Financial Policies of Westpac Banking Corporation Essay

Financial Policies of Westpac Banking Corporation - Essay Example The bank is listed on the Australian Stock Exchange and has made a satisfactory performance over time. Financial Policies of Westpac Banking Corporation related to Capital Structure In 2008, Westpac went into a strategic alliance with St. George Bank Limited in a merger operation. In that merger, the exchange ratio of St. George Bank Limited to Westpac Bank was 1.31. This means that the valuation of the assets of St George was at a higher level than that of Westpac, and therefore the shareholders of St George have got a better valuation as compared to the shareholders of Westpac. The bank went into a merger policy because it wanted to make more use of its resources and have a better financial health (Rosenbaum and Pearl, 2009, p. 36). This would also help the bank to survive in the long run. At this juncture to retain the positive sentiment of the investors, Westpac announced a special dividend of $ 1.25 per share. This has a positive impact on the prices of the shares and the prices seem to go up; therefore, it is a deliberate step on part of the company to keep a stable position in the securities market. Dividend Payout Policies of Westpac The financial history of the company reveals that dividend has been paid by the company bi-annually in the month of July and at the end of the year, December. The dividend yield for the stockholders had ranged from 0.56 to 0.86. The returns that the shareholders have got by investing in the company is well understood by the dividend yield paid ever time (Gallagher, 2003, p. 194). The mean and the standard deviation of the yield have been calculated. Mean 0.736666667 Standard Deviation 0.108857705 The average yield of the dividend has been 0.736. A dividend payout ratio of 70% per share would encourage the shareholders to invest more money in the stock and to hold the stock for a longer period of time. These dividends are directly transferred to the accounts of the shareholders. The company generally adopts any of the two di vidend payout policies- the Dividend Reinvestment Plan (DRP) in which the retained earnings that the company generates are capitalized by the company instead of being distributed (Modigliani and Miller, 1958, p. 282). This is often known as the growth schemes by which the company acquires more assets or uses the money for productive purposes. The second option that the company takes is to distribute the dividends to the shareholders. The shareholders who look forward to short-term investments and do not want to engage their money in the long term in the stocks of Westpac would prefer the second option because they would be getting a dividend yield of an average of 70% within 6 months time. For example, in the year 2010, the company paid out dividends at a ratio of 64.9% (Westpac Group, 2012). The share price of Westpac that time was at an average of 23.24. Thus it is lucrative stocks for the investors who would hold the stock for a minimum period of 1 year. Buyback of Shares by West pac Most of the companies in Australia goes for a share buyback for avoiding the risk that any bigger firm may take over the business (Doan, Yap, and Gannon, 2011, p. 69). Westpac followed on the similar line to keep the capital structure fundamentally strong. The company announced the buyback of shares as a strategy for successful management of its finances. The cash profit of the bank from interest income and other supplementary services got increased by 10% during this time.