KATHMANDU UNIVERISTY SCHOOL OF MANAGEMENT Identifying Most Suitable Dividend Policy for Nepalese Companies at Present Scenario Also includes individual analysis of four different companies of Nepal Submitted By: Abhishu Rimal(13327) Dixa Shrestha(13331)
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kathmandu univeristy school of management
Identifying Most Suitable Dividend Policy for Nepalese Companies at Present Scenario
Also includes individual analysis of four different companies of Nepal
Submitted By:
Abhishu Rimal(13327)
Dixa Shrestha(13331)
Manjul Shrestha(13332)
Netra Bahadur Dahal(13309)
Submitted To:
Mr. Sabin Panta
Kathmandu University School of Management
ACKNOWLEDGEMENT
This financial term paper is the result of incessant effort and cooperation extended by many
individuals. The report would not have been possible without the continuous support and
assistance of various individuals.
We express our sincere thanks to Mr. Sabin Bikram Panta, Assistant Professor at KUSOM for
supervising and providing us his valuable time and inputs for the completion of this report.
Our deepest appreciation goes to all those individuals who have directly or indirectly helped us
in our accomplishment of the project.
Abishu Rimal (13327)
Dixa Shrestha (13331)
Manjul Shrestha (13332)
Santosh Dahal (13309)
LIST OF FIGURES
Particulars Page Number1. Motive behind Cash Dividend 62. Dividend Influence on Investment
Decision7
3. Mode of Income Distribution, Regularity and Stability of Dividend
7
4. Awareness of Residual Dividend Policy 85. Signaling Effect 96. Dividend or Capital Gain Preference 107. Line chart of DPS, EPS, DPR of
Chilime Hydropower16
8. Line chart of DPS, EPS, DPR of Butwal Hydropower Company
18
9. Line chart of DPS, EPS, DPR of Nepal Doorsanchar Company
19
10. Line chart of DPS, EPS, DPR of Everest Bank Ltd
21
LIST OF TABLES
Particulars Page Number1. Motive behind Cash Dividend 62. Comparison of DPR of various years of
Chilime Hydropower16
3. Comparison of DPR of various years of Butwal Power Company
17
4. Comparison of DPR of various years of Nepal Doorsanchar Company
19
5. Comparison of DPR of various years of Everest Bank Limited
20
ii
EXECUTIVE SUMMARYDividend policy decision is a very crucial decision made by any company. Once a company
generates profit, management must decide on what to do with those profits. They could
distribute the profit as dividend to the shareholders or continue to retain the profits within the
company. None of the research has been taken regarding the best applicable dividend theory in
the context of Nepal. Better understanding of whether to focus on dividend gain or capital gain,
extent of the effect of the signals, reasons for cash dividend, and so on is necessary to have a
clear view of the investment climate of Nepal.
Some of the findings of the survey conducted are as follows:
1. Most of the investor has preference towards cash dividend.
2. Dividend decision has influence on investment decision of investors.
3. Investors prefer regular dividends.
4. Most of the investors are not aware of the residual dividend policy.
5. Dividend distribution has signaling effect.
6. Investors prefer of dividend gain over capital gain.
7. Dividend relevant theory is highly applicable in Nepal
8.
iii
TABLE OF CONTENTS
ACKNOWLEDGEMENT.............................................................................................................i
LIST OF FIGURES.......................................................................................................................ii
LIST OF TABLES.........................................................................................................................ii
EXECUTIVE SUMMARY..........................................................................................................iii
INTRODUCTION.........................................................................................................................1
Background..................................................................................................................................1
Problem Statement.......................................................................................................................1
Objectives of the Study................................................................................................................2
Scope of the Study.......................................................................................................................2
Literature Review.........................................................................................................................2
Methodology................................................................................................................................3
Limitations of the Study...............................................................................................................5
RESULTS AND ANALYSIS OF INVESTORS’ RESULTS.....................................................6
Findings of Investor’s Survey......................................................................................................6
Motive behind Cash Dividend..................................................................................................6
Influence of Dividend on Investment Decision........................................................................7
Mode of Income Distribution, Regularity and Stability...........................................................7
Residual Dividend Policy.........................................................................................................8
Signaling Effect........................................................................................................................9
Analysis of Different Dividend Theories...................................................................................10
Dividend Irrelevant Theory....................................................................................................11
Dividend Relevant Theory.....................................................................................................11
Descriptive Theory of Dividend.............................................................................................12
Clientele Theory in Nepalese Investment Environment.........................................................12
Signaling Theory....................................................................................................................13
Dividend Theory and Dividend Puzzle..................................................................................13
DIVIDEND DISTRIBUTION TREND ANALYSIS OF FOUR NEPALESE COMPANIES.......................................................................................................................................................15
iv
Analysis of Dividend Policy of Four Companies......................................................................15
Chilime Hydropower Company Limited................................................................................15
Butwal Power Company (BPC).............................................................................................17
Nepal Doorsanchar Company Ltd..........................................................................................18
Everest Bank Ltd....................................................................................................................20
CONCLUSION AND RECOMMENDATIONS.......................................................................22
Conclusion.................................................................................................................................22
Recommendations......................................................................................................................23
Recommendation to Companies.............................................................................................23
Recommendation to Investors................................................................................................23
BIBLIOGRAPHY........................................................................................................................24
v
INTRODUCTION
Background
Dividend policy decision is a very crucial decision made by any company. Once a company
generates profit, management must decide on what to do with those profits. They could
distribute the profit as dividend to the shareholders or continue to retain the profits within the
company. The policy of a company on the division of its profit between distribution to
shareholders and retention for its investment is known as dividend policy. Since, investors have
different perceptions on present cash dividends and future a capital gain, coming up with a
dividend policy is challenging for the directors and financial manager of a company. A confusion
that arises is regarding the extent of effect that dividend has on the share price.
Dividend policy is largely dependent on individual content or signaling hypothesis, investor’s
perception and clientele effect. To solve this confusion in the context of dividend policy of
Nepalese companies, this study has been carried out. Thus, this study focuses on the perception
of Nepalese investors regarding dividend and dividend policy. Also, some major factors affecting
the dividend policy has been figured out.
Problem Statement
Dividend policy directly as well as indirectly plays a vital role in increasing or decreasing the
shareholders’ value. Thus, a company should consider various aspects before making such
decision. Some of the researches have been conducted in Nepal regarding corporate dividend
policy and also on the relationship between dividend distribution and stock price. Better
understanding of whether to focus on dividend gain or capital gain, extent of the effect of the
signals, reasons for cash dividend, and so on is necessary to have a clear view of the investors’
perception regarding dividend policy.
There is clearly some information content in dividend announcements: Stock prices tend to fall
when dividends are cut, even if they don’t always rise when dividends are increased. However,
this doesn’t necessarily validate the signaling hypothesis since it is difficult to tell whether any
stock price changes that follow changes in dividends reflect only signaling effects or both
signaling and dividend preferences (Eugene & Michael, 2012, p. 645). Also, it was necessary to
analyze and compare few of the companies regarding their dividend policy so that the investors’
perception on such Dividend Payout Ratio (DPR) can be better understood
Thus, the problem statement of this paper is ‘To identify the most suitable dividend policy for
Nepalese companies at present scenario.’
Objectives of the StudySome of the major objectives of the study are as follows:
To view the applicability of different dividend theories in context of Nepal
To understand the investors perspective regarding dividend and retention
Scope of the Study
The study focuses on the effect of a company’s dividend policy on the share price and also on
identifying most suitable dividend policy for Nepalese companies. The scope of the study is as
follows:
Major factors that affect the dividend policy of companies in Nepal.
Perception and preference of Nepalese investors towards dividend and dividend
policy
Dividend distribution trend analysis of four companies of three different
industries – banking, hydropower and networking.
Literature Review
The term ‘dividend policy’ refers to “the practice that management follows in making dividend
payout and retention decisions or, in other words, the size and pattern of cash distributions over
time to shareholders” (Lease et al., 2000, p.29). One of the major decisions that a company needs
to make is dividend decision. Miller and Modigliani (1961) have given a theory stating that the
2
shareholders should be indifferent between amount distributed and retained in the firm. The
better understanding of the payout depends on the investigation of the payout decisions of a firm
in isolation from other financial decisions (Brealey, Myers and Allen, 2005).
Miller and Modigliani theory (1961) propounded the ‘dividend irrelevance’ theory suggesting
the firm’s value is determined solely by the earning power and risk of its investments and the
manner in which it splits its earnings streams between dividends and retained funds does not
affect this value (Gitman, 2012). Gordon (1961; bird in hand Theory) focused on the so-called
uncertainty resolution theory of dividends (“bird in the hand” theory). The belief in support of
dividend relevance theory is that investors see current dividends as less risky than future
dividends or capital gains. Besides these there are certain descriptive theories that explain the
relevance of dividend Clientele Theory, Signaling Theory, behavior bias theory.
Signaling theory suggests the relevance of the dividend due to the information content.
Bhattacharya (1979) claimed that the existence of information asymmetries between managers
and outside investors could play a signaling role regarding dividends. This view regarding the
signaling effect is also consistent with Miller and Rock (1985). Investors’ preference for
dividend varies with time. (Baker and Wurgler, 2004b), one possibility is that investor demand
reflects time-varying risk preferences or “sentiment.” Specifically, in low-sentiment periods
(e.g., recessions, bearish trend) investors may prefer “safer” dividend-paying stocks.
Methodology
The steps used in the completion of this report are as follows:
Formulation of the problem: The problem statement of this project study is ‘To identify the
most suitable dividend policy for Nepalese companies at present scenario.’
Problem solving approach: Primary as well as secondary sources of data was collected to
address the problem.
Research Design: Various data collected from primary and secondary sources are collected,
tabulated, analyzed and presented.
3
Data Collection: Different primary as well as secondary sources of information were used in
collecting the data.
Primary Source
Survey was conducted among 30 investors of Kathmandu Valley.
Short interviews of the investors were conducted.
Secondary Source:
Official website of four companies- Everest Bank Limited, Nepal
Doorsanchar Company Ltd, Chilime Hydropower Company Ltd, and
Butwal Power Company
Annual Reports of the respective companies
Related articles, research, newspapers, etc.
Questionnaire Development: Questionnaire survey technique was used for the collection of the
data. 17 questions were prepared and they were easy to understand. For the final draft of the
questions, few investors were interviewed regarding the questions. The questions included
different categories like Dividend Distribution (6 questions), Dividend policy (2 question),
Signaling Effect (4 questions), Dividend Theories (Dividend Irrelevance Theory, Bird-in Hand
theory) (5 questions).
Sample Selection: 30 random investors inside Kathmandu valley were directly approached with
the questionnaire. Short interviews were taken with the same investors.
Data Analysis: Following steps were involved in data analysis:
In the first phase data was extracted from the filled questionnaire as well as from
annual reports of four companies.
In the second phase, data were presented in the form of different graphs and
diagrams with the help of Excel Sheet.
In the final phase, based on the graphs and diagrams different conclusions were
drawn about the dividend decisions.
4
Limitations of the StudySome of the limitations of our study are as follows:
Due to the time constraint only 30 of the investors were approached with the
questionnaire and the report is prepared based on this survey.
To analyze the most relevant theory of investor preferences in the context of
Nepal, only perception of buyers are taken into consideration.
Only few aspects of dividend policy have been taken into consideration, future
forecasts and possibilities are beyond the scope of this study.
Only four companies were taken for the analysis purpose. Had more companies
been taken, the more accurate results could have been expected.
5
RESULTS AND ANALYSIS OF INVESTORS’ RESULTS
Findings of Investor’s Survey
Based on the survey conducted, analysis of the preferences of the investors was analyzed.
Analysis such as motive behind cash dividend, influence of dividend on investment decision,
investors’ preference on the stability of dividend, degree of awareness of residual dividend
policy, and so on was done. The analysis is explicitly shown below:
Motive behind Cash Dividend
To increase share price
To make shareholders
happyTo convey about
company's prospects
To make new shareholders
Other reasons
Motive for cash dividend
6
Motive% of
customers
To increase share price 6
To make shareholders happy 42
To convey about company's prospects 22
To make new shareholders 26
Other reasons 4
Total 100
Fig 1: Motive behind Cash Dividend
Table 1: Motive behind Cash Dividend
Most of the investor has preference towards cash dividend. Amongst the respondents, most
believe that company provide cash dividend to make shareholders happy. 22% of the investors
believed that the motive for cash dividend was to convey the company’s prospects. This is the
result of signaling effect. This shows that when the company pays cash dividend many of the
investors have positive belief about the company’s growth prospects.
Influence of Dividend on Investment Decision
The influence of dividend on investment decision can be understood from the following figure:
Yes84%
No16%
Fig 2: Dividend Influence on Investment Decision
84% of the respondents agreed to the notion that dividend decision has influence on investment
decision of investors.
7
88%88 %
Mode of Income Distribution, Regularity and Stability
Very Important24%
Impor-tant46%
Neutral20%
Not important10%
Degree of stability of dividend
Fig 3: Mode of Income Distribution, Regularity and Stability of Dividend
According to above shown results it can be deduced that investors prefer regular dividends.
Other form of dividend such as stock dividends and low regular dividend plus extra is not highly
welcomed. Stock repurchase is the not welcomed form of dividend. About 70% of the
respondents believe stability of dividend to be important.
The mode of dividend plays a significant role in determining the expectation of the shareholder.
Thus, dividend policy has significant impact of the share price of the company. By providing
stable and regular dividend, the risk and uncertainty associated with investment in the share is
reduced. As the riskiness is reduced, the required rate of return of shareholders will also
decrease. This eventually reduces the cost of equity and WACC of the firm. Reduction in WACC
means that the discounting rate for company’s earnings will be reduced. This will ultimately
result in increase of market value of the share of the company.
Residual Dividend Policy
In residual dividend policy, if a company has profitable investment opportunities, the company
invests the required amount out of the earnings and the remaining amount of the earnings is
distributed as dividend (Jeewan, R.Shiva, & Rajendra, 2010).
8
59%
Investors’ perception regarding residual dividend policy
Yes64%
No36%
Degree of awareness of residual dividend pol-icy
Fig 4: Awareness of Residual Dividend Policy
The above chart signifies that there are still significant portion of the population that are not
aware of residual dividend policy. If people were m re aware of the residual dividend policy then
investors would not have negative view towards dividend cuts or zero dividend or unstable
dividends. As people are not aware of the policy, the above finding of people valuing stable and
regular dividend is justifiable. In context of Nepal, since significant portion of people are still not
aware of residual dividend policy, unstable dividend might not be welcomed by investors in
Nepal.
Signaling Effect
Shareholders often view a dividend payment as a signal of the firm’s future success. A stable and
continuous dividend is a positive signal, conveying the firm’s good financial health.
Shareholders are likely to interpret a passed dividend payment due to a loss or to very low
earnings as a negative signal (Lawrence, 2011).
Investor’s perception regarding dividend payment or dividend cut in context of Nepal is
presented below:
9
70%
30%
Strongly agree
Agree
Neutral
DiagreeStrongly disagree
33
47
10
7
3
Do you agree dividend cut has negative impact of company in
market
Percentage
Fig 5: Signaling Effect
The analysis of the chart done above, highlight the fact that dividend distribution has signaling
effect. It can be seen that most investors agree to the fact that dividend declaration have
significant impact on of company’s prospect in the market. Due to this fact managers are not
willing to cut dividend, as it portraits a negative image of the company’s future in the market.
Preference towards Dividend or Capital Gain
The figure given below entitled degree of importance shows the preference of dividend gain over
capital gain. 53% of the people prefer dividend gain where as 47% of the people prefer capital
gain. This shows that in Nepal, most of the investors prefer some constant source of income i.e.
dividend gain.
10
35%44%
70%
Dividend gain53%
Capital gain47%
Degree of importance
Fig 6: Dividend or Capital Gain Preference
Tax Effect
In the dividend preference of the investors, tax has a significant influence according to our
survey. Investors were asked whether tax effects would make them to prefer capital gains over
dividend gain then 62% of the investors preferred capital gain rather than dividend gain.
Currently, dividend gain tax and capital gain tax are brought down to the similar level. However
preferring capital gain over dividend gain might be due to time value effect.
Due to time value effects, a dollar of taxes paid in the future has a lower effective cost than a
dollar paid today. So even if dividends and gains are taxed equally, capital gains are never taxed
sooner than dividends (Eugene & Michael, Tax preference theory, 2012).
Analysis of Different Dividend Theories
Our primary objective is to analyze the prevalence of dividend policies in Nepal. We try to figure
out whether dividend theories help to solve the dividend puzzle. Our sample is primarily
individual/retail investors. Among our respondents we will try to find their preference of either
dividend gain or capital gain. The descriptive theories of dividend like the clientele theories and
life cycle theories provide insight on the characteristics of the investors receiving dividend and
firms paying them. Behavioral theories see market inefficiency (investor sentiment), investor
11
biases, as the key drivers of dividend payments. Hence for the purpose of our study we have
taken insight on the observation of descriptive as well as the behavioral theories.
For our study we will look into dividend relevance and dividend irrelevance. For dividend
relevance theories we will analyze motivation theories like bird-in-hand, self-control, and mental
accounting theories.
Dividend Irrelevant Theory
This theory suggests that dividend policy has no effect on the price of the company’s stock and
its cost of capital. Our survey showed that there is not much prevalence of the dividend
irrelevance theory. 47% of the investors preferred capital gain. This shows that most of the
Nepalese investors prefer dividend gain. Thus, dividend policy of a firm has some impact upon
the price of the stock. However, this preference may be due to signaling effect which signals
managements’ earnings expectations. Thus, the motive for the preference was analyzed to have
better view of the theory applicable in Nepal.
53% of the investors in our survey preferred dividend gain where as only about 6% of the
investors believed that firms motive behind providing dividend is to increase the value of the
firm. This being, however dividend decision is not totally irrelevant decision. Through our
survey it was found that dividend irrelevance theory is not highly regarded in Nepalese context.
There seems to be huge prevalence of dividend preference.
Dividend Relevant Theory
Our survey revealed that the investors had huge preference for dividend over capital gains. Thus,
dividend relevance theory is much more prevalent in Nepalese context. While analyzing the bird
in hand theory Nepalese retail investors were in huge preference of dividend. The survey
highlighted that investor’s preferred stability of the dividend. Major retail investors preferred
dividend gain to capital gain mainly due to following reasons:
12
Investors see current dividends as less risky than future dividends or capital gains
(Lawrence, 2011)
Many investors don’t have enough knowledge about the market mechanism. Thus, these
investors prefer secured stable income which is provided by dividends.
Clientele effect/ Investors profile of Nepalese investors have increased preference of
dividend.
Hence, the most prevalent dividend theory in Nepal is the Dividend Relevance (Bird in hand
Theory).Various behavioral theories can be referred to explain the Nepalese investors’
preference for Dividend Gain over Capital Gain.
Descriptive Theory of Dividend
These theories basically describe the investors’ and companies’ feature and nature influencing
the dividend policy. The major dividend theories are:
Clientele Theory in Nepalese Investment Environment
Different groups or clienteles of stockholders prefer different dividend payout policies (Eugene
& Michael, 2012, p. 643). Our survey basically focused on retail investors and their dividend
preferences. Various aspects of the investors influence their preference for particular dividend
theory. Following facts about the investors were revealed through our survey:
The bullish and bearish trend of the stock market affects the decision of stockholders.
Stock market at present is in the bearish trend. Thus, the market is risky from the
perspective of the investors. Thus, wanting to prefer dividend gain over capital gain.
Nepalese investors prefer stable dividend as it has supplemented the income of many of
the investors. Thus, they are much more inclined towards dividend gain over capital gain.
Nepalese investors are risk averse by nature. So they would prefer dividend returns over
capital gain.
The respondents’ age profile ranged from 24 to 56. 53% preferred dividend gain while
47% preferred capital gain. Age clientele did not have much effect.
13
We can see that clientele effect has made an impact on investors’ preference for dividend returns
over capital return. More over various facets of investors have come into play in clientele effect.
Signaling Theory
The investors believe the dividend announcement to better signal for the prospect of the
company. Reduced dividend trend of the company is attributed to negative future prospect of the
company. Such signaling effect of the dividend has effect on the value and market price of the
firm. Decrease in dividend has serious repercussion in the value of the firm in the market.
In context of Nepal, investors have strong belief in the information content of the dividend
decision. Thus the signaling theory shows the relevancy of dividend in influencing the value of
the firm. 80% of the respondent believed that dividend cut provide negative information of the
company’s future earnings.
Nepalese investors have a one minded view of dividend decision i.e. dividend increase signals
better prospect of the company and dividend cut signals reduced future prospect of the company.
The companies should efficiently make the dividend decision.
Dividend Theory and Dividend Puzzle
There have been several theories of dividend propounded. All the theories add to certain degree
of confusion. The pioneering dividend theory of Miller and Modigliani (Dividend Irrelevance
Theory) states that dividend policy does not have significant value, as investors can create their
own dividend policy (Eugene & Michael, 2012, p. 639). Miller and Modigliani theory believed
that investors are indifferent regarding the choice between dividend and capital gain. This policy
ignores brokerage cost and tax cost.
Our survey revealed that dividend had a great influence investor’s investment decisions most of
the investors preferred dividend gain. The dividend puzzle in context of Nepal can be solved by
the Bird in hand Theory. There are many factors in influencing investors’ choice for the dividend
such as the nature of the Nepalese investors’ being a risk averse, dividend incorporates certain
14
portion of the households’ income. As the Nepalese market is in bearish trend, this has also
resulted in investors wanting sure returns.
Thus we can say Dividend Relevant Theory (Bird in hand Theory) is the ultimate theory
prevalent in our country. Dividend decision plays a significant role in determining the future
prospect of the company in the market.
15
DIVIDEND DISTRIBUTION TREND ANALYSIS OF FOUR
NEPALESE COMPANIES
This is the other part of report endeavoring to provide a glimpse of dividend policy of Nepalese
company representing sector like Banking and Insurance, Manufacturing, Hydropower, and
Networking. At first, the individual analysis of dividend policy of each company based on EPS,
DPS and Payout Ratio is done and is concluded with comparative analysis between them.
Analysis of Dividend Policy of Four Companies
Chilime Hydropower Company Limited
Chilime Hydropower Company Limited (Chilime) was incorporated in 1995 with an objective of
hydroelectricity generation through optimal utilization of resources within the country. Nepal
Electricity Authority (NEA) holds majority ownership with 51% shareholding. Chilime has
actually begun working towards its 2020 vision already. Right after the generation of
hydroelectricity began on 25August 2003, the company applied for further projects and has four
projects in its pipeline now.
From the table and the graph given below showing dividend growth rate we can find that
dividend per Share of Chilime Hydropower was increasing at increasing rate till 2009/10.
However, it was increasing at decreasing rate in 2010/11. Earnings Growth Rate significantly
increased from 1.78% in 2007/08 to 8.24% in 2008/09. But this growth decreased to 5.72% in
2009/10 and then there was negative growth rate of 4.17% in 2010/11. However, each year the
dividend payout ratio was increasing. To encourage investors and avoid the negative signaling
due to dividend cut, manager of Chilime ensure the consistency and growth in dividend despite
fluctuations in earning.
16
Year 2006/7 2007/8 2008/9 2009/10 2010/11
Dividend per share
30.00 35.00 45.00 60.00 70.00
Earnings Per share
91.49 93.12 100.79 106.56 102.12
Dividend growth rate (%) [DG]
16.67 28.57 33.33 16.67
Earnings growth rate (%)[EG]
1.78 8.24 5.72 -4.17
Dividend Payout Ratio (%) [DPR]
32.79 37.59 44.65 56.31 68.55
Table 2: Comparison of DPR of various years of Chilime Hydropower
[Source: Chilime Annual Report 2011/2012]
2006/7 2007/8 2008/9 2009/10 2010/11-10.00
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
[DG]
[EG]
[DPR]
Year
Perc
enta
ge
Fig 7: Line chart of DPS, EPS, DPR of Chilime Hydropower
17
However, when EPS decreased in 2010/11 and Chilime invested Rs. 192.42 million in the same
year, the company then cut its DPS. Investment in new project was Rs. 84.20 million in 2008/09.
There was significant increase in investment of 128.53% in 2009/10.
Dividend Payout Ratio (DPR) is increasing each year from 2006/07 to 2010/11. It means that the
retention ratio is decreasing each year. However, the company is investing more each year in
new investments.
Butwal Power Company (BPC)
Butwal Power Company (BPC) was established in 1966 by a visionary Norwegian engineer Mr.
Odd Hoftun. Mr. Hoftun with the aim of educating the young of Nepal started Tinau hydropower
plant, and to create the opportunities for small businesses by utilizing the hydropower potential
of Nepal’s river. He managed to raise support from his home country, and brought tons of
equipment from Norway to Butwal in 1964. BPC was established with the various concepts for
developing self-competency in various area of the hydropower industry like engineering,
construction, operation, maintenance and manufacturing of hydroelectric equipment.
Year 2007/8 2008/9 2009/10 2010/11 2011/12
Dividend per share 30.0 30.0 30.0 25.0 25.0
Earnings Per Share
42.2 34.8 24.3 32.4 47.6
Dividend growth rate (%) 0.0 0.0 -16.7 0.0
Earnings growth rate (%) -17.61 -30.10 33.39 46.82
Dividend Payout Ratio (%) 71.12 86.33 123.51 77.16 52.55
Table 3: Comparison of DPR of various years of Butwal Power Company
The above mentioned growths are shown in below line chart:
18
2007/8 2008/9 2009/10 2010/11 2011/12
-40.0-20.0
0.020.040.060.080.0
100.0120.0140.0
DG
EG
DPR
Year
Perc
enta
ge
Fig 8: Line chart of DPS, EPS, DPR of Butwal Hydropower Company
[Source: Annual Report of Butwal Power Company (2011/12)]
Dividend per Share (DPS) of Butwal Power Company is quite stable. From 2007/08 to 2009/10
the growth rate of dividend is 0%. However, in 2009/10, the company slashed it DPS by Rs. 5.
During 2009/10 the EPS was increasing at an increasing rate. However, in preceding years EPS
was decreasing. During those years company was maintaining same dividend. However, when
there was growth of EPS in 2009/10, the company might have analyzed the possibility of the
decrease in the EPS in the coming years. So, to deal with the possible adverse situation and to
bring the consistency in the dividend it might have slashed its dividend by Rs.5 so that it can
maintain the same dividend in future too.
Nepal Doorsanchar Company Ltd
Nepal Doorsanchar Company Ltd popularly known as Nepal Telecom is the largest
telecommunication service provider in Nepal. The company was a monopoly until 2003, when
the first private sector operator UTL started providing basic telephony services.
Doorsanchar Company Ltd earnings per share and dividend per share over the years 2007/2008
to 2011/2012 is as follows:
19
Year 2007/8 2008/9 2009/10 2010/11 2011/12
Earnings Per Share 53.00 68.00 72.00 81.00 77.00
Earnings growth rate
(%) [EG] 28.30 5.88 12.50 -4.94
Dividend per share 10.00 25.00 35.00 40.00 41.00
Dividend growth rate
(%) [DG]
150.00 40.00 14.29 2.50
Dividend Payout Ratio
(%) [DPR] 18.87 36.76 48.61 49.38 53.25
Table 4: Comparison of DPR of various years of Nepal Doorsanchar Company
[Source: Annual Report of Nepal Telecom (2011/12)]
Fig 9: Line chart of DPS, EPS, DPR of Nepal Doorsanchar Company
Both the DPS and EPS of Nepal Telecom are increasing each year. However, growth rate of both
DPS and EPS are in decreasing trend. As the earning is increasing the company is providing
more dividends. The Dividend Payout Ratio is increasing each year. Most investors look for a
company that has a dividend ratio of between 40-60 percent. With this breakdown, shareholders
20
2007/8 2008/9 2009/10 2010/11 2011/12-20.00
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
DG
EG
DPR
Year
Perc
enta
ge
earn a profit while still allowing the company to roll over the money to increase internal growth.
Companies that have a higher payout ratio are investing less money into the company for growth
(Dividendpayoutratio.org, 2013). Thus, Nepal Doorsanchar is retaining less for its internal
growth.
Everest Bank Ltd
Everest bank was founded in 1994, the bank has been one of the leading banks of the country
and has been catering its services to various segments of the society since then. It is now catering
to more than 5.5 lacs customers today. (Welcome to Everest Bank)
The information obtained regarding Everest Bank Limited’s earning per share and dividend per
share over the years 2007/2008 to 2011/2012 is as follows:
Table 5: Comparison of DPR of various years of Everest Bank Limited
[Source: Annual Report of Everest Bank Ltd (2011/12)]
21
Year 2007/8 2008/9 2009/10 2010/11 2011/12
Earnings Per Share 91.82 99.99 100.16 83.18 88.55
Earnings growth rate (%) [EG] 8.90 0.17 -16.95 6.46
Dividend per share 50.00 60.00 60.00 60.00 31.58
Dividend growth rate (%)[DG] 20.00 0.00 0.00 -47.37
Dividend Payout Ratio (%) [DPR] 54.45 60.01 59.90 72.13 35.66
2007/8 2008/9 2009/10 2010/11 2011/12
-60.00
-40.00
-20.00
0.00
20.00
40.00
60.00
80.00
DGEG
DPR
Axis Title
Fig 10: Line chart of DPS, EPS, DPR of Everest Bank Ltd
Everest bank provided constant dividend from 2008/09 to 2010/11 to its investors. However, in
2011/12, it slashed its dividend by 47.37%. Earnings growth rate of the bank in 2010/11 was
negative but the bank was providing constant dividend as it was providing in the previous two
years. In 2011/12 the earnings of the bank became positive and the bank reduced its dividend.
Cutting the dividend when the earnings are low might have sent a negative signal towards the
investors. So, the bank might have waited till the earnings became positive. Since, the Everest
bank might have felt that it will not be able to maintain the same dividend in the future, it might
have cut its dividend. But to lessen the negative signal, the company might have waited till the
earnings became positive. On an average, firms that cut dividends have had poor earnings in the
years directly preceding the cut but have actually improved earnings in subsequent years
(Eugene & Michael, Financial Management, 2012).
Dividend Payout Ratio (DPR) of the bank is fluctuating. It might be due to the fluctuating EPS of
the company.
22
CONCLUSION AND RECOMMENDATIONS
ConclusionWe conducted survey among the investors to analyze the most prevalent dividend theory in
explaining the dividend puzzle of the country. We tried to analyze the relevancy of the dividend
and dividend policy in the investment climate of Nepal. Dividend relevant theories like “Bird in
hand theory” is most prevalent in the context of Nepal.
Investors believed that the major motive of companies for the payment of dividend was to make
investors happy and these investors prefer stable dividend. The findings also revealed that
majority of the investors didn’t know much about residual dividend policy.
The survey revealed that dividend is highly relevant in context of Nepal and also if any company
slashes its dividend then investors will have negative perception towards the company.
Besides the survey conducted, our report also focused on the analysis of the dividend trend of
four different companies from different industries. Dividend payout trend was analyzed of these
companies separately and a comparative analysis of the dividend was made. According to our
analysis what we found was that there was no consistency in the payout trend. The fluctuation
that occurred can be attributed to the economy of the country, the nature of the industries
involved and so on. Huge investment opportunity has led the fluctuating trend in the hydropower
sector. Unlike hydropower sector, the competition is fierce in banking sector. Thus, banks
normally do not want to cut its dividend, however, there is fluctuation in the payout in this sector
too.
Major findings of the survey are as follows:
1. Most of the investor has preference towards cash dividend.
2. Dividend decision has influence on investment decision of investors.
3. Investors prefer regular dividends.
4. Most of the investors are not aware of the residual dividend policy.
5. Dividend distribution has signaling effect.
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6. Investors prefer of dividend gain over capital gain.
7. Dividend relevant theory is highly applicable in Nepal.
Recommendations
Recommendation to Companies
Some of the recommendations for companies are as follows:
1. Nepalese investors prefer stable dividend and dividend cut portray a negative signal
towards the company. Thus, company should try to provide stable dividend, however if
dividend cut becomes necessary then the company should pre-inform the investors about
the reasons for dividend slash.
2. Company should carry out careful analysis before providing higher dividend. The
company should provide such dividend amount that it can maintain in future
3. Many times company might be slashing its dividend looking its future growth prospects.
The company should inform the investors about such opportunity to nullify or reduce the
negative signaling effect.
Recommendation to Investors
Some of the recommendations to the investors are as follows:
1. Investors should analyze the investment opportunities before investing in any
company. Higher dividend payout sometimes also reflects lower investment prospects
of the company, which is not good from the long term perspective.
2. Reduced earning might not always be the reason of the lower dividend. When the
company sees growth prospect it can cut its dividend and dividend cut in this way is
necessary for the growth of the company.
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BIBLIOGRAPHY
Dividendpayoutratio.org. (2013, 02). Retrieved 09 12, 2013, from Dividend Payout Ratio:
http://www.dividendpayoutratio.org/
Eugene, B. F., & Michael, E. C. (2012). Financial Management. Delhi: Cengage Learning India
Private Limited.
Eugene, B. F., & Michael, E. C. (2012). Tax preference theory. In B. F.Eugene, & E. C. Michael,
Financial Management (pp. 640-641). Delhi: Cengage Learning India Private Limited.
Jeewan, B., R.Shiva, G., & Rajendra, M. (2010). Dividend as a passive residual. In B. Jeewan, G.
R.Shiva, & M. Rajendra, Basic Financial Management (p. 292). Kathmandu: Bani Offset
Mudranalaya.
Lawrence, G. J. (2011). Arguments for dividend relevance. In G. J. Lawrence, Principles of
Managerial Finance (pp. 514-515). New Delhi: Saurabh Printers.
Welcome to Everest Bank. (n.d.). Retrieved 09 14, 2013, from Everest Bank:
http://www.everestbankltd.com/main/
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