168 5 FACTORS AFFECTING DIVIDEND DECISION FACTORS AFFECTING DIVIDEND DECISION FACTORS AFFECTING DIVIDEND DECISION FACTORS AFFECTING DIVIDEND DECISION Dividend is a widely researched arena but still its fathom has to be explored as numerous questions remains unanswered. The question of “Why do corporations pay dividends?” has puzzled researchers for many years. Despite the extensive research devoted to solve the dividend puzzle, a complete understanding of the factors that influence dividend policy and the manner in which these factors interact is yet to be established. Allen et al. (2000) 1 stated that: “Although a number of theories have been put forward in the literature to explain their pervasive presence, dividends remain one of the thorniest puzzles in corporate finance.” The dividend decision is taken after due considerations to number of factors like legal as well as financial. This is so because one set of dividend policy cannot be evolved that can be applied to all firms rather the dividend decision vary from firm to firm in light of the firm specific considerations. Lintner (1956) 2 suggested that dividend depends in part on the firm's current earnings and in part on the dividend for the previous year. He found that major changes in earnings with existing dividend rates were the most important determinants of the firm's dividend policy. Ramcharran (2001) 3 observed that:
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5555 FACTORS AFFECTING DIVIDEND DECISION...5.1.2 Financial Factors Affecting Dividend Decision The above mentioned factors are not limited and many more can be there that affect the
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Behavior, Growth in EPS, Growth in Working Capital, Return on Capital Employed,
Return on Net worth, Age of the Company, Net Profit to Net worth, Net Profit ratio,
Market to Book value, Tobin’s Q and Uncertainty in EPS. The analysis has been made
carried out with the help of Factor Analysis. The following steps were followed in order
to extract the factors.
The principal component analysis using VARIMAX rotation of twenty one variables
pertaining to Engineering, FMCG, IT and Textiles industrial sector has led to the
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extraction of numerous factors. After a meaningful set of variables have been obtained,
the next task is to group the variables under particular factor and label them in order to
assign some meaning to the factor loadings. Variables with higher loadings are
considered more important and have greater influence on the label selected to represent
the factor. For this purpose, the sampling adequacy tests have been conducted to know
that whether the sample is adequate or not. KMO recommends accepting value greater
than .5 as barely acceptable (value below this leads either to collect more data or to
rethink which variable should be included or excluded). And Bartlett recommends the
accepting value less than .05. Bartlett’s test finds that the correlations, when taken
collectively are significant at .0001 level whereas measure of sampling adequacy looks at
the patterns between the variables.
Derivation of the factors is based on the perusal of correlation matrix results in retaining
only those components that fulfill the same criteria. The decision to choose the factor
loadings has been based on the criteria of sample size (factor loading between .3-.4 if the
sample ranges between 150 and 350). Since the sample size for the current study is 172,
so only the loadings above .30 have been considered for the study. For obtaining the
rotated factor matrix, Orthogonal rotation method viz. VARIMAX rotation has been used
which shows factor loadings for each variable onto each factor. In this matrix, only the
main factors have been displayed which are reliable & whose value is more than .3 and
the rest have been eliminated. After identifying the significant factor loadings, next step
is to study the communalities of the variables, representing the amount of variance
accounted for by the factor solution for each variable. It is generally assumed that
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variable with communalities> .50 should be retained for the study. In the present analysis,
no variable could be found having communality <.50. Hence, finally, the structure of the
factors for the variables has been well-defined and the significant factors have been
selected and grouped together for labeling.
5.2.1) FACTOR ANALYSIS RESULTS FOR INDIVIDUAL INDUS TRIAL
SECTORS FOR THE YEAR 2007
A) Engineering Industry
For the Engineering industrial sector, the overall MSA value falls in the acceptable range
(above .50) with a value of .656 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.1: KMO and Bartlett's Test for Engineering Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .656
Approx. Chi-Square 1069.090
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded eight factors for Engineering Industry which represented
82.815% of the variance, of 21 variables deemed sufficient in terms of total variance
explained (solution should account for >60% variance). Table 5.2 summarises the
orthogonal solution resulting from VARIMAX rotation of the original twenty one
measures for Engineering industrial sector for the year 2007.
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Table 5.2: Factor Analysis for Factors Affecting Dividend in Engineering Industry
for the Year 2007
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability and Investment Set
5.150 21.110 21.110
Net Profit Ratio .864 Return on Net worth .961 Return on Capital Employed
.871
Market to Book Value .650 Free Cash flow .549 Net Profit to Net worth Ratio
.956
Dividend Rate 3.781 17.862 38.972 Dividend Per Share .952 Dividend Per Share to Market Value
.876
Dividend Per Share to Face value
.930
Dividend Payout .948 Financial Soundness 2.307 12.460 51.431 Current Ratio .828 Debt Equity Ratio .725 Cash Holding .713 Solvency Ratio .858 Liquidity 1.524 7.555 58.986 Growth in Working Capital
.785
Company’s Age 1.306 6.678 65.664 Age .892 Earnings and Share Price Behavior
1.215 6.275 71.939
Share Price Behavior .694 Profit After Tax .569 Growth in EPS .512 Investment Opportunity 1.098 5.521 77.460 Tobin’s Q .893 Risk and Uncertainty 1.009 5.355 82.815 EPS Uncertainty .814
The factor 1 variables: “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Market to Book Value”, “Free Cash Flow” and “Net profit to Net worth
ratio” are interpreted under the construct “Profitability and Investment Set”. Factor 2 was
named as “Dividend Rate” and includes the variables “Dividend per Share”, “Dividend
185
Per share to Market Value”, “Dividend per share to Face Value” and “Dividend Payout”.
Factor 3 was named as “Financial Soundness” and includes variables “Current Ratio”,
“Debt Equity”, “Cash Holding” and “Solvency Ratio”. Factor 4 was named as “Liquidity”
and includes variables “Growth in Working Capital”. Factor 5 was named as “Company’s
Age” and includes variables “Age”. Factor 6 was named as “Earnings and Share Price
Behavior” and includes variables “Share Price Behavior”, “Profit after Tax” and “Growth
in Earnings per Share”. Factor 7 was named as “Investment Opportunity” and includes
variables “Tobin’s Q”. Factor 8 was named as “Risk and Uncertainty” and includes
variables “Earnings per Share Uncertainty”.
B) FMCG Industry
For the FMCG industrial sector, the overall MSA value falls in the acceptable range
(above .50) with a value of .504 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.3: KMO and Bartlett's Test for FMCG Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .504
Approx. Chi-Square 517.791
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded seven factors for FMCG sector which represented 75.5% of
the variance, of 21 variables deemed sufficient in terms of total variance explained
(solution should account for >60% variance). Table 5.4 summarises the orthogonal
186
solution resulting from VARIMAX rotation of the original twenty one measures for
FMCG industrial sector for the year 2007.
Table 5.4: Factor Analysis for Factors Affecting Dividend in FMCG Industry for
the Year 2007
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability and Investment Set
5.336 22.481 22.481
Net Profit Ratio .538 Return on Net worth .944 Return on Capital Employed
.955
Market to Book Value .797 Free Cash flow .688 Net Profit to Net worth Ratio
.939
Dividend Rate 2.732 11.211 33.691 Dividend Per Share .551 Dividend Per Share to Market Value
.536
Dividend Per Share to Face value
.911
Dividend Payout .544 Financial Soundness 2.182 11.182 44.874 EPS Uncertainty .855 Age .611 Debt-Equity Ratio .735 Profit After tax .710 Growth in Working Capital .527 Solvency Ratio .718 Investment Opportunity 1.690 8.291 53.164 Tobin’s Q .905 Liquidity 1.548 8.089 61.253 Current Ratio .542 Cash Holdings .836 Growth Rate 1.267 7.375 68.628 Growth in EPS .822 Share Price Movement 1.099 6.872 75.500 Share Price Behavior .525
The factor 1 variables: “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Market to Book Value”, “Free Cash Flow” and “Net profit to Net worth
Ratio” are interpreted under the construct “Profitability and Investment Set”. Factor 2
187
was named as “Dividend Rate” and includes the variables “Dividend per Share”,
“Dividend Per share to Market Value”, “Dividend per share to Face Value” and
“Dividend Payout”. Factor 3 was named as “Financial Soundness” and includes variables
“EPS Uncertainty”, “Age”, “Debt Equity”, “Profit after Tax”, “Growth in Working
Capital” and “Solvency Ratio”. Factor 4 was named as “Investment Opportunity” and
includes variable “Tobin’s Q”. Factor 5 was named as “Liquidity” and includes variables
“Current Ratio” and “Cash Holdings”. Factor 6 was named as “Growth Rate” and
includes variables “Growth in EPS”. Factor 7 was named as “Share Price Movement” and
includes variables “Share Price Behavior”.
C) IT Industry
For the IT industrial sector, the overall MSA value falls in the acceptable range (above
.50) with a value of .554 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.5: KMO and Bartlett's Test for IT Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .554
Approx. Chi-Square 632.765
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded seven factors for IT sector which represented 80.392% of the
variance, of 21 variables deemed sufficient in terms of total variance explained (solution
should account for >60% variance). Table 5.6 summarises the orthogonal solution
188
resulting from VARIMAX rotation of the original twenty one measures for IT industrial
sector for the year 2007.
Table 5.6: Factor Analysis for Factors Affecting Dividend in IT Industry for the
Year 2007
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability Position 5.475 22.637 22.637 Net Profit Ratio .940 Return on Net worth .629 Return on Capital Employed .670 Free Cash Flow .846 Net Profit to Net worth Ratio .650 Growth in Working Capital .778 Dividend Rate 3.274 11.999 34.636 Dividend Per Share .494 Dividend Per Share to Market Value
.419
Dividend Per Share to Face value
.852
Dividend Payout .418 Financial Soundness 2.365 11.179 45.815 Current Ratio .836 Cash Holding .746 Debt Equity .873 Solvency Ratio .593 Company’s Age 1.984 10.036 55.851 Age .764 Investment Opportunity 1.571 9.853 65.704 Market Value to Book Value .846 Tobin’s Q .891 Share Prices and Uncertainty
1.169 7.415 73.119
EPS Uncertainty .505 Share Price Behavior .720 Earnings and Growth Rate 1.044 7.273 80.392 Profit After Tax .864 Growth in EPS .898
The factor 1 variables: “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Market to Book Value”, “Free Cash Flow” , “Net profit to Net worth ratio”
and “Growth in Working Capital” are interpreted under the construct “Profitability
Position”. Factor 2 was named as “Dividend Rate” and includes the variables “Dividend
189
per Share”, “Dividend Per share to Market Value”, “Dividend per share to Face Value”
and “Dividend Payout”. Factor 3 was named as “Financial Soundness” and includes
4 was named as “Company’s Age” and includes variables “Age”. Factor 5 was named as
“ Investment Opportunity” and includes variables “Market Value to Book Value” and
“Tobin’s Q”. Factor 6 was named as “Share Prices and Uncertainty” and includes
variables “EPS Uncertainty” and “Share Price Behavior”. Factor 7 was named as
“Earnings and Growth Rate” and includes variables “Profit after Tax” and “Growth in
Earnings per Share”.
D) Textile Industry
For the Textiles industrial sector, the overall MSA value falls in the acceptable range
(above .50) with a value of .546 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.7: KMO and Bartlett's Test for Textiles Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .546
Approx. Chi-Square 655.154
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded seven factors for Textiles sector which represented 86.306%
of the variance, of 21 variables deemed sufficient in terms of total variance explained
(solution should account for >60% variance). Table 5.8 summarises the orthogonal
190
solution resulting from VARIMAX rotation of the original twenty one measures for
Textiles industrial sector for the year 2007.
Table 5.8: Factor Analysis for Factors Affecting Dividend in Textiles Industry for
the Year 2007
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability Position 5.109 23.449 23.449 Return on Net worth .928 Return on Capital Employed .851 Net Profit to Net worth Ratio .905 Profit After Tax .880 Growth in EPS .666 Financial Soundness 4.103 16.11 39.559 Growth in Working Capital .820 Net Profit Ratio .947 Cash Holdings .826 Solvency ratio .958 Investment and Risk 3.096 13.427 52.986 EPS Uncertainty .886 Tobin’s Q .762 Market Value to Book value .943 Dividend Rate 2.220 11.953 64.938 Dividend Per Share .890 DPS to Market Value .811 DPS to Face Value .713 Dividend Payout .780 Capital Structure and Share Price Behavior
1.317 8.000 72.938
Debt Equity .743 Share Price Behavior .754 Company’s Age 1.262 7.114 80.052 Age .798 Liquidity Position 1.110 6.254 86.306 Current Ratio .732 Free Cash Flow .581
The factor 1 variables “Return on Net worth”, “Return on Capital Employed”, “Net Profit
to Net worth”, “Market to Book Value”, “Profit after Tax” and “Growth in Earnings per
Share” are interpreted under the construct “Profitability Position”. Factor 2 was named as
“Financial Soundness” and includes the variables “Growth in Working Capital”, “Net
191
profit Ratio”, “Cash Holdings” and “Solvency Ratio”. Factor 3 was named as “Investment
and Risk” and includes variables “EPS Uncertainty”, “Tobin’s Q” and “Market Value to
Book Value”. Factor 4 was named as “Dividend Rate” and includes variables “Dividend
per Share”, “Dividend to Market Value”, “Dividend to Face Value” and “Dividend
Payout”. Factor 5 was named as “Capital Structure and Share Price Behavior” and
includes variables “Debt Equity Ratio” and “Share Price Behavior”. Factor 6 was named
as “Company’s Age” and includes variables “Age”. Factor 7 was named as “Liquidity
Position” and includes the variables “Current Ratio” and “Free Cash Flow”.
5.2.2) FACTOR ANALYSIS RESULTS FOR GROUPED DATA FOR THE YEAR
2007
The sampling adequacy tests have been conducted to know that whether the sample is
adequate or not. For the grouped data, the overall MSA value falls in the acceptable range
(above .50) with a value of .648 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.9: KMO and Bartlett's Test for Grouped Data
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .648
Approx. Chi-Square 1982.956
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor Analysis has resulted in retaining seven factors for the grouped data which
retained represented 68.771% of the variance, of 21 variables deemed sufficient in terms
of total variance explained (solution should account for >60% variance). Table 5.10
192
summarises the orthogonal solution resulting from VARIMAX rotation of the original
twenty one measures for the grouped data for the year 2007.
Table 5.10: Factor Analysis for Factors Affecting Dividend for Grouped Data for
the Year 2007
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability and Investment Set 4.037 17.519 17.519 Return on Net worth .956 Return on Capital Employed .887 Market Value to Book Value .644 Net Profit to Net worth Ratio .946 Profit After Tax .356 Dividend Rate 3.018 13.740 31.259 Dividend Per Share .902 Dividend per Share to Market Value
.735
Dividend per Share to Face Value .735 Dividend Payout .916 Financial Soundness 2.403 9.365 40.624 Net Profit Ratio .917 Current Ratio .730 Cash Holdings .622 Free Cash Flow .553 Solvency Ratio .926 Share Price Movement 1.465 8.229 48.853 Share Price Behavior .728 Capital Structure and Investment Opportunity
1.343 6.790 55.642
Debt-Equity Ratio .569 Tobin’s Q .709 Growth Rate 1.126 6.616 62.259 Growth in EPS .829 Growth in Working Capital .414 Company’s Age and Uncertainty 1.049 6.512 68.771 EPS Uncertainty .614 Age .769
The factor 1 variables “Return on Net worth”, “Return on Capital Employed”, “Market to
Book Value”, “Net Profit to Net worth” and “Profit after Tax” are interpreted under the
construct “Profitability and Investment Set”. Factor 2 was named as “Dividend Rate” and
includes variables “Dividend per Share”, “Dividend to Market Value”, “Dividend to Face
193
Value” and “Dividend Payout”. Factor 3 was named as “Financial Soundness” and
includes the variables “Net profit Ratio”, “Current Ratio”, “Cash Holdings”, “Free Cash
Flow” and “Solvency Ratio”. Factor 4 was named as “Share Price Movement” and
includes variables “Share Price Behavior”. Factor 5 was named as “Capital Structure
and Investment Opportunity” and includes variables “Debt-Equity Ratio” and “Tobin’s
Q”. Factor 6 was named as “Growth Rate” and includes the variables “Growth Rate in
EPS” and “Growth Rate in Working Capital”. Factor 7 was named as “Company’s Age
and Uncertainty” and includes the variables “EPS Uncertainty” and “Age”.
5.2.3) FACTOR ANALYSIS RESULTS FOR INDIVIDUAL INDUS TRIAL
SECTORS FOR THE YEAR 2008
A) Engineering Industry
For the Engineering industrial sector, the overall MSA value falls in the acceptable range
(above .50) with a value of .671 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.11: KMO and Bartlett's Test for Engineering Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .671
Approx. Chi-Square 770.271
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded six factors for Engineering sector which represented 68.679%
of the variance, of 21 variables deemed sufficient in terms of total variance explained
(solution should account for >60% variance). Table 5.12 summarises the orthogonal
194
solution resulting from VARIMAX rotation of the original twenty one measures for the
Engineering sector for the year 2008.
Table 5.12: Factor Analysis for Factors Affecting Dividend in Engineering Industry
for the Year 2008
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability Position 5.209 18.222 18.222 Net Profit Ratio .876 Return on Net worth .873 Return on Capital Employed
.785
Free Cash flow .649 Net Profit to Net worth Ratio
.907
Financial Soundness 3.163 14.316 32.538 Current Ratio .885 Debt Equity Ratio .613 Cash Holding .854 Growth in Working Capital
.582
Solvency Ratio .910 Dividend Rate 1.982 11.825 44.363 Dividend Per Share .818 Dividend Per Share to Market Value
.768
Dividend Per Share to Face value
.734
Dividend Payout .462 Company’s Age and Profitability
1.696 10.312 54.675
Age .623 Profit After Tax .488 Investment Opportunity 1.259 8.427 63.102 Market Value to Book Value
.776
Tobin’s Q Earnings and Share Price Behavior
1.114 5.578 68.679
Share Price Behavior .489 Growth in EPS .467
The factor 1 variables: “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Free Cash Flow” and “Net profit to Net worth ratio” are interpreted under
195
the construct “Profitability Position”. Factor 2 was named as “Financial Soundness” and
includes variables “Current Ratio”, “Debt Equity”, “Cash Holding”, “Growth in Working
Capital” and “Solvency Ratio”. Factor 3 was named as “Dividend Rate” and includes the
variables “Dividend per Share”, “Dividend Per share to Market Value”, “Dividend per
share to Face Value” and “Dividend Payout”. Factor 4 was named as “Company’s Age
and Profitability” and includes variables “Age” and “Profit after Tax”. Factor 5 was
named as “Investment Opportunity” and includes variable “Market Value to Book Value”
and “Tobin’s Q”. Factor 6 was named as “Earnings and Share Price Behavior” and
includes variables “Share Price Behavior”, and “Growth in Earnings per Share”.
B) FMCG Industry
For the FMCG industrial sector, the overall MSA value falls in the acceptable range
(above .50) with a value of .556 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.13: KMO and Bartlett's Test for FMCG Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .556
Approx. Chi-Square 514.505
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded eight factors for FMCG sector which represented 80.717% of
the variance, of 21 variables deemed sufficient in terms of total variance explained
(solution should account for >60% variance). Table 5.14 summarises the orthogonal
196
solution resulting from VARIMAX rotation of the original twenty one measures for the
FMCG sector for the year 2008.
Table 5.14: Factor Analysis for Factors Affecting Dividend in FMCG Industry for
the Year 2008
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability and Investment Opportunity
4.723 20.505 20.505
Net Profit Ratio .612 Return on Net worth .947 Return on Capital Employed .950 Market to Book Value .763 Net Profit to Net worth Ratio .951 Capital Structure and Risk 2.830 10.531 31.036 Debt-Equity Ratio .839 Solvency Ratio .771 Liquidity 2.319 10.069 41.105 Current Ratio .710 Cash Holding .758 Growth in Working Capital .850 Dividend Rate 2.027 9.757 50.862 Dividend Per Share .594 Dividend Per Share to Market Value
.698
Dividend Per Share to Face value
.911
Dividend Payout .907 Earnings and Uncertainty 1.539 9.205 60.067 EPS Uncertainty .830 Profit After tax .789 Company’s Age and Risk 1.355 8.439 68.506 Age .513 Tobin’s Q .908 Financial Soundness 1.109 6.262 74.768 Free Cash Flow .448 Growth in EPS .862 Share Price Movement 1.048 5.949 80.717 Share Price Behavior .552
The factor 1 variables: “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Market to Book Value” and “Net profit to Net worth Ratio” are interpreted
under the construct “Profitability and Investment Opportunity”. Factor 2 was named as
197
“Capital Structure and Risk” and includes the variables “Debt-Equity Ratio”, “Solvency
Ratio”, “Dividend per share to Face Value” and “Dividend Payout”. Factor 3 was named
as “Liquidity” and includes variables “Current Ratio”, “Cash Holdings” and “Growth in
Working Capital. Factor 4 was named as “Dividend Rate” and includes the variables
“Dividend per Share”, “Dividend Per share to Market Value”, “Dividend per share to
Face Value” and “Dividend Payout”. Factor 5 was named as “Earnings and Uncertainty”
and includes variables “EPS Uncertainty” and “Profit after Tax”. Factor 6 was named as
“Company’s Age and Risk” and includes variables “Age” and “Tobin’s Q”. Factor 7 was
named as “Financial Soundness” and includes variables “Free Cash Flow” and “Growth
in EPS”. Factor 8 was named as “Share Price Movement” and includes variables “Share
Price Behavior”.
C) IT Industry
For the IT industrial sector, the overall MSA value falls in the acceptable range (above
.50) with a value of .616 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.15: KMO and Bartlett's Test for IT Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .616
Approx. Chi-Square 535.094
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded seven factors for IT sector which represented 75.881% of the
variance in IT sector, of 21 variables deemed sufficient in terms of total variance
198
explained (solution should account for >60% variance). Table 5.16 summarises the
orthogonal solution resulting from VARIMAX rotation of the original twenty one
measures for the IT sector for the year 2008.
Table 5.16: Factor Analysis for Factors Affecting Dividend in IT Industry for the Year 2008
Factors Factor
Loadings Eigen Value Percentage of
Variance Explained Cumulative
Variance Profitability Position 5.249 19.166 19.166 Net Profit Ratio .954 Return on Net worth .912 Return on Capital Employed .729 Free Cash Flow .581 Net Profit to Net worth Ratio .901 Dividend Rate 2.945 11.166 30.332 Dividend Per Share .735 Dividend Per Share to Market Value
.897
Dividend Per Share to Face value .821 Dividend Payout .637 Liquidity 2.135 10.485 40.817 Cash Holding .921 Financial Soundness 1.857 10.456 51.273 Current Ratio .879 Growth in Working Capital .559 Solvency Ratio .518 Leverage and Risk 1.354 9.760 61.033 EPS Uncertainty .921 Debt Equity .572 Earnings and Investment Opportunity
1.264 8.010 69.043
Tobin’s Q .730 Market Value to Book Value .610 Growth in EPS .799 Share Prices and Profits 1.131 6.839 75.881 Share Price Behavior .685 Profit After Tax .778
The factor 1 variables: “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Free Cash Flow” and “Net profit to Net worth Ratio” are interpreted under
the construct “Profitability Position”. Factor 2 was named as “Dividend Rate” and
includes the variables “Dividend per Share”, “Dividend Per share to Market Value”,
199
“Dividend per share to Face Value” and “Dividend Payout”. Factor 3 was named as
“Liquidity” and includes variable “Cash Holding”. Factor 4 was named as “Financial
Soundness” and includes variables “Current Ratio”, “Growth in Working Capital” and
“Solvency Ratio”. Factor 5 was named as “Leverage and Uncertainty” and includes
variables “Debt-Equity Ratio” and “EPS Uncertainty”. Factor 6 was named as “Earnings
and Investment Opportunity” and includes variables “Tobin’s Q”, “Market Value to Book
Value” and “Growth in Earnings per Share”. Factor 7 was named as “Share Prices and
Profits” and includes variables “Share Price Behavior” and “Profit after Tax”.
D) Textile Industry
For the Textile industrial sector, the overall MSA value falls in the acceptable range
(above .50) with a value of .512 for KMO and .000 for Bartlett’s test (less than .5), these
measures indicate that the set of variables are appropriate for factor analysis.
Table 5.17: KMO and Bartlett's Test for Textile Industry
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .512
Approx. Chi-Square 499.187
df 210 Bartlett's Test of Sphericity
Sig. .000
Factor analysis has yielded seven factors for Textile sector which represented 68
84.604% of the variance, of 21 variables deemed sufficient in terms of total variance
explained (solution should account for >60% variance). Table 5.18 summarises the
orthogonal solution resulting from VARIMAX rotation of the original twenty one
measures for the Textile sector for the year 2008.
200
Table 5.18: Factor Analysis for Factors Affecting Dividend in Textiles Industry for
the Year 2008
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Company’s Age and Profitability Position
6.305 26.809 26.809
Net Profit Ratio .956 Return on Net worth .932 Return on Capital Employed .756 Age .810 Net Profit to Net worth Ratio .923 Profit After Tax .911 Financial Soundness 3.289 13.759 40.568 Current Ratio .807 Debt-Equity Ratio .622 Solvency Ratio .882 Dividend Rate 2.346 13.525 54.094 Dividend Per Share .926 DPS to Market Value .590 DPS to Face Value .919 Dividend Payout .593 Liquidity Growth 2.052 8.176 62.269 Growth in Working Capital .854 Earnings and Uncertainty 1.664 8.007 70.276 EPS Uncertainty .809 Growth in EPS .627 Liquidity Position 1.067 7.563 77.838 Cash Holding .645 Free Cash Flow .830 Investment Opportunity and Share Price Movement
1.044 6.766 84.604
Share Price Behavior .908 Market Value to Book Value .651 Tobin’s Q .535
The factor 1 variables “Net Profit Ratio”, “Return on Net worth”, “Return on Capital
Employed”, “Age”, “Net Profit to Net worth” and “Profit after Tax” are interpreted under
the construct “Company’s Age and Profitability Position”. Factor 2 was named as
“Financial Soundness” and includes the variables “Current ratio”, “Debt-Equity Ratio”,
and “Solvency Ratio”. Factor 3 was named as “Dividend Rate” and includes variables
“Dividend per Share”, “Dividend to Market Value”, “Dividend to Face Value” and
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“Dividend Payout”. Factor 4 was named as “Liquidity Growth” and includes variable
“Growth in Working Capital”. Factor 5 was named as “Earnings and Uncertainty” and
includes variables “EPS Uncertainty” and “Growth in EPS”. Factor 6 was named as
“Liquidity Position” and includes the variables “Cash Position” and “Free Cash Flow”.
Factor 7 was named as “Investment Opportunity and Share Price Movement” and
includes the variables “Share Price Behavior”, “Market Value to Book Value” and
“Tobin’s Q”.
5.2.4) FACTOR ANALYSIS RESULTS FOR GROUPED DATA FOR THE YEAR
2008
The principal component analysis using VARIMAX rotation of twenty one variables
pertaining to the grouped data for the four industrial sectors viz. Engineering, FMCG, IT
and Textiles, has led to the extraction of numerous factors. The tests of sampling
adequacy have been conducted to know that whether the sample is adequate or not. For
the grouped data, the overall MSA value falls in the acceptable range (above .50) with a
value of .703 for KMO and .000 for Bartlett’s test (less than .5), these measures indicate
that the set of variables are appropriate for factor analysis.
Table 5.19: KMO and Bartlett's Test for Grouped Data
Kaiser-Meyer-Olkin Measure of Sampling Adequacy .703
Approx. Chi-Square 1458.408
df 210 Bartlett's Test of Sphericity
Sig. .000
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Factor Analysis has resulted in retaining seven factors for the grouped data which
represented 64.072% of the variance, of 21 variables deemed sufficient in terms of total
variance explained (solution should account for >60% variance). Table 5.20 summarises
the orthogonal solution resulting from VARIMAX rotation of the original twenty one
measures for the grouped data for the year 2008.
Table 5.20: Factor Analysis for Factors Affecting Dividend for Grouped Data for
the Year 2008
Factors Factor Loadings
Eigen Value Percentage of Variance Explained
Cumulative Variance
Profitability Position 4.487 18.251 18.251 Net Profit Ratio .656 Return on Net worth .899 Return on Capital Employed .823 Net Profit to Net worth Ratio .909 Financial Soundness 2.465 11.515 29.765 Current Ratio .850 Debt-Equity Ratio .487 Cash Holding .791 Solvency Ratio .808 Dividend Rate and EPS 1.855 9.948 39.713 EPS Uncertainty .689 Dividend Per Share .694 Dividend per Share to Market Value
.790
Dividend per Share to Face Value .546 Dividend Payout .623 Investment Opportunity 1.428 6.758 46.471 Market Value to Book Value .557 Tobin’s Q .724 Liquidity 1.147 6.555 53.025 Free Cash Flow .558 Growth in Working Capital .321 Share Price Movement 1.057 5.645 58.670 Share Price Behavior .750 Growth in EPS .795 Company’s Age and Profitability 1.017 5.401 64.072 Age .511 Profit After Tax .733
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The factor 1 variables “Return on Net worth”, “Return on Capital Employed”, “Net Profit
to Net worth” and “Profit after Tax” are interpreted under the construct “Profitability
Position”. Factor 2 was named as “Financial Soundness” and includes the variables “Net
profit Ratio”, “Current Ratio”, “Debt-Equity Ratio”, “Cash Holdings” and “Solvency
Ratio”. Factor 3 was named as “Dividend Rate and EPS” and includes variables “EPS
Uncertainty”, “Dividend per Share”, “Dividend to Market Value”, “Dividend to Face
Value” and “Dividend Payout”. Factor 5 was named as “Investment Opportunity” and
includes variables “Market Value to Book Value” and “Tobin’s Q”. Factor 5 was named
as “Liquidity” and includes the variables “Free Cash Flow” and “Growth Rate in
Working Capital”. Factor 6 was named as “Share Price Movement” and includes
variables “Share Price Behavior”. Factor 7 was named as “Company’s Age and
Profitability” and includes the variables “Age” and “Profit after Tax”.
5.3 MAIN FINDINGS
The results of the study presented above show that the determinants of dividend
identified in the literature apply equally to Indian industries under study. More
importantly, the results are an important first step in consolidating our understanding of
the factors affecting dividend decision of industries in India in general. The
“Profitability” factor is related to the extent of profits that accrue to the industry in order
to take a decision on declaration of dividend. Further, it also influences the opportunities
for future investments. The “Dividend Rate” factor is related to the dividend declared by
the companies. The determinants in this group include the dividend per share, dividend
payout, and relationship of dividend with market value and face value of shares. The
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“Financial Soundness” factor is related with the creditworthiness of the industries which
is influenced by solvency position and cash position. Further “Liquidity” factors are also
one of the major factors affecting dividend in terms of free cash holdings and current
ratio. An important factor “Share Price Movement” also influences the dividend decision
in terms of the relationship of dividend with behavior of the share prices. Further,
“ Investment Opportunity” factor also has emerged as an important factor presenting the
trade-off between the dividend declaration and the future investment opportunities set.
The key implication of these findings is that the Indian industries decision of dividend is
influenced by these factors.
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