
be minimised up to a high extent (Kandasamy and et. al., 2014). Furthermore, financial and
business risks are two most crucial ones which are to be assessed by firm.
Financial Risk-

GSK Plc uses derivative instruments and also uses variety of financial instruments so as
to effectually carry out operational tasks in the best possible manner. Furthermore, derivatives
used are interest rate swaps, foreign exchange forward contracts to be settled at a future date is
utilised as well. Moreover, such transactions are used to manage financial risk quite effectually
and as such, it is required that business should take funds by properly analysing it and then raise
funds quite effectively. On the other hand, debt equity ratio provides clarity that debt is highly
used by firm as gearing ratios in recent period is high enough. It is required that equity should be
utilised so that GSK Plc can take advantage of it in the best possible way. Balanced equity
should be used and thus, advantage of debt and equity can be extracted in a better way. It had
invested heavily in R&D along with expiry of intellectual property protection (Rafols and et. al.,
2014).
Net debt of organisation in 2017 comes out of 13.2 billion pounds and equity inclusive
non-controlling interests amount to 3.5 billion which consists of total capital structure to 16.7
billion. These figures clearly shows that firm has more of the debt in capital structure which
means that debt obligations will rise and company might default in paying out the same. It helps
in leveraging best practices in context of risk management and control along with global
standards which are designed in appropriate format.
Business Risk-
GSK Plc has business risk prevailing in the operational activities. First and foremost of
such risk is foreign exchange risk management as external trade or international trade has many
fluctuations particularly in currencies. In order to effectively minimise translation exposure of
foreign currency to dominate borrowings raised externally with of organisation's cash flows and
assets (Vogel, 2014). The currencies in which it is dominated are Euros, Pound Sterling, US
Dollars and could be swapped in other designated currencies as well. EPS of GSK Plc is being
decreased in past years (Leng, Ozkan and Trzeciakiewicz, 2018). However, it is increased in
2017 showing that it is earning adequate value of Pounds on a per share basis. Apart from this, it
is required that higher EPS should be achieved by which good quantum of dividends could be
paid, thereby, increasing dividend payout ratio.
(D) Recommendation for purpose of optimal mix for GSK Plc.
Optimal capital structure: The perfect and optimum capital structure could be
implicated by best ratio for debt to equity as it would help in maximising value. In simpler word

it could be elaborated that if there is presence of perfect balance between range of debt and
equity which will also decrease cost of capital of GSK Plc. On the basis of above analysis, GSK
Plc is not having its debt to equity ratio in appropriate format, as it did not follow concept of 2 : 1
or 1 : 1 as an idle ratio for this industry. GSK Plc is operating on debt and very less equity, as
there should presence of the best combination of debt and equity as well. In the same series, most
logical step should be taken for decreasing ratio of debt to capital for increment of profitability
and revenue.
The GSK Plc should consider various disadvantages of huge debt as there is fixed cost
such as interest which increase break even point of organization or profit structure. If there is
presence of huge interest cost in financial periods which are difficult as it will raise insolvency
risk. It would be not able to gain growth due to huge cost for purpose of serving debt in
systematic aspect. The instruments of debt consist of various restrictions on activities of
organization which helps in preventing management for context of getting its financial options
on alternative basis and opportunities for business which is non core.
On basis of financing through equity, as it does not have any specific obligation for
repaying the amount which had been acquired with respect to equity financing. As every owner
of organisation wants to achieve success and for purpose of providing equity to investors as
perfect return on their investment in GSK Plc, but on this aspect there is not any specific
requirement for interest charges or payments in context of debt financing. The most important
concern is that it does not give any burden to organization in financial aspect (Rajagopal, 2017).
The most essential measure which could be taken for decreasing ratio of debt to capital is
considered as very effective for managing inventory. As it could be consider very specific and
sizeable amount for working capital of GSK Plc. The other way to raise capital which could be
taken up by GSK Plc is to restructure debt. In the above organization, it has largely financed at
huge interest rate and debt so in this series, organization should be able to seek its debt which are
existing at cheap rate and to refinance it. This strategy would be able to reduce both monthly
payments and expenses of interest as well and it will also raise bottom line profitability of GSK
along with cash flow.
CONCLUSION
Hereby it can be concluded that dividend policy decisions are required to be made in
effective manner so as to maximize shareholders' wealth and attain more investment. It can be

analyzed from financial performance of GSK Plc that it has to rely on equity because debt is
used in large quantum. This will inculcate risk of insolvency as principal amount is to be paid
along with accrued interest on it. Hence, it is required that balanced capital structure should be
applied and advantage of both financing options should be used. This will maximize dividends
which can be paid to shareholders.

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ONLINE
Annual Report GSK. 2017 [Online] Available Through:
<https://www.gsk.com/en-gb/investors/corporate-reporting/annual-report-2017/>.
Debt vs Equity. 2018. [Online]. Available through :<https://smallbusiness.findlaw.com/business-
finances/debt-vs-equity-advantages-and-disadvantages.html>.