Transcript
Report on Dividend policy
Case analysis on Bank
EXECUTIVE SUMMARY
A dividend is a usually distributed in cash form to stock holders of a corporation
approved by the board of director. It may also include stock dividend or other forms of
payment. A stock dividend represents a distribution of additional shares to common
stockholders. Dividends are only cash payments regularly made by corporations to their
stockholders.
The dividend policy such as the payment of dividend affects the market price of share. If
there is a debate in this issue, this theory is commonly accepted. In this report the
relationship between dividend and the market price of share is proved in the banking
sector of Bangladesh. But it is also revealed that dividend is not the only variable to
affect share price.
The result shows a significant relationship between dividend and share price. Some other
factors such as profit, EPS, growth rate, retained earnings, money supply etc.
CONTENTS
Introduction
1
Objective
2
Methodology
2
Literature Review
3
Overview of the Companies
9
Related Financial Data Analysis
Limitations
25
Conclusion & Recommendation
25
INTRODUCTION
As Bangladesh is a developing country, the corporate culture is growing very slightly in
our country. Dividend policy is a major financing decision that involves with the payment
to shareholders in return of their investments. Every firm operating in a given industry
follows some sort of dividend payment pattern or dividend policy and obviously it is a
financial indicator of the firm. Thus, demand of the firm’s share should to some extent,
dependant on the firm’s dividend payment pattern.
Many investors like to watch the dividend yield, which is calculated as the annual
dividend income per share divided by the current share price. The dividend yield
measures the amount of income received in proportion to the share price. If a company
has a low dividend yield compared to other companies in its sector, it can mean two
things: (1) the share price is high because the market reckons the company has
impressive prospects and isn't overly worried about the company's dividend payments, or
(2) the company is in trouble and cannot afford to pay reasonable dividends. At the same
time, however, a high dividend yield can signal a sick company with a depressed share
price. Dividend yield is of little importance for growth companies because, retained
earnings will be reinvested in expansion opportunities, giving shareholders profits in the
form of capital gains.
So, the study will investigate the relationship between dividend and the market price of
share Bangladesh. In our detailed study, we will examine with some real life sample (five
banks) that whether the dividend policy has any effect on the firm’s share price
determinants are many in members other than the dividend payment pattern, we just
focus on the specific factor; the dividend policy.
OBJECTIVE
Objective guides the thinking of any set of operation either directly or indirectly. It works
as a lamp-post in a dark night to find out the right way. Our objective in this study is to
find out whether the dividend policy has any impact on share price of that company. For
this purpose we have given a term paper named, “Impact of Dividend on Share Price”.
And that’s why though there are many variables creating impact on share price, our main
focus is on dividend & its policy.
Besides, as students of MBA program, the objective of this study is to acquire knowledge
about share price, share price, share market, dividend, and policy of company on
retention on dividend payment, through our field work.
METHODOLOGY
Primary Data: Primary data is collected by interviewing with some officials of these
banks. Md. Abu Tayeb (Senior Vice President), Mohammad Jashim Uddin (Senior Asst.
Vice President) and Md. Monowar Hossain (Senior Officer) all these persons are the
staffs of DBBL help us to provide different data on this related topic.
Secondary Data: The main source of data for this report is Annual Reports. We have
also collected data from the securities market, different websites, different books and
different journals.
LITERATURE REVIEW
Gittman (2004, pp. 312) divided stock into two types, such as common stock and
preferred stock. He also showed that dividends are the outcome of investment. So,
common stocks are an ownership claim against primarily real or productive asset
(Higgins, 1995), but he also said that if the company prospers, stockholders are the chief
beneficiaries, if it falters, they are the chief losers. Smith (1988) presented that stocks are
one of the most popular forms of investment. People buy stocks for various reasons:
some are interested in the long-term growth of their investment by buying low priced
stock of a new company in the hope of substantially growth of share price over the next
few years. Another reason he suggested that in a well established firm stockholders
expect the stock growth will be stable over the long run. (Smith,1988).
Stockholders expect dividend but it is not promised (Gittman, 2004). Common stocks are
hold by true owners of the business. Sometimes they are known as ‘residual owners’ as
they receive whatever left after winding up of the company (Gittman, 2004; Higgins
1995). Another type of stock is known as publicly owned stock. Common stock owned
by a broad group of unrelated investors or institutional investors is called as publicly
owned stock. However, all common stock of a firm owned by a small group of investors
is denoted as closely owned stock. When all the stock is owned by a single person is
known as privately owned stock. Due to the limit of number of share, stock can be
classified in to four types. Such as authorize share, outstanding share, treasury stock and
issued stock (Gittman, 2004). Authorized shares represent the maximum number of
shares a firm allows to issue. Outstanding shares are hold by public. Treasury stock is
repurchased by firm itself and it is no longer considered as outstanding share. Issued
shared are the shares that have been put into circulation. Recently stock repurchase option
is very popular as it is able to increase stock value by decreasing outstanding stock
number (Port, 1976). Port also suggested that firms should avoid issuing stock to pay
dividend as they slow down company growth.
According to Short and Welsch (1990), Johns (1998) and Port (1976), a dividend is a
usually distributed in cash form to stock holders of a corporation approved by the board
of director. It may also include stock dividend or other forms of payment. A stock
dividend represents a distribution of additional shares to common stockholders (Higgins,
1995).On the other hand, Ross et al. (2005) divided earnings into two parts; either it is
retained or paid as dividend. Whereas Wild et al. (2001), Johns (1998) and Kieso et al.
(2004) argued that retained earnings are the primary source of dividend distribution to the
stockholder. Dividends are only cash payments regularly made by corporations to their
stockholders (Johns, 1998). He also specified that they are decided upon the declaration
by the board of the directors and can range from zero to virtually any amount the
corporation can afford to pay.
Jones (2005) said that dividends are the only cash payment a stockholder receives
directly from firm and these are the foundation of valuation for common stocks. Stock
price response to an unexpected dividend change announcement is related to the dividend
preferences of the marginal investor in that firm where other things remaining same
(Denis et al., 1994). In addition, a company, which changes dividend policy, is expected
to experience upward or downward trends in share returns (Gunasekarage et al., 2006).
They also said that for the initiating firms, the share prices continued to rise even after the
initial public offering (IPOs). Higgins (1995) said that if the company will have less
money to invest, or it will have to raise more money from external sources to make the
same investments stockholders claim on future cash flow, which reduces share price
appreciation. Moreover, during dividend announcement period stock price also fluctuate
due to announcement of dividend. Mulugetta et al. (2002) examined the impact of
Standard and Poor’s ranking changes on stock prices. In addition, Affleck-Graves &
Mendenhall (1992) found that stock price reacts after 8 days on average up to 54 days of
such earning announcement.
With this believe, Hampton (1996) said that value of stock increase by more dividend and
share remain undervalued by lower dividend policy. In addition, he also showed that
there are two schools of thought regarding with the effect of dividend on stick price, one
is dividends do not affect market price and the another one is dividend policies have
profound effects on a firm’s position in the stock market. . Benartzi et al. (1997), Ofer
and Siegel’s (1987) and Bae (1996) found a positive correlation between share price and
dividend. Furthermore, Campbell and Shiller (1988) found a relationship between stock
prices, earnings and expected dividends and he drives a conclusion that earnings and
dividends is powerful in predicting stock returns over several years. Wilkie analyzed a 76
months share price index and dividend announced. He found a correlation coefficient,
which was under 0.7 for the period 76 months and he also get that the maximum value of
the regression coefficient being reached after 79 months. Moreover, Shiller (1984, 1989)
recommended investors in his study to buy the stocks when price is low relative to
dividends and to sell stocks when it is high payoffs. On the other hand to their opinion,
Jensen and Johnson (1995) suggested that, dividend cut results reduction in share price.
More interesting matter is that if capital markets are perfect, dividends have no influence
on the share price (Miller and Modgliani, 1961). Miller and Modgliani (1961) also states
that if the market is imperfect, dividend may affect stock price.
OVERVIEW OF THE COMPANIES
ISLAMI BANK BANGLADESH LTD. (IBBL)
Islamic banking started in Bangladesh through establishment of the
ISLAMI BANK BANGLADESH Ltd. (IBBL), which is considered to be the
first interest-free bank in Southeast Asia. It was incorporated on 13
March 1983 as a public limited company under the COMPANIES ACT
1913. In December 2001, IBBL had 121 branches; its authorized capital
was Tk 1000 million and paid up capital Tk 640 million.
Listing Year: 1985 Market Category: A
Outstanding Capital in BDT* (mn) 3802.0
Face Value 1000.0Total no. of Securities 3801600
Share Percentage:
Sponsor/Director 40
Govt.0 Institute 0 Foreign 0 Public 60
Graph-1: The Market Price of Share of IBBL in 2006-2007 (Highest value: 6930 Lowest value: 3408.75)
DUTCH-BANGLA BANK LIMITED (DBBL)
Dutch-Bangla Bank Limited (the Bank) is a scheduled commercial bank. The Bank was
established under the Bank Companies Act 1991 and incorporated as a public limited
company under the Companies Act 1994 in Bangladesh with the primary objective to
carry on all kinds of banking business in Bangladesh. The Bank is listed with Dhaka
Stock Exchange Limited and Chittagong Stock Exchange Limited. DBBL- a Bangladesh
European private joint venture scheduled commercial bank commenced formal operation
from June 3, 1996
Listing Year: 2001 Market Category :AOutstanding Capital in BDT* (mn) 202.0Face Value 100.0Total no. of Securities 2021350
Share Percentage:
Sponsor/Director 64
Govt.0 Institute 0 Foreign 26 Public 10
Graph-2: The Market Price of Share of DBBL in 2006-2007 Highest value: 6576.5, Lowest value: 1600
BANK ASIA
Bank Asia a public limited banking company incorporated on 28 September 1999. It
started banking business on 27 November 1999 with equity participation from 22
promoters. The authorised and paid up capital of the bank is Tk 800 million and Tk 218
million respectively. The paid up capital is divided into 2,180,000 ordinary shares of Tk
100 each fully paid by the sponsors.
Listing Year: 2004 Market Category : AOutstanding Capital in BDT* (mn) 1395.0 Face Value 100.0 Total no. of Securities 13950000
Share Percentage:
Sponsor/Director 52
Govt.0 Institute 17 Foreign 0 Public 31
Graph-3: The Market Price of Share of Bank Asia in 2006-2007 Highest value: 517.25, Lowest value: 334
INTERNATIONAL FINANCE, INVESTMENT AND COMMERCE BANK LIMITED (IFIC)
IFIC Bank (International Finance, Investment and Commerce Bank Limited)
originally named as International Finance and Investment Company, was
formed in October 1976. It obtained certificate of commencement on 28
February 1977 as an INVESTMENT BANKING company. The company was
established mainly to carry out banking and other financial business outside
Bangladesh (especially in the oil-rich Middle-Eastern countries) either singly
or in collaboration with other companies, banks and financial institutions.
BANGLADESH BANK allowed IFIC to transform itself into a banking company
and accordingly, it was renamed and after completion of required legal
formalities, it started full-fledged commercial banking operations on 24 June
1983.
Listing Year: 1986 Market Category : ZOutstanding Capital in BDT* (mn) 671.0 Face Value 100.0 Total no. of Securities 6706995
Share Percentage:
Sponsor/Director 18 Govt.35 Institute 0 Foreign 0 Public 47
Graph-4: The Market Price of Share of IFIC in 2006-2007 Highest value: 1198, lowest value: 0
ARAB BANGLADESH BANK LTD
AL BARAKA BANK Ltd often called the second Islamic bank of Bangladesh,
commenced banking business on 20 May 1997. It is a joint-venture enterprise
of Al-Baraka Investment and Development Company, a renowned financial
and business house of Saudi Arabia, Islamic Development Bank, a group of
eminent industrialists of Bangladesh, and the government of Bangladesh. The
authorized capital of the bank is Tk 600 million and its paid up capital is Tk
259.55 million. The bank has now 35 branches in different parts of the
country.
Listing Year: 1983 Market Category: AOutstanding Capital in BDT* (mn) 743.0Face Value 100.0Total no. of Securities 7432618Share Percentage:
Sponsor/Director 50
Govt.1 Institute 0 Foreign 0 Public 49
Graph-5: The Market Price of Share of AB Bank in 2006-2007 Highest value: 3236.75, Lowest value: 684.75
Related Financial Data Analysis
The financial data we gathered to find out the relationship between various variables with
price of five different banks are given. We attempted to explore some conclusion on the
behavioral pattern of changing the share market price. The data are extracted from annual
reports of five selected banks that are Arab Bangladesh (AB) Bank, Bank Asia (BA),
232.98
121.485
121.8925
103.718
39.1040
50
100
150
200
250
2001 2002 2003 2004 2005 2006 2007
Year
To
tal
Div
iden
d P
aid
3688.2846
4544.1524
5113.2974
4103.9648
2590.7376
0
1000
2000
3000
4000
5000
6000
2001 2002 2003 2004 2005 2006 2007Year
Sha
re P
rice
(Mkt
.)
Dutch Bangla Bank Ltd (DBBL), International Finance and Investment Corporation
(IFIC) and Islami Bank Bangladesh Ltd. (IBBL). The annual data of these banks has been
taken from the annual reports and other annual publications of Dhaka Stock Exchange.
ISLAMIC BANK BANGLADESH LTD (IBBL)
YEAR EPSP/E RATIO
SHARE PRICE (MKT)
DIVIDEND
CASHBONUS SHARE
TOTAL
2002 931.92 2.78 2590.7376 232.98 0 232.982003 195.52 20.99 4103.9648 0 39.104 39.1042004 518.59 9.86 5113.2974 0 103.718 103.7182005 487.57 9.32 4544.1524 0 121.8925 121.8932006 485.94 7.59 3688.2846 72.891 48.594 121.485TOTAL 2619.54 50.54 20040.4368 305.871 313.3085 619.18AVERAGE 523.908 10.108 4008.08736 61.1742 62.6617 123.836
Table-1: Financial data of IBBL from 2002-2006
Graph-6: Trend of Market Price of Share and payment of total Dividend from 2002-
2006
2187.76031840.1786
1850.6349
945.0873
431.3926
0
500
1000
1500
2000
2500
2001 2002 2003 2004 2005 2006 2007Year
Shar
e Pr
ice
(Mkt
.) 44.795
45.4925
26.30925
20.79417.572
0
5
10
15
20
25
30
35
40
45
50
2001 2002 2003 2004 2005 2006 2007
Year
To
tal
Div
iden
d P
aid
DUTCH BANGLA BANK LTD. (DBL)
YEAR EPSP/E RATIO
SHARE PRICE(MKT)
DIVIDEND
CASH BONUS SHARE
TOTAL
2002 87.86 4.91 431.3926 17.572 0 17.5722003 103.97 9.09 945.0873 20.794 0 20.7942004 116.93 18.71 2187.7603 26.30925 0 26.309252005 181.97 10.17 1850.6349 45.4925 0 45.49252006 179.18 10.27 1840.1786 44.795 0 44.795TOTAL 669.91 53.15 7255.0537 154.96275 0 154.96275AVERAGE 133.982 10.63 1451.01074 30.99255 0 30.99255
Table-2: Financial data of DBBL from 2002-2006
Graph-7: Trend of Market Price of Share and payment of total Dividend from 2002-2006
BANK ASIA
YEAR EPSP/E RATIO
SHARE PRICE (MKT)
DIVIDEND
CASHBONUS SHARE
TOTAL
2002 48.51 0 0 0 0 02003 35.98 11.56 415.9288 0 8.6352 8.63522004 39.48 12.35 487.578 0 9.87 9.872005 34.36 8.11 278.6596 3.436 6.872 10.308
951.2658
572.792
407.077
222.2352
467.4596
0100200300400500600700800900
1000
2001 2002 2003 2004 2005 2006 2007Year
Shar
e Pr
ice
(Mkt
.)
2.024
14.9904
1.6091.5841.46325
0
2
4
6
8
10
12
14
16
2001 2002 2003 2004 2005 2006 2007Year
Tota
l Div
iden
d Pa
id
428.0052
278.6596
487.578
415.9288
0
0
100
200
300
400
500
600
2001 2002 2003 2004 2005 2006 2007
Year
Shar
e Pr
ice
(Mkt
.)
8.6352
0
9.87
10.308 10.6575
0
2
4
6
8
10
12
2001 2002 2003 2004 2005 2006 2007
YearTo
tal D
ivid
end
Paid
2006 42.63 10.04 428.0052 0 10.6575 10.6575TOTAL 200.96 42.06 1610.1716 3.436 36.0347 39.4707AVERAGE 40.192 8.412 322.03432 0.6872 7.20694 7.89414
Table-3: Financial data of Bank Asia from 2002-2006
Graph-8: Trend of Market Price of Share and payment of total Dividend from 2002-2006
INTERNATIONAL FINANCE AND INVESTMENT CORPORATION (IFIC)
YEAR EPSP/E RATIO
SHARE PRICE (MKT)
DIVIDEND
CASHBONUS SHARE
TOTAL
2002 19.51 23.96 467.4596 1.46325 0 1.463252003 15.84 14.03 222.2352 0 1.584 1.5842004 16.09 25.3 407.077 0 1.609 1.6092005 20.24 28.3 572.792 0 2.024 2.0242006 62.46 15.23 951.2658 0 14.9904 14.9904TOTAL 134.14 106.82 2620.8296 1.46325 20.2074 21.67065AVERAGE 26.828 21.364 524.16592 0.29265 4.04148 4.33413
Table-4: Financial data of IFIC from 2002-2006
2842.6632
500.3001
363.9819
385.1793
223.3392
0
500
1000
1500
2000
2500
3000
2001 2002 2003 2004 2005 2006 2007Year
Sh
are
Pri
ce (
Mkt
.)
2.841
27.924
0.90950.1815
0.867
0
5
10
15
20
25
30
2001 2002 2003 2004 2005 2006 2007
Year
To
tal d
ivid
end
Pai
d
Graph-9: Trend of Market Price of Share and payment of total Dividend from 2002-2006
ARAB BANGLADESH BANK (AB BANK)
YEAR EPSP/E RATIO
SHARE PRICE (MKT)
DIVIDEND
CASHBONUS SHARE
TOTAL
2002 5.78 38.64 223.3392 0 0.867 0.8672003 3.63 106.11 385.1793 0 0.1815 0.18152004 18.19 20.01 363.9819 0 0.9095 0.90952005 28.41 17.61 500.3001 0 2.841 2.8412006 93.08 30.54 2842.6632 0 27.924 27.924TOTAL 149.09 212.91 4315.4637 0 32.723 32.723AVERAGE 29.818 42.582 863.09274 0 6.5446 6.5446
Table-5: Financial data of AB Bank from 2002-2006
Graph-10: Trend of Market Price of Share and payment of total Dividend from 2002-2006
TOTAL INDUSTRY (TOTAL ACCUMULATED DATA)
YEAR EPSP/E RATIO
SHARE PRICE (MKT)
DIVIDEND
CASHBONUS SHARE
TOTAL
2002 218.716 14.058 3074.709528 50.40305 0.1734 50.576452003 70.988 32.356 2296.887728 4.1588 9.90094 14.059742004 141.856 17.246 2446.448576 5.26185 23.2213 28.48315
2005 150.51 14.702 2212.79802 9.7857 26.7259 36.51162006 172.658 14.734 2543.942972 23.5372 20.43318 43.97038TOTAL 754.728 93.096 12574.78682 93.1466 80.45472 173.6013AVERAGE 150.9456 18.6192 2514.957365 18.62932 16.090944 34.72026
Table-6: Financial data of total 5 Banks from 2002-2006
LIMITATION
1. Sample size of the study is fixed and too short (n=25).
2. Many companies do not give cash dividend.
3. Dividend is not the only variable which affect on share price.
4. It is assumed that the capital market is organized.
5. It is assumed that there is no inflation or deflation in the economy
6. It is assumed that money supply in the market is fixed.
7. Companies on which the study is made do not disclose the market position of
their share.
8. Straight line equation is used but there are different variables which affect share
price.
9. Sampling error in the study is considered.
10. Due to lack real life experience, the level best effort may not be presented
dynamically.
CONCLUSION & RECOMMENDATION
The dividend policy of a company determines what proportion of earnings is distributed
to the shareholders by way of dividends, and what proportion is ploughed back for
reinvestment purposes. Since the main objective of financial management is to maximize
the market value of equity shares, one key area of study is the relationship between the
dividend policy and market price of equity shares.
According to this model founded by Graham and Dodd, the market price of the shares
will increase when a company declares a dividend rather than when it does not.
According to James Walter, the dividend policy of a company has an impact on the share
valuation. On the other hand according Myron Gordon, the dividend policy of the
company has an impact on share valuation.
But according Miller and Modiliani, the market price of the share does not depend on the
dividend payout, i.e. the dividend policy is irrelevant. When profits are used to declare
dividends, the market price increases. But at the same time there is a fall in the reserves
for reinvestment. Hence for expansion, the company raises additional capital by issuing
new shares. Increase in the overall number of shares, will lead to a fall in the market price
per share. Hence the shareholders would be indifferent towards the dividend policy.
From the above models confuses as the impact of dividend on share price. In our study
we make the co relation of different variables and try to compare which variables has the
significant impact on share price. After the study we have revealed dividend has a
significant impact on share price.
From our study we recommend the following issues:
1. Most of the investors are irrational. SEC should take different initiative to make
them rational.
2. Both cash and stock dividend should be paid consistently
3. Sometimes capital market is affected by different fake information which also
affect share price. SEC should take initiatives for this condition.
4. The company should disclose the overall market price of their share in the annual
report.
5. SEC should take initiative for the companies which are making significant losses.
6. Money supply has an effect on share price. SEC should take initiatives on this
issue.
7. Political, general economic, financial and stock market conditions, particularly
where the company operates or is listed
8. Perceptions of investors about the different factors should be implemented.
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