Report On Dividend Policy

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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Percentage:

Sponsor/Director Govt.0 40

Market Category: A 3802.0 1000.0 3801600 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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Percentage:

Sponsor/Director Govt.0 64

Market Category :A 202.0 100.0 2021350 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 Outstanding Capital in BDT* (mn)

Market Category : A 1395.0

Face Value

100.0

Total no. of Securities Share Percentage:

Sponsor/Director Govt.0 52

13950000 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 COMMERCE BANK LIMITED (IFIC)

AND

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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Sponsor/Director 18 Percentage:

Market Category : Z 671.0 100.0 6706995 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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Sponsor/Director Govt.1 Percentage: 50

Market Category: A 743.0 100.0 7432618 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), 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

EPS

P/E SHARE RATIO PRICE (MKT)

2002 2003 2004

931.92 195.52 518.59

2.78 20.99 9.86

2590.7376 4103.9648 5113.2974

2005

487.57

9.32

4544.1524

DIVIDEND BONUS CASH SHARE 232.98 0 0 39.104 0 103.718 121.892 0 5

TOTAL 232.98 39.104 103.718 121.893

2006 TOTAL AVERAGE

485.94 2619.5 4 523.90 8

7.59

3688.2846

72.891

50.54

20040.4368

305.871

10.108

4008.08736

61.1742

48.594 313.308 5

121.485

62.6617

123.836

619.18

6000 4544.1524

5000 5113.2974 4000

3688.2846

4103.9648 3000 2000

Total Dividend Paid

Share Price (Mkt.)

Table-1: Financial data of IBBL from 2002-2006

250 232.98 200

150

121.485 103.718

100

121.8925

2590.7376 50

1000 0 2001

39.104 0 2001

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

Year

2007 Year

Graph-6: Trend of Market Price of Share and payment of total Dividend from 20022006

DUTCH BANGLA BANK LTD. (DBL) YEAR

EPS

2002 2003 2004 2005 2006

87.86 103.97 116.93 181.97 179.18

DIVIDEND P/E SHARE BONUS RATIO PRICE(MKT) CASH SHARE 4.91 431.3926 17.572 0 9.09 945.0873 20.794 0 18.71 2187.7603 26.30925 0 10.17 1850.6349 45.4925 0 10.27 1840.1786 44.795 0

2007

TOTAL 17.572 20.794 26.30925 45.4925 44.795

669.91

AVERAGE

53.15

154.9627 5

7255.0537

2500 Share Price (Mkt.)

0

154.96275

133.98 10.63 1451.01074 30.99255 0 2 Table-2: Financial data of DBBL from 2002-2006 Total Dividend Paid

TOTAL

2187.7603 1840.1786

2000

1850.6349

1500

50

44.795

45

45.4925

40 35 30 25

26.30925

20

1000

945.0873

30.99255

20.794

15

17.572

10

500

431.3926

5 0 2001

0 2001 2002 2003 2004 2005 2006 2007 Year

2002

2003

2004

2005

2006

2007 Year

Graph-7: Trend of Market Price of Share and payment of total Dividend from 20022006

BANK ASIA DIVIDEND EPS BONUS CASH SHARE 48.51 0 0 0 0 35.98 11.56 415.9288 0 8.6352 39.48 12.35 487.578 0 9.87 34.36 8.11 278.6596 3.436 6.872 42.63 10.04 428.0052 0 10.6575 200.96 42.06 1610.1716 3.436 36.0347 40.192 8.412 322.03432 0.6872 7.20694 Table-3: Financial data of Bank Asia from 2002-2006 P/E RATIO

YEAR 2002 2003 2004 2005 2006 TOTAL AVERAGE

SHARE PRICE (MKT)

487.578

500

428.0052

400 415.9288

300

278.6596

200 100

9.87 10

10.308

8

10.6575

8.6352

6 4 2

0 2002

Total Dividend Paid

Share Price (Mkt.)

0 8.6352 9.87 10.308 10.6575 39.4707 7.89414

12

600

0 2001

TOTAL

0

2003

2004

2005

2006

2007 Year

0 2001

2002

2003

2004

2005

2006

2007 Year

Graph-8: Trend of Market Price of Share and payment of total Dividend from 20022006

INTERNATIONAL FINANCE AND INVESTMENT CORPORATION (IFIC)

Share Price (Mkt.)

2002 2003 2004 2005 2006 TOTAL AVERAGE

SHARE PRICE (MKT)

1000 951.2658 900 800 700 600 467.4596 500 572.792 400 407.077 300 200 222.2352 100 0 2001 2002 2003 2004 2005 2006 2007 Year

TOTAL 1.46325 1.584 1.609 2.024 14.9904 21.67065 4.33413

16

Total Dividend Paid

YEAR

DIVIDEND EPS BONUS CASH SHARE 19.51 23.96 467.4596 1.46325 0 15.84 14.03 222.2352 0 1.584 16.09 25.3 407.077 0 1.609 20.24 28.3 572.792 0 2.024 62.46 15.23 951.2658 0 14.9904 134.14 106.82 2620.8296 1.46325 20.2074 26.828 21.364 524.16592 0.29265 4.04148 Table-4: Financial data of IFIC from 2002-2006 P/E RATIO

14.9904

14 12 10 8 6 4

1.46325

1.584

1.609 2.024

2 0 2001

2002

2003

2004

2005

2006

Graph-9: Trend of Market Price of Share and payment of total Dividend from 20022006

ARAB BANGLADESH BANK (AB BANK)

2007

Year

P/E RATIO

DIVIDEND BONUS CASH SHARE 0 0.867 0 0.1815 0 0.9095 0 2.841 0 27.924

SHARE PRICE (MKT)

YEAR

EPS

2002 2003 2004 2005 2006

5.78 38.64 223.3392 3.63 106.11 385.1793 18.19 20.01 363.9819 28.41 17.61 500.3001 93.08 30.54 2842.6632 149.0 212.91 4315.4637 0 32.723 9 29.81 42.582 863.09274 0 6.5446 8 Table-5: Financial data of AB Bank from 2002-2006

TOTAL

3000

Total dividend Paid

Share Price (Mkt.)

AVERAGE

2842.6632 2500 2000 1500

0.867 0.1815 0.9095 2.841 27.924 32.723 6.5446

30 27.924 25 20 15 10

1000 500

TOTAL

363.9819

223.3392

0 2001

385.1793 2002 2003

500.3001

2004 2005

2006 2007 Year

5

0.867

0 2001

2002

0.1815 2003

0.9095

2004

2.841

2005

2006

Graph-10: Trend of Market Price of Share and payment of total Dividend from 2002-2006

TOTAL INDUSTRY (TOTAL ACCUMULATED DATA) YEAR

EPS

P/E RATIO

2002

218.716

14.058

2003

70.988

32.356

2004

141.856

17.246

2005

150.51

14.702

2006

172.658

14.734

SHARE PRICE (MKT) 3074.70952 8 2296.88772 8 2446.44857 6 2212.79802 2543.94297 2

DIVIDEND BONUS CASH SHARE 50.4030 0.1734 5

TOTAL 50.57645

4.1588

9.90094

14.05974

5.26185

23.2213

28.48315

9.7857

26.7259

36.5116

23.5372

20.43318

43.97038

2007 Year

12574.7868 93.1466 80.45472 173.6013 2 150.945 2514.95736 18.6293 AVERAGE 18.6192 16.090944 34.72026 6 5 2 Table-6: Financial data of total 5 Banks from 2002-2006 TOTAL

754.728

93.096

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.