Dividend Policy Analysis Report: Marks and Spencer (M&S) Finance

This report provides a comprehensive analysis of Marks and Spencer's (M&S) dividend policy. It begins by examining the company's current dividend strategy, including its shift from a fixed to a reduced dividend payout. The analysis uses the Market Based View (MBV) and Resource Based View (RBV) to understand the factors influencing the policy, such as international expansion, fluctuating returns, and debt reduction. The report then evaluates the dividend policy using the Life Cycle Model, Internal and External Factors Model, and Free Cash Flow to Equity (FCFE) model, assessing the consistency of the policy with each model's implications. The FCFE analysis reveals a free cash flow to equity ratio, highlighting the company's financial flexibility. Finally, the report concludes with recommendations on whether M&S should maintain a higher or lower dividend policy, considering its investment opportunities and the need to protect its financial flexibility, suggesting that the company should maintain a lower dividend policy and use the funds for reinvestments.

Running head: STRATEGY AND FINANCE
Strategy and Finance
Name of the Student
Name of the University
Author Note

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STRATEGY AND FINANCE
Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................2
Answer to Question 3...................................................................................................................4
Answer to Question 4...................................................................................................................4
Bibliography.................................................................................................................................5

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Answer to Question 1
The analysis of the dividend policy of Marks and Spencer (M&S) suggests that the entity
paid a fixed dividend of £18.7p to the shareholders for the Financial Years 2015-16, 2016-17 and
2017-18. However, this changed to £13.9p for the F.Y. 2018-19. Hence, on the basis of the
above figures, it can be suggested that the business had a fixed-payout policy in terms of the
amount paid as a dividend. However, this has changed in the recent times and the company is
paying a reduced amount of dividends in the current financial year. On the basis of the Market
Based View, M&S is having a lower dividend payout policy which the company intends to
improve in the future period. This is because the company is operating in the retail industry on an
international scale and requires additional capital as a part of the expansion process. The
fluctuating ROE also suggests that the industry is susceptible to the decrease in returns over a
period of time. Hence, it is essential for the company to keep a low dividend policy to have a
higher level of reinvestment. The Resource Based View suggests that the company is also
reducing its high level of debt by repaying huge amounts of it. In 2017-18, the company has
reduced its debt amount by 15% to £523.2 million. Hence, the company has decreased its
dependence on the debt funds in the recent years and has reduced the dividend payouts made by
it. The payments of dividend are made by the company in the form of cash and deposited into the
bank account of the shareholders of the company.
Answer to Question 2
When analysed using the Life Cycle Model, it can be suggested that the Life Cycle of
Marks and Spencer is in the maturity phase. Hence, the company is operating in a profitable
manner and the dividends paid out by the company are medium to high in nature. A majority of
the amount declared by the company as dividend is paid out by the company in the short and

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long run. The Internal and External Factors (Model) suggests that the dividend policy suggested
by the company is a result of the need for the additional capital to expand its business. Hence, the
company has decided to retain its profits and reinvest them as a part of its new investments.
Another reason is to maintain a sustainability in the earnings made by it. The profits earned by
the company in the recent times have been fluctuating in the recent times. Hence, the company
has reduced the dividend payout to maintain sustainability in the future dividends paid by it and
to avoid any extreme fluctuations in the payments made by it. Another factor which has limited
the dividend payout is the high amount of debts repaid by the company. In order to reduce the
debt amounts and improve the liquidity of the business, the dividend policy has been amended by
the business.
The FCFE analysis of the model provides the following results:
Particulars Formula Amount
Net Income 417.2
Net Capex Closing PP&E+Depreciation-Opening
PP&E
179.5
Change in Net Working
Capital
155.9
New Debt 784.7
Debt Repayment 282.4
Free Cash Flows 584.1
Dividends + Buybacks 303.5
CF to Stockholders ratio 0.52

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The above model indicates that the Free cash flow to equity ratio of the business is 0.52.
This can be attributed to the willingness of the firm to maintain financial flexibility as a part of
its business activities. Hence, the dividend policy of the entity suggests that the entity is looking
to be more financially flexible to better manage its risks. It is consistent with the other models
mentioned above.
Answer to Question 3
On the basis of the analysis, the new investment opportunities available to the entity are
good prospects. The ROE and the ROCE of the company is also significantly higher than those
of other companies in the industry. Hence, the company can choose to reinvest the funds in the
new projects to sustain higher returns in the future.
Answer to Question 4
On the analysis based on the three models, the company should look to maintain a low
dividend policy as the business is looking to protect its flexibility while also generating sufficient
returns in the future. Hence, the company should invest more in new projects. Hence, the
company should maintain a lower dividend policy and the funds should be used for
reinvestments.

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Bibliography
Corporate.marksandspencer.com. (2020). [online] Available at:
https://corporate.marksandspencer.com/documents/msar-2019/full-annual-report.pdf [Accessed
27 Mar. 2020].
Freear, J., 2015. Marks and Spencer and the social history of food c. 1950-1980, with particular
reference to the relationship between consumer behaviour and retailing strategies (Doctoral
dissertation, University of Leeds).
Tarasanski, P., 2017. Brexit: Changing Dynamics of Corporate Financial Risks, Return, and
Performance: Case Companies: BP, Royal Bank of Scotland, Marks & Spencer,
GlaxoSmithKline, EasyJet.