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An overview of Dividend Policy

Dividend is that portion of net profits which is distributed among the shareholders. The dividend

decision of the firm is vital for the finance manager since it determines the amount to be

distributed among shareholders and the amount of profit to be retained in the business.

Retained earnings are very important for the growth of the firm. Shareholders may also expect

the company to pay more dividends. So both the growth of company and higher dividend

distribution are in conflict. So the dividend decision has to be taken in the light of wealth

maximization objective. This requires a very good balance between dividends and retention of

earnings.

Dividend policy is concerned with financial policies regarding paying cash dividend in the

present or paying an increased dividend at a later stage. Whether to issue dividends and what

amount, is determined mainly on the basis of the company's available profit (surplus cash) and

influenced by the company's long-term earning power. When cash surplus exists and is not

needed by the firm, then management is expected to pay out some or all of those surplus

earnings in the form of cash dividends or to repurchase the company's stock through a share

buyback program.

Dividend theories

Dividend Irrelevance Theory:

Under these frictionless perfect capital market assumptions, dividend irrelevance follows from

the Modigliani-Miller theorem. Merton Miller and Franco Modigliani (MM) developed a theory

that shows that in perfect financial markets (certainty, no taxes, no transactions costs or other

market imperfections), the value of a firm is unaffected by the distribution of dividends. They

argue that value is driven only by the firm's ability to earn money and riskiness of its activity

can have an impact on the value of the company. The value of a firm is unaffected by how that

firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt,

nor does it matter what the firm's dividend policy is. Essentially, firms that pay more dividends

offer less stock price appreciation that would benefit stock owners who could choose to profit

from selling the stock. However, the total return from both dividends and capital gains to

stockholders should be the same. If dividends are too small, a stockholder can simply choose to

sell some portion of his stock. Therefore, if there are no tax advantages or disadvantages

involved with these two options, stockholders would ultimately be indifferent between returns

from dividends or returns from capital gains.

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Merton Miller and Franco Modigliani (MM) grounded their theory on a set of assumptions:

No time lag and transaction costs exist.

Securities can be split into any parts.

No taxes and flotation costs.

Financial leverage does not affect the cost of capital.

Both managers and investors have access to the same information.

Firm's cost of equity is not affected in any way by distribution of income between dividend

and retained earnings.

Dividend policy has no impact on firm's capital budget

Dividend Relevance theory (Bird-in-the Hand theory):

A theory developed by Myron J. Gordon & Linter that tells Stockholders prefer current dividend.

Gordon and Lintner suggested stockholders prefer current dividends that a positive relationship

exists between dividends and market value. Fundamental to this theory is that Bird-in-the Hand

argument suggests that investors are risk averse & attach less risk to current as opposite to

future dividends or capital gains. Because current dividends are less risky, investors will lower

their required return - thus boosting stock prices.

Cash Dividend reduces investor uncertainty causing investors to discount the firm’s earnings at

a lower rate and it places a higher value on the firm’s stock. If dividends are increased, investor

uncertainty will decrease, lowering the required return (Ks) and increasing the value of the

firm’s stock. If dividends are reduced or are not paid, investor uncertainty will increase, raising

the required return (Ks) and lowering the value of the firm’s stock.

Empirical studies fail to provide conclusive evidence in support of dividend relevance argument.

However, financial managers & stockholders believe that dividends are relevant. Approximately

90% of CFOs agree or strongly agree that they smooth dividends from year to year and try to

avoid reducing dividends. Dividend smoothing behavior was also recorded by other surveys.

According to the survey, managers believed that “the market puts a premium on stability or

gradual growth in rate” of dividends.

A financial manager may treat the dividend decision in the following two ways:

1) As a long term financing decision:

When dividend is treated as a source of finance, the firm will pay dividend only when it does

not have profitable investment opportunities. But the firm can also pay dividends and raise an

amount by the issue of shares.

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2) As a wealth maximization decision:

Payment of current dividend has a positive impact on the share price. So to maximize the price

per share the firm must pay more and more dividends.

Dividend policies

A dividend policy based on the paying a low regular dividend, supplemented by an additional

dividend when earnings are higher than normal in a given period. An additional dividend

optionally paid by the firm if earnings are higher than normal in a given period is called extra

dividend. By establishing a low regular dividend that is paid each period, the firm gives

investors the stable income necessary to build confidence in the firm. The extra dividend

permits them to share in the earnings from an especially good period.

Constant- Pay-out ratio:

The dividend payout ratio indicates the percentage of each dollar earned that is distributed to

the owners in the form of cash.

Dividend Payout Ratio = Cash Dividend Per Share / E.P.S.

With a constant-payout-ratio dividend policy, the firm established that a certain percentage of

earnings are paid to owners in each dividend period. The problem with this policy is that if the

firm’s earnings drop or if a loss occurs in a given period, the dividends may be low or even

nonexistent which could adversely affect the firm’s share price.

Regular Dividend Policy: The regular dividend policy is based on the payments of a fixed amount dividend in each

period. This policy provides the owners with generally positive information, thereby minimizing

uncertainty. Often, firms that use this policy increase the regular dividend once a proven

increase in earnings has occurred. Under this policy, dividends are never decreased.

Low-Regular and Extra Dividend Policy:

Some firms establish a low-regular and extra dividend policy, paying a low regular dividend supplemented by an additional dividend when earnings are higher than normal in a given period. By calling the additional dividend an extra dividend, the firm avoids giving shareholders false hopes. This policy is especially common among companies that experience cyclical shifts in earnings.

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Key components of discussion

From the below table and figure we can easily understand Beximco Pharmaceuticals Limited is

following which Dividend for the last 5 years:

Net Income:

Year Net Income

(in million TK.)

2010 1,052 2011 1,199 2012 1,319 2013 1,405 2014 1,528

Table 1: Net income in the last 5 years

Growth rate of net income:

Year Net Income

(in million TK.) Calculation

Growth Rate (%)

2010 1,052 - - 2011 1,199 [(1,199-1,052)/ 1,052]*100 13.97 2012 1,319 [(1,319-1,199)/ 1,199]*100 10.01 2013 1,405 [(1,405-1,319)/ 1,319]*100 6.52 2014 1,528 [(1,528-1,405)/ 1,405]*100 8.75

Table 2: Net income and its growth rate in the last 5 years

1,0521,199

1,319 1,4051,528

0

500

1,000

1,500

2,000

2010 2011 2012 2013 2014

Chart 1: Net income in the last 5 years

Net Income (in million TK.)

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Interpretation: Growth in net income is even more important than sales because net income tells the investor

how much money is left over after all of the operating costs are subtracted from sales. From

the above tables (Table-1,2, Chart-1,2), we can see that Beximco Pharmaceuticals Limited has

earned profit in the years 2010, 2011, 2012, 2013 and 2014. But in the year 2011 and 2012 it

has a negative growth rate of respectively (10.01) % and (6.52) % in profit. In 2011 and 2012,

the growth of Beximco Pharmaceuticals Limited was significantly affected because of political

unrest in Bangladesh.

Dividend declaration

After analyzing percentage dividend of the last 5 years, we have found out that Beximco Pharmaceuticals Limited had declared only Stock dividend in 2010-12 and both Cash dividend & Stock dividend 2013-14 to its shareholders. Details are as follows-

1. Cash Dividend:

Table 3: Cash Dividend declared in the last 5 years

13.97

10.01

6.52

8.75

0

5

10

15

2010 2011 2012 2013

Chart 2: Growth rate of net income in the last 5 years

2010

2011

2012

2013

Year Dividend (%)

2010 0

2011 0

2012 0

2013 10

2014 10

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Interpretation:

Beximco Pharmaceuticals Limited has declared 10% cash dividend in last two years on the face value for their share holders and previous to that no cash dividend was paid. They give stock dividend to their share holders on a consistent basis through which they spread good news in the market that it’s a good prospect company.

2. Stock Dividend:

Considering the market consideration factor, Beximco Pharmaceuticals Limited is providing mostly stock dividend as well as some cash dividend in order to satisfy both types of investors considered under cliental effect- short term and long term investor. by looking at the dividend trend it can also be said that they are more focused on stock as it helps the company to provide dividend without transfer of cash and also a tool to increase number of common stock/ paid up capital.

Year Dividend (%)

2010 20

2011 21

2012 15

2013 5

2014 5

Table 4: Stock Dividend declared in the last 5 years

2010 2011 2012 2013 2014

0% 0% 0%

10% 10%

Chart 3: Cash Dividend declared in the last 5 years

2010 2011 2012 2013 2014

20% 21%

15%

5% 5%

Chart 4: Stock Dividend declared in the last 5 years

Dividend (%)

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Interpretation: From the above table we can say that Beximco Pharma declared at least 5 percent stock dividend every year. Is had declared highest 21 percent stock dividend in the year 2011. From the above table it is also clear that, this company has a position in between growing and maturity stage, though it has more internal and external sources to raise fund for future expansion but it mainly focus on internal sources. It also helps the company by provide dividend without transfer of cash and also a tool to increase number of common stock/ paid up capital.

Total Dividend:

Year Cash Dividend (%) Stock Dividend (%) Total Dividend (%)

2010 0 20 20

2011 0 21 21

2012 0 15 15

2013 10 5 15

2014 10 5 15

Table 5: contribution of cash, stock dividend in total dividend

Interpretation:

Beximco Pharmaceuticals Limited does not follow any specific dividend policy. We also see that

the percentage of stock dividend was not similar as well as they also declare cash dividend in

recent two years and the percentage of stock dividend was not same. Finally the percentage of

total dividend is fluctuated from 15% to 21%.

0

0

0

10

10

20

21

15

5

5

20

21

15

15

15

2010

2011

2012

2013

2014

Chart 5: contribution of cash, stock dividend in total dividend

Cash Dividend (%) Stock Dividend (%) Total Dividend (%)

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Stockholders’ equity: Beximco Pharmaceuticals Limited has the following stockholders equity status over the last 5 years-

Year Equity amount (In millions)

2010 15,974

2011 17,128

2012 18,408

2013 19,776

2014 20,920

Table 6: Stock holders equity in balance sheet

Interpretation:

The information mentioned in the above mentioned graph and chart shows an increasing trend in stockholders equity starts from 2010 up to 2014. Earnings per Share:

An Earnings per Share (EPS) is the amount of money earned by a company expressed in per

share. Following table provides the information of EPS of Beximco Pharmaceuticals Limited in

different years.

Year EPS (in TK.)

2010 4.18

2011 3.93

2012 3.77

2013 3.82

2014 4.15

Table 7: EPS in the last 5 years

0

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013 2014

Chart 6: Stock holders equity in balance sheet

Equity amount (In millions)

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Interpretation:

From the above table and chart, we can see that from 2010 to 2014 the Earning per share is fluctuating each year, EPS was in decreasing mode in early two years (2011-12) which was not good for both the company and for the shareholders. And it is in increasing slot in 2013-14.

Trend of Earnings per Share (EPS):

Year EPS (in TK.) Calculation Growth Rate (%)

2010 4.18 - -

2011 3.93 [(3.93-4.18)/ 4.18]*100 -5.98

2012 3.77 [(3.77-3.93)/ 3.93]*100 -4.07

2013 3.82 [(3.82-3.77)/ 3.77]*100 1.33

2014 4.15 [(4.15-3.82)/ 3.82]*100 8.64

Table 8: EPS growth in the last 5 years

Interpretation:

From the above table and chart, we can see a “U” shape trend exist in last five years. From 2010 to 2014 the Earning per share growth rate is fluctuating each year. EPS have negative growth rate in early two years (2011-12) which was not good for both the company and for the shareholders. And it is in increasing slot in 2013-14.

3.4

3.6

3.8

4

4.2

2010 2011 2012 2013 2014

Chart 7: EPS in the last 5 years

EPS (in TK.)

0

-5.98

-4.07

1.33

8.64

2010 2011 2012 2013 2014

Chart 8: EPS growth in the last 5 years

Growth Rate (%)

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Dividend Payout Ratio:

Dividend payout ratio = Cash Dividend per Share / Earnings per Share (EPS)

Dividend payout ratio says the percentage of EPS that is paid as dividend. It helps us to determine whether it is following dividend relevance theory or dividend irrelevance theory.

Year Cash dividend

per Share

Earnings

per Share Calculation

Dividend payout

ratio (%)

2010 0 4.18 (0/4.18)*100 0

2011 0 3.93 (0/3.93)*100 0

2012 0 3.77 (0/3.77)*100 0

2013 1 3.82 (1/3.82)*100 26.18

2014 1 4.15 (1/4.15)*100 24.10

Table 9: Dividend Payout ratio of Beximco Pharmaceuticals Limited for last 5 years

Interpretation:

From the above table and chart, we can see that the dividend payout ratio was nil in first three years (2010-2013) and increased in last two years (2013-2014). Through this Beximco Pharmaceuticals Limited is spreading good news in the market that it’s a good prospect company.

Dividend Retention ratio:

Year Dividend payout

ratio (%)

Retention ratio

[1- Dividend payout ratio (%)]

2010 0 100

2011 0 100

2012 0 100

2013 26.18 73.82

2014 24.10 75.90

Table 10: Retention ratio for last 5 years

0 0 0

26.1824.1

0

10

20

30

2010 2011 2012 2013 2014

Chart 9: Dividend Payout ratio for last 5 years

Dividend …

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Interpretation:

In 2010 to 2012 the retention ratio was very high as on that years less cash dividend paid to

their share holders and keeps more as retained earnings. In 2013 and 2014 retention ratio falls

as company decide to pay 10% cash dividend. By seeing the trend of retention ratio we can

say they were followed dividend irrelevance theory for their future growth.

Price earnings (P/E) ratio: Price ratio is a key investor performance measure. P/E ratio is the ratio of a company’s current share price to its earnings per share. A high P/E ratio indicates strong shareholders confidence towards the company and low Price earnings (P/E) ratio indicates lower confidence.

Year Price Earning (P/E)

ratio (times)

2010 32.32

2011 23.82

2012 14.83

2013 12.36

2014 14.14

Table 11: P/E ratio for last5 years

0

50

100

2010 2011 2012 2013 2014

100 100 100

73.82 75.9

Chart 10: Retention ratio for last 5 years

Retention ratio [1- Dividend payout ratio (%)]

201033%

201124%

201215%

201313%

201415%

Chart 11: P/E ratio for last 5 years

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Interpretation:

It is seen that year end P/E ratio was at least 12.36 times in the year 2013 and highest P/E

ratio was 32.32 times in the year 2010. P/E ratio have a downwards direction. This is not a

good sign for the future growth and prospect of the company, which will discourage the

investors for investing in the company. Moreover, fewer dividends are paid in recent a year

which is parallel trend to dividend.

Relation between Dividend and Market Price of Stock

From the table and chart given below, we can say that market price was high when rate of dividend was

high in 2010 & 2011. Then the decreasing rates of dividend results gradually decrease of market price.

Here we can comment according to dividend Relevance theory.

Interpretation:

According to available data of Beximco Pharmaceuticals Limited from 2010 to 2014, it is clear that

Beximco Pharmaceuticals is following dividend relevance theory (Bird-in -The Hand Theory) which is

developed by Myron J. Gordon & Linter. Myron J. Gordon & Linter said that there is a direct link between

Dividend Policy of the firm and its market value and a company may declare higher dividend because of

the following reason:

2010 2011 2012 2013 2014

20 21 15 15 15

135.1

93.6

55.947.2

58.7

Chart 12: Dividend in % and Stock Price

% Dividend Market Price (TK.)

Year Dividend (%) Stock Price in DSE (TK)

2010 20 135.10

2011 21 93.60

2012 15 55.90

2013 15 47.20

2014 15 58.70

Table 12: Dividend in % and Stock Price of Beximco Pharmaceuticals Limited

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Stockholders prefer current dividend

Direct link between dividend policy of the firm and its market value

Investors are risk averse & attach less risk to current as opposite to future dividends or capital gains.

Investors believe that “a bird in the hand is worth two in the bush”

Cash dividend reduce uncertainty – causing earning at a lower rate

Financial manager & stockholders believe that dividends are relevant

Relation between NI and total Dividend:

Year Net Income

(in million TK.) Dividend (%)

2010 1,052 20

2011 1,199 21

2012 1,319 15

2013 1,405 15

2014 1,528 15

Table 13: NI and Dividend of relationship

Interpretation:

From the above table and charts we can see that net income is continuously raising from 2010

to 2014 and percentage of dividend payment also increased in 2011 compare to 2010 as net

income increased. But in 2012 to 2013 dividend falls and remain constant at 15% though the

net income have in increasing trend. As net income increase every year, However dividend rate

become constant at the same point so, we can assume that company focus on future

investment rather paying dividend which ultimately enhance the shareholders wealth in long run

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2010 2011 2012 2013 2014

Chart 13.1: NI and Dividend of relationship

Net Income (in million TK.)

0

5

10

15

20

25

2010 2011 2012 2013 2014

Chart 13.2: NI and Dividend of relationship

Dividend (%)

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Relation between NI and Cash Dividend:

Year Net Income

(in million TK.)

Cash Dividend

(%)

2010 1,052 0

2011 1,199 0

2012 1,319 0

2013 1,405 10

2014 1,528 10 Table 14: Relationship of NI and cash Dividend

Interpretation:

The company does not provide any cash dividend in the first 3 year though they have

increasing net income. That indicates that they use the income more in investment and provide

stock dividend to reduce the shareholders dissatisfaction. As a result net income increased more

in subsequent years and then company decides to pay cash dividends as they already capture

the potential investment opportunities and now they have enough cash to distribute

By observing the relationship or trend of total and cash dividend with net income, we came in a

conclusion that the company focus on long term wealth maximization rather short term profit

maximization that attracts the risk taker investors to invest more in shares of the organization.

Net assets value (NAV) per share:

Net assets value per share measure value of the investment based on its assets less its

liabilities.

Net assets value (NAV) per share = Total Net Asset Value of Company/ Number of Share

Outstanding

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2010 2011 2012 2013 2014

Chart 14.1: Relationship of NI and cash dividend

Net Income (in million TK.)

0 0 0

10 10

2010 2011 2012 2013 2014

Chart 14.1: Relationship of NI and cash dividend

Cash Dividend (%)

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Year Net asset value (NAV) per share

Market Price of share

2010 79 135.10

2011 68 93.60

2012 60 55.90

2013 56 47.20

2014 57 58.70 Table 15: Relationship of NAV and market price of share

Interpretation:

The net asset value (NAV) per share shows a decreasing mode starts from the year 2011 and

continues till 2013 and slightly increased in 2014. NAV trend influence the market price of the

share which also has a decreasing mode starts from the year 2011 and continues till 2013 and

slightly increased in 2014. So dividend is not only factor that affect the share price.

7968

60 56 57

135.1

93.6

55.947.2

58.7

0

50

100

150

200

250

2010 2011 2012 2013 2014

Chart 15: Relationship of NAV and market price of share

Market price

Net asset value (NAV) per share