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 Introduction1 Objective2 Methodology2 Literature Review3 Overview of the Companies9 Related Financial Data Analysis Limitations25 Conclusion & Recommendation25 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.

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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. for the period 76 months and he also get that the maximum value of the regression coefficient being reached after 79 months. Moreover, Shiller (1984, 1989) recommended investors in his study to buy the stocks when price is low relative to dividends and to sell stocks when it is high payoffs. On the other hand to their opinion, Jensen and Johnson (1995) suggested that, dividend cut results reduction in share price. More interesting matter is that if capital markets are perfect, dividends have no influence on the share price (Miller and Modgliani, 1961).

Miller and Modgliani (1961) also states that if the market is imperfect, dividend may affect stock price. OVERVIEW OF THE COMPANIES ISLAMI BANK BANGLADESH LTD. (IBBL) Islamic banking started in Bangladesh through establishment of the Islami bank Bangladesh Ltd. (IBBL), which is considered to be the first interest-free bank in Southeast Asia. It was incorporated on 13 March 1983 as a public limited company under the companies act 1913. In December 2001, IBBL had 121 branches; its authorized capital was Tk 1000 million and paid up capital Tk 640 million. Listing Year: 1985 Market Category: A | |Outstanding Capital in BDT* (mn) | |3802. 0 | | | | | | | | | |Face Value  | |1000. | | | |Total no. of Securities | |3801600 | | | |Share Percentage:  |Sponsor/Director 40 | | |Govt. | | |Institute 0 | | |Foreign 0 | | |Public 60 | | | | Graph-1: The Market Price of Share of IBBL in 2006-2007 (Highest value: 6930 Lowest value: 3408. 5) DUTCH-BANGLA BANK LIMITED (DBBL) Dutch-Bangla Bank Limited (the Bank) is a scheduled commercial bank. The Bank was established under the Bank Companies Act 1991 and incorporated as a public limited company under the Companies Act 1994 in Bangladesh with the primary objective to carry on all kinds of banking business in Bangladesh. The Bank is listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited. DBBL- a Bangladesh European private joint venture scheduled commercial bank commenced formal operation from June 3, 1996 Listing Year: 2001 Market Category :A | |Outstanding Capital in BDT* (mn) | |202. 0 | | | |Face Value  | |100. | | | |Total no. of Securities | |2021350 | | | |Share Percentage:  |Sponsor/Director 64 | | |Govt. | | |Institute 0 | | |Foreign 26 | | |Public 10 | | | |

Graph-2: The Market Price of Share of DBBL in 2006-2007 Highest value: 6576. 5, Lowest value: 1600 BANK ASIA Bank Asia a public limited banking company incorporated on 28 September 1999. It started banking business on 27 November 1999 with equity participation from 22 promoters. The authorised and paid up capital of the bank is Tk 800 million and Tk 218 million respectively. The paid up capital is divided into 2,180,000 ordinary shares of Tk 100 each fully paid by the sponsors. Listing Year: 2004 Market Category : A | |Outstanding Capital in BDT* (mn) | |1395. 0 | | | | | | | | |Face Value  | |100. 0 | | | |  | | | | | |Total no. f Securities | |13950000 | | | |Share Percentage:  |Sponsor/Director 52 | | |Govt. | | |Institute 17 | | |Foreign 0 | | |Public 31 | | | |

Graph-3: The Market Price of Share of Bank Asia in 2006-2007 Highest value: 517. 25, Lowest value: 334 INTERNATIONAL FINANCE, INVESTMENT AND COMMERCE BANK LIMITED (IFIC) IFIC Bank (International Finance, Investment and Commerce Bank Limited) originally named as International Finance and Investment Company, was formed in October 1976. It obtained certificate of commencement on 28 February 1977 as an investment banking company.

The company was established mainly to carry out banking and other financial business outside Bangladesh (especially in the oil-rich Middle-Eastern countries) either singly or in collaboration with other companies, banks and financial institutions. Bangladesh bank allowed IFIC to transform itself into a banking company and accordingly, it was renamed and after completion of required legal formalities, it started full-fledged commercial banking operations on 24 June 1983. Listing Year: 1986 Market Category : Z | |Outstanding Capital in BDT* (mn) | |671. 0 | | | |Face Value  | |100. | | | |Total no. of Securities | |6706995 | | | |Share Percentage: |Sponsor/Director 18 | | |Govt. 5 | | |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 l baraka bank Ltd often called the second Islamic bank of Bangladesh, commenced banking business on 20 May 1997. It is a joint-venture enterprise of Al-Baraka Investment and Development Company, a renowned financial and business house of Saudi Arabia, Islamic Development Bank, a group of eminent industrialists of Bangladesh, and the government of Bangladesh. The authorized capital of the bank is Tk 600 million and its paid up capital is Tk 259. 55 million. The bank has now 35 branches in different parts of the country. Listing Year: 1983 Market Category: A | |Outstanding Capital in BDT* (mn) | |743. 0 | | | |Face Value | |100. | | | |Total no. of Securities | |7432618 | | | |Share Percentage:  |Sponsor/Director 50 | | |Govt. | | |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 RATIO |SHARE PRICE (MKT) |DIVIDEND | | | | | |CASH |BONUS SHARE |TOTAL | |2002 |931. 92 |2. 78 |2590. 7376 |232. 8 |0 |232. 98 | |2003 |195. 52 |20. 99 |4103. 9648 |0 |39. 104 |39. 104 | |2004 |518. 59 |9. 86 |5113. 2974 |0 |103. 718 |103. 718 | |2005 |487. 57 |9. 32 |4544. 1524 |0 |121. 8925 |121. 893 | |2006 |485. 94 |7. 59 |3688. 846 |72. 891 |48. 594 |121. 485 | |TOTAL |2619. 54 |50. 54 |20040. 4368 |305. 871 |313. 3085 |619. 18 | |AVERAGE |523. 908 |10. 108 |4008. 08736 |61. 1742 |62. 6617 |123. 836 | Table-1: Financial data of IBBL from 2002-2006 Graph-6: Trend of Market Price of Share and payment of total Dividend from 2002-2006 DUTCH BANGLA BANK LTD. (DBL) YEAR |EPS |P/E RATIO |SHARE PRICE(MKT) |DIVIDEND | | | | | |CASH | | | | | |CASH | | | | | |CASH | | | | | |CASH | | | |CASH |BONUS SHARE |TOTAL | |2002 |218. 716 |14. 058 |3074. 709528 |50. 40305 |0. 1734 |50. 57645 | |2003 |70. 988 |32. 356 |2296. 887728 |4. 1588 |9. 90094 |14. 05974 | |2004 |141. 856 |17. 246 |2446. 448576 |5. 26185 |23. 2213 |28. 48315 | |2005 |150. 51 |14. 702 |2212. 79802 |9. 7857 |26. 7259 |36. 5116 | |2006 |172. 658 |14. 734 |2543. 942972 |23. 5372 |20. 43318 |43. 97038 | |TOTAL |754. 728 |93. 096 |12574. 78682 |93. 1466 |80. 45472 |173. 6013 | |AVERAGE |150. 9456 |18. 6192 |2514. 957365 |18. 62932 |16. 090944 |34. 72026 | |Table-6: Financial data of total 5 Banks from 2002-2006

LIMITATION 1. Sample size of the study is fixed and too short (n=25). 2. Many companies do not give cash dividend. 3. Dividend is not the only variable which affect on share price. 4. It is assumed that the capital market is organized. 5. It is assumed that there is no inflation or deflation in the economy 6. It is assumed that money supply in the market is fixed. 7. Companies on which the study is made do not disclose the market position of their share. 8. Straight line equation is used but there are different variables which affect share price. 9.

Sampling error in the study is considered. 10. Due to lack real life experience, the level best effort may not be presented dynamically. CONCLUSION & RECOMMENDATION The dividend policy of a company determines what proportion of earnings is distributed to the shareholders by way of dividends, and what proportion is ploughed back for reinvestment purposes. Since the main objective of financial management is to maximize the market value of equity shares, one key area of study is the relationship between the dividend policy and market price of equity shares.

According to this model founded by Graham and Dodd, the market price of the shares will increase when a company declares a dividend rather than when it does not. According to James Walter, the dividend policy of a company has an impact on the share valuation. On the other hand according Myron Gordon, the dividend policy of the company has an impact on share valuation. But according Miller and Modiliani, the market price of the share does not depend on the dividend payout, i. e. he 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.