the impact of dividend policy on performance evaluation of firms quoted on the nigerian stock...

The impact of dividend policy on performance evaluation of firms quoted on the Nigerian Stock Exchange.

THE IMPACT OF DIVIDEND POLICY ON PERFORMANCE

EVALUATION OF FIRMS QUOTED ON THE NIGERIAN STOCK

EXCHANGE

(CASE STUDY OF SELECTED QUOTED COMPANIES IN

NIGERIA)

BY

AYENI PEACE OLAOLUWA

RUN 07-08/1132

CORPORATE FINANCIAL REPORTING

ACC 409

ACCOUNTING DEPARTMENT

LECTURER IN CHARGE:

MR LAWRENCE IMEOKPARIA

1


1ST SEMESTER 2010/2011 SESSION

INTRODUCTION

BACKGROUND OF THE STUDY

In recent time, foreign direct investment has received considerable attention by successive

governments in Nigeria (Mohammed, 2006). The number of shares traded on the floor of the

Nigerian Stock Exchange has also increased within this period as a result of the privatization

programme vigorously pursued by the federal government and the intensified search for core

investors in the privatized companies (Tanko, 1997 and Musa, 2001). Dividend policy no doubt

influences the decision of both local and foreign investors (Musa, 2001). Studies on dividend

policy are therefore of clear policy relevance, especially for a country that is interested in rapid

and sustained economic growth.

Previous studies on dividend policy in Nigeria such as, Soyode (1975), Oyejide (1976), Izedonmi

and Eriki (1996), Adelegan (2000), Inanga and Adelegan (2001) and Adelegan (2003), have

focused attention on the test of Lintner’s model as modified by earlier works of Brittain (1964),

Fama and Babiak (1968) and the recent works of Simons (1994) and Charitou and Vafeas

(1998). However, the previous studies have recognised the dynamic nature of the Nigerian

economy and the factors that influence corporate dividend policy. As Frankfurter and Wood

(1997) indicate, dividend pattern of a firm is a cultural phenomenon that changes continuously

in relation to environment and time.

Rather than replicating the methodology of previous researches, this study utilizes a recent

model developed by Musa (2005) which captures some factors that are considered sensitive

and relevant to the Nigerian economy in recent time. This study therefore differs from the

previous studies in five respects. First, it utilizes a model that has been recently developed to

investigate the dividend policy of Nigerian firms. Second, some of the variables used in the

study to the best of the author’s knowledge are tested empirically for the first time in Nigeria.

The two outstanding variables that satisfy this description are net current assets and

investment. Third, the period covered by this research (1993 to 2002) is unique to this study

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and substantially encompasses the peak period of the privatisation program. Government

divested its shareholdings in over sixty percent (60%) of the public enterprises slated for

privatisation during this period. In addition, Nigerian government made concerted efforts to

attract Foreign Direct Investment (FDI) into the country. Fourth, the operational definition of

some variables

such as dividend and cash flow are peculiar to this study. Fifth, rather than using a hold out

sample situation, this study captures such variables as growth, firm size and industry

classification as dummy variables in the research model.

PURPOSE OF THE STUDY

The main purpose of these study is to identify the significant relationship between dividend

policy in Nigerian Stock Exchange in Nigeria and earnings and dividend of a firm.

RESEARCH QUESTIONS

i) What is the separate and combined effect of current earnings, previous dividends on the

dividend policy of quoted firms in Nigeria?

ii) To what extent can the two variables be utilized in explaining and predicting the dividend

policy of quoted firms in Nigeria?

RESEARCH HYPOTHESIS

HO: Current earnings, previous dividend, do not have significant aggregate impact on the

dividend policy of quoted firms in Nigeria.

H1: Current earnings, previous dividend, do have significant aggregate impact on the dividend

policy of quoted firms in Nigeria.

HO: There is no significant relationship between dividend policy of quoted firms and current

earnings, previous dividend.

H1: There is a significant relationship between dividend policy of quoted firms and current

earnings, previous dividend.

LIMITATION OF THE STUDY

1. Time constraints.

3


2. Availability of information needed.

3. Choice of firms to use.

LITERATURE REVIEW

Researchers on corporate dividend policy have over the years followed two divergent paths.

Some researchers have followed a behavioural approach by surveying the opinion of corporate

managers in order to gain insight into the factors they consider most important in determining

their firms’ dividend policy. Studies in this category include the works of Baker et al. (1985),

Farrelly et al. (1986), Baker and Farrelly (1988), Pruitt and Gitman (1991), Baker and Powell

(1999, 2001) and Mainoma (2001). These studies found that different managers at different

times attach varying importance to the factors that influence a firm’s dividend decision.

However, certain factors such as level of current and past earnings and the pattern of variability

of past dividends have emerged a consistently important over the years.

Some researchers on the other hand followed a normative approach and developed and

empirically tested various mathematical models in order to explain the dividend policy of firms.

Lintner (1956) was the first researcher to develop and test the partial-adjustment model of

dividend. His model suggests that change in dividends is a function of the target dividend

payout less the last period’s dividend payout multiplied by the speed of an adjustment factor.

Fama and Babiak (1968) confirmed the robustness of Lintner’s model after examining several

other models of dividend behaviour. Their results support Lintner’s view that managers prefer a

stable dividend policy and are reluctant to increase to increase dividend to a level that cannot

be sustained. Several other empirical works in both developed and emerging economies have

tested the modified version of Lintner’s model after refining and restating the model or after

extending it. These include the works of Darling (1957), Brittain (1964) Pogue (1971) Rao and

Sarma (1971), Oyejide (1976) Dhameja (1978), Hagerman and Huefner (1980) Bar-Yosef and Lev

(1983), Nakamura and Nakamura (1985) Crum et al. (1988), Jose and Stevens (1989), Simons

(1994), Benartzi et al. (1997), Charitou and Vafeas (1998) and Adelegan (2003). Some of the

new variables grafted into the Lintners model by the various modified models include index of

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liquidity, measure of sales fluctuation, income variability, indebtedness (leverage) and cash

flow.

Rather than confirming or modifying Lintner’s model, Rozeff (1982) developed an alternative

model of corporate dividend policy. Rozeff’s five-variable model relates the level of dividend

(divided payout ratio) to the percentage of stock held by insiders, average growth rate of

revenues, and the natural logarithm of the number of common stockholders. Rozeff’s model

takes the following form (coefficient signs show the hypothesized relationship)

Rozeff (1982: 249) found all the five variables to be significant in explaining dividend payment.

Later studies by Demsey and Laber (1992) and Demsey et al. (1993) replicated and extended

Rozeff’s model by examining another seven-year period. These studies confirm the stability of

Rozeff’s original five-variable model. Casey and Anderson (1999) and Casey and Dickens (2000)

also extended Rozeff’s model in their Tax Reform Act (TRA) model. Their result was consistent

with the previous findings of Demsey and Laber (1992) and Demsey et al. (1993).

In Nigeria, the earliest researches on dividend policy focused attention on the dividend

behaviour of Nigerian companies since and during the period of indigenisation. The results of

the studies were controversial and inconclusive. Uzoaga and Aloizieuwa (1974) investigated the

pattern of dividend policy pursued by a sample of 13 companies within four years (1969-1972)

which covers the indigenisation period. The study concludes that the change in the level of

dividend paid by the companies could best be explained by fear and resentment rather than the

conventional factors used in the Linter’s model. This conclusion was challenged by later studies

such as Inanga (1975, 1978) Soyode (1975), and Oyejide (1976). They criticized Uzoaga and

Alozieuwa’s study for its failure to empirically test the contribution of conventional factors to

change in dividend of the affected companies.

However, Inanga (1975) and Soyode (1975) also failed to empirically investigate the extent to

which Lintner’s model could be used to explain the dividend policy of the companies in Nigeria.

The two studies rather advanced both conventional and non-conventional factors (such as

excess liquidity resulting from the infusion of new capital and the unrealistic pricing policy of

the Capital Issues Commission) as explanations for the change in the dividend behaviour of

their sampled companies.

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The work of Oyejide (1976) appears to be the first published study in Nigeria that tested

empirically the Lintner’s model as modified by Brittain (1966). The study covered a longer time

period of eight years from 1968 to 1976 and an increased sample size of 19 companies in

comparison with the four-year period and 13 companies used in previous studies. The study

found strong support for the Lintner’s model in Nigeria.

Several other Nigerian studies in recent time have confirmed the findings of Oyejide (1976).

Izedonmi and Eriki (1996) tested the modified Lintner’s morel using data from 1984 to 1989

while Adelegan (2003) re-evaluated the incremental information content of cash flow in the

modified Lintner’s model using data from 1984 to 1997. Their results are both consistent with

the findings of Oyejide (1976).

Since dividend policy of firms is a cultural phenomenon that changes continuously according to

environment and time (Frankfurter and Wood, 1997), dividend behavioural models must

necessarily be continuously modified to capture those factors that are peculiar to a particular

period and environment. Musa (2005) thus criticises both Lintner’s and Rozeff’s model with

their modifications on the basis of the fact that the models are predicated on the assumption of

constant response coefficient implying that investors react identically to the explanatory of all

firms. As Collins and Kotheri (1989), Dechow (1994), Charitou and Vafeas (1998) and Adelegan

(2003) indicate, theassumption of constant response coefficient is unrealistic.

This is because the response coefficient has been found to be affected by firm-specific,

industry-specific and economic factors which are dynamic in nature. In addition, although some

of the factors captured by the models have emerged as consistently important, the models fell

short of capturing some factors that are considered as current and sensitive in the context of

the Nigeria economy. These limitations have been addressed by Musa’s (2005) model which in

the basis for this study.

DIVIDEND POLICY

What is Dividend Policy

Dividend is the distribution of value to shareholders.

6


Dividend policies are the regulations and guidelines that companies develop and implement as

the means of arranging to make dividend payments to shareholders. Establishing a specific

dividend policy is to the advantage of both the company and the shareholder. In order to make

sure the policy is workable, a company should develop a viable policy and then run this policy

through a number of test scenarios in order to determine what impact the dividend policy

would have on the operation of the business.

In many cases, companies choose to explicitly state the provisions within the dividend policy.

This is definitely to the advantage of the shareholder, as a well defined policy makes it much

easier to project the amount of payout profits generated for the period under consideration

and thus be able to determine the size of the dividends that will be issued. When the dividend

policy is well defined and documented, it is easy for the shareholder to obtain a written copy

and thus be fully informed as to how the policy works.

However, there are cases where the dividend policy is not so well documented. When this is

the case, investors sometimes base their assumptions on upcoming dividend payments on what

has occurred in the past. While less systematic, it is still possible to project a more or less

accurate estimate of what the dividend payout will actually be.

In cases where the dividend policy is not specifically defined, investors often look at the history

to spot any trends that emerged in the past. If the dividend payments have been more or less

constant for the last several years, and there has been no loss in business volume, it is

reasonable to assume the payments will still be in the same general range as before. However,

if the dividend history is more volatile, the shareholder may attempt to identify what factors led

to the up and down movement of the dividends and determine if any of those factors are

relevant to the current dividend period.

In both expressed and implied dividend policy procedures, it is less common for the dividends

to be increased. Part of the reason for that is companies tend to look closely at retained

earnings and want to make sure the increased level of earnings will be sustained over the long

7

http://www.wisegeek.com/what-are-retained-earnings.htm

http://www.wisegeek.com/what-are-retained-earnings.htm

http://www.wisegeek.com/what-is-a-dividend-payout.htm


term. Once this upward trend is deemed to be more or less permanent, the company may

choose to increase dividends.

What happens to the value of the firm as dividend is increased, holding everything else (capital

budgets, borrowing) constant. Thus, it is a trade-off between retained earnings on one hand,

and distributing cash or securities on the other.

TYPES

Cash Dividend

Example: $.5 for every share you hold Regular, regular + "extra”, special

Dates:

|_____________|______________|___________|____

1/15 1/26 1/30 2/15

Declaration Ex-dividend Record Payment

Date Date Date Date

Only investors who hold the security prior to the ex-dividend date receive the dividend.

Stock Dividend

Example: 1 new stock for each 10 you hold

Stock Purchase

Method

in the open market

tender offer

direct negotiation with major shareholders

Reasons

Alternative to "extra" or special dividend.

Example. A company just sold a division and cannot use the proceeds for favorable

investments.

If management believes the stock is under-valued.

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As an obstacle to takeovers. If

management re-purchases stocks, then the price increases, thus prevents raiders from

acquiring company at an attractive price.

Greenmail.

EPS increases, thus value of firm increases !?

Advantages

i. Shareholders have a choice: sell shares or keep.

ii. Firm has no obligation to make future repurchases.

Disadvantages;

i. May signal to investors that the firm's investment opportunities are limited.

ii. The firm may pay too high a price for the repurchase. Example: Greenmail

Stock Split

Example. (2-1 split), i.e., for every share you own, now you own two.

Argument for splits: To make stock "more attractive" to investors?!

Value of firm is not expected to change.

DIVIDEND CONTROVERSY THEORIES

Irrelevant, rightists (high dividend), leftists (low payoff), Middle of the Road

k = capital gains + dividend yield

Irrelevant

M & M in the case of perfect markets.

Reasoning: There is nothing the firm can do that investors cannot duplicate. Firm and investors

have identical opportunities.

Rightists

Bird in the hand fallacy. "Paying out some cash today reduces risk of future payoff uncertainty"

Alternatives CF1 CF2 CF CFT

1 0 0 ... 100 ...

2 20 20 ... 60 ...

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What about return?

Grand Ma's argument: "I need the regular cash dividend to live on!"

Leftists

Tax argument:

Tax on dividends = tax on income $ tax on capital gains.

But tax on dividends must be paid now, while on capital gains would be in the future.

Illustration. Invest $100, ks = 10% , T = 40%

Case 1. Stock held for 20 years.

FV20 = $100(1+.1)20 = 672.75

after tax FV20 = final value - tax paid

= 672.75 - (T)(capital gains)

= 672.75 - (.4)(672.75 - 100)

= 443.65

Case 2. Assume that all earnings are paid as dividends. Investor takes money and buys back

stock.

FV20 = $100 (1 + After tax rate of return) 20

= 100 [1 + ks (1 - T)] 20

= 100 [ 1 + .1(1 - .4)]20 = 320.7

. Case 1 is better. Thus, Optimal dividend policy is zero/very low.

MIDDLE OF THE ROAD

Signaling: Regular dividend can be used by managers to provide information/signal about

future prospects.

In practice, it is too expensive to signal with dividends.

PRACTICAL ISSUES

Legal Requirements:

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Companies cannot keep "excess" cash as retained earnings if no investment opportunities exist.

They have to distribute them as dividends.

Institutional Restrictions:

Many trust portfolios are required to protect the investment principle and can only spend

investment income. Thus, they tend to invest in companies with high dividends.

Market Reaction to Dividend ‘:

Price usually ‘. Investors interpret it as a negative signal, in that the firm's future opportunities

are not good.

Dividend Policy in Practise

Constant $ pay-off

Constant payoff: fixed % of earnings

Residual Theory: Pay out $ that cannot be re-invested in the firm at the required rate of

return ks.

The Nigerian Business Environment and Capital Market

Nigeria is a low income country in Sub-Saharan Africa with a gross national income per capita of

US560 dollars. Table 1 provides economic data on doing business in Nigeria compared with 175

countries of the world. In 2006, Nigeria moved down from number 76 out of 175 in terms of

ease of access to credit to number 83. This represents a significant decline in Nigerians’ access

to credit.

Table 1: Economic Data on Nigerian Business Environment (Total 175 countries rank)

Ease of: 2006 rank 2005 rank Change in rank

Getting Credit 83 76 -7

Paying Taxes 105 99 -6

Protecting Investors 46 43 -3

Starting a Business 118 115 -3

Doing Business 108 109 1

Registering property 170 171 1

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Enforcing contracts 66 105 3

Dealing with licenses 129 134 5

Source: The World Bank (2006): Doing Business.

The Nigerian business environment has also moved backwards in terms of investor protection

and the ease of starting a business. Nigeria ranked 170, 66 and 108 respectively in terms of

ease of registration of property, contract enforcement and doing business in 2006 as compared

with 175 nations. These rankings also reflect the degree of imperfections in the economy.

The Nigerian capital market commenced operations in 1961 as the Lagos Stock Exchange. It

was redesignated the Nigerian Stock Exchange (NSE) in 1977 with branches established in

Lagos, Port Harcourt and Kaduna. The NSE trading floor has now increased to seven locations in

Lagos, Kaduna, Port Harcourt, Kano, Ibadan, Onitsha and Abuja.

The Securities and Exchange Commission (SEC) was established to protect investors and

promote capital market growth and development in the country. It is the apex regulatory organ

of the Nigerian Capital Market. Formerly called the Capital Issue Committee (1961), and later

the Capital Issues Commission (Capital Issue Decree No. 14 of 1973), the SEC was established

under the SEC Decree No. 71 of 1979 amended in 1988 and 1999.

The total number of listed securities (comprising government stock, industrial loans and

equities) increased from 9 in 1961 to 52 in 1971 and 71 in 1978. It also increased from 157 in

1980 to 276 in 1994 but declined to 260 in 2000 and increased to 277 in 2004, with an average

annual growth rate of 17% for the entire period (Ariyo and Adelegan, 2005).

The current operational highlights of the Nigerian stock market are presented in Table 2. The

value of shares traded was 225.82 billion naira (US$1.737 billion) 7, the value of new issues

approved was 227.38 billion naira (US$1.749 billion) in 2004 and market capitalization in 2004

was 2,112 billion naira (US$16,246 billion). The exchange rate is USD$1=130 naira.

Dangote Sugar maintains dividend policy

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Pays N1 dividend as Honeywell declares N0.11

Food major company, Dangote Sugar Plc, said it is maintaining its dividend policy, as it disclosed

its intention to pay shareholders a dividend of N1 per share for its year ended 2009

operations.The company made the disclosure on the floor of the Nigerian Stock Exchange

(NSE), where the financial results were released to the investing public at the weekend.Details

of the company’s results showed that turnover rose from N80.67 billion in 2008 to N82.39

billion in the year under review.

However, its profit before tax slumped to N19.586 billion, from the previous year’s N30.15

billion, while profit after tax dipped to N13.185 billion in the year from N21.871 billion recorded

in 2008.

Its first quarter ended March 31, 2010 financial result also released on the floor of the exchange

showed that turnover grew to N22.787 billion from the corresponding period of N19.107 billion

in 2009, while profit before tax declined to N5.939 billion, from N5.591 in the same period of

2009. Profit after tax equally went down to N3.971 billion from N4.193 billion in the

corresponding period of 2009.

Similarly, another food sub-sector’s company, Honeywell Flour Mills Plc has declared N0.11

dividend per share returns to shareholders, for the year ended 2009 financial operations. This

was also disclosed in the company’s financial year results released to the investing public on the

floor of the NSE at the weekend.

The results showed that the company’s profit grew to N1.175 billion in the year, as against

N217.115 million recorded in 2008, while profit before tax rose to N2.330 billion from N687 152

million in 2008. Turnover rose to 33.528 billion in the year, from N28.580 billion recorded in

2008.

Factors affecting Dividend Policy

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(1) Type of Business: The type of business carried on by the company influences the dividend

policy. If the company is in a business which has a stable demand and stable earnings, it can

follow a stable dividend policy. While a company which deals in luxury items has irregular flow

of income and cannot adopt a steady dividend policy. Generally companies dealing in

necessities of life, public utilities etc. have stable income.

(2) Current Year's Earnings: A company has to determine the amount of dividend keeping in

view the actual earnings of the current year only. Of course, the whole of earnings is not

distributed by the company every year, but it is the base of dividend policy. Even the companies

following stable dividend policy makes some changes within a certain limit on the basis of

current year's profit. There is no definite proportion between dividend and profit but dividend

is raised, if the current year's profit has increased considerably. As one author states, "The

starting point of dividend policy is the earnings of the firm. The upper limit on dividends,

practically speaking, is fixed by the earnings of the current period."

(3) Past Dividends: To a lesser extent the dividends declared during previous years must also be

considered. Shareholders do expect that the company would pay not less than dividend paid in

the past. Of course, if circumstances change, departure has to be made from the past trend of

dividends. But generally directors are reluctant to reduce the previous year's rate of dividend

and if need be, they would try to maintain the rate of dividend, withdrawing from the past

accumulated profit.

(4) Estimate of Future Earnings: A company cannot adopt a stable dividend policy without

taking into account the estimates of future earnings. The current year's rate is rationally

determined only when estimate of future earnings is considered. If the profit is likely to rise in

future, then only the directors can think of raising current dividend. If the future is not so

bright, the current dividend cannot be increased, as the rational dividend policy cannot ignore

the fluctuations in earnings from year to year.

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(5) Future Needs of Capital: The current profit is divided into retained earnings and dividend.

When the company is in need of additional capital for future expansion of business, has to

restrict its rate of dividend and keep a major part of its current earnings for meeting working

capital needs and fixed capital requirements of expansion of business. Particularly small

companies and newly established companies have no other source of raising finance and would

therefore depend mainly on this source.

(6) Fluctuations in Business: The alternative waves of depression and boom in business has a

considerable impact on dividend policy. A wise management would adjust itself to the changes

in business from time to time. During boom period, a company should build up a good amount

of reserves, so that it can withstand the period of depression and can maintain a stable

dividend policy. If need be, the company can easily raise finance by maintaining high rate of

dividend.

(7) Present Amount of Reserves: A company having sufficient amount of reserves would be

able to face the times of low demand with confidence, the prudent management would

therefore, try to build up, sufficient reserves during boom period by restricting the rate of

dividend and thus try to strengthen its financial position. Of course, in India it has been made

compulsory by Companies Act that companies are required to transfer not more than 10% of

their net profits to Reserve if the rate of dividend exceeds 10% on graded rates. No company is

allowed to transfer less than this to the reserves before declaring dividend.

(8) Distribution of Shareholdings: If the company is a closely-held, it is easy for the Board to

postpone the dividend and transfer the entire profit to reserves. However, in case the

shareholding is widely distributed, with a large number of shareholders, it would be difficult for

the Board to take decision of reducing or suspending dividend. If shareholders are mostly from

middle class group of society, they expect a higher and consistent rate of dividend and the

directors cannot ignore the expectations of shareholders.

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(9) Age of the Company: The dividend policy is affected by the fact whether a company is an

old and established one or is a new one. A new company cannot afford to declare a high rate of

dividend from the beginning, as it has to fall back on retained earnings for its requirements of

funds for expansion. However, an established company would have built up enough reserves

and can afford to be liberal in dividend distribution.

(10) Position of Liquidity: Dividend is payable in cash as per provisions of Companies Act.

Hence, the directors are required to take into account the liquid position before declaring

dividend. A company may have good deal of profit but may not have enough cash. In that case

dividend has to be postponed or the lower rate of dividend should be declared. Even if the

present liquid position may be satisfactory, the company may require cash to buy assets for

expansion of business. In that case too, management should postpone payment of dividend.

There is thus a direct link between liquid position and payment of dividend. A company which

maintains a satisfactory level of liquidity at all times may be able to maintain stable dividend

policy in the long run. In order to have a proper idea of cash flows which may help formulate

dividend policy, it would be better to prepare a cash budget for say two to three years, which

would give an idea to the management whether it would have enough cash to declare dividend.

(11) Government Policy: The changes in government fiscal policies, industrial and labour

policies considerably affect the working of some or all of the business firms. Their profits are

affected either favourably or adversely. Dividend policy has to be adjusted to such changes. In

some cases, the government may restrict the rate of dividend in certain industries or impose

tax if the rate of dividend exceeds a particular limit. Dividend policy is thus affected by changes

in government policies.

(12) Taxation: Due to high rates of taxes, the company's profits are reduced, leading to a lower

rate of dividend. In case of closely-held companies the shareholders who are mostly in the

highest tax brackets would like to receive less dividend and opt for capital gains. (It must be

noted at this stage that dividends declared by Indian companies are completely tax-free in the

16


hands of the shareholders and so this argument does not hold good). Many companies would

like to issue bonus shares frequently instead of paying high rates of dividend.

(13) Legal Restrictions: The Companies Acts of various countries may put restrictions of

payment of dividends. For example, according to Sec. 205 of Indian Companies Act, no dividend

can be paid without providing depreciation on fixed assets, dividend has to be paid in cash,

dividend warrants must be dispatched within 30 days of declaration of dividend etc. No

dividend can be paid out of capital. It has to be paid out of earnings of the company. If the

company declares a dividend in excess of 10%, it is required to transfer a particular percentage

of profit on sliding scale to the reserve fund. It can make use of past accumulated profits for

payment of dividend subject to certain rules issued by the Central Government. The objective

of legal restrictions is to see that the paid up capital of the company is not reduced and the

interest of creditors and shareholders is not adversely affected.

Sometimes even the suppliers of loans also stipulate certain restrictions on dividend in the

agreements made with them.

(14) Attitude of Management: The attitude of management has considerable impact on

dividend policy. The management with foresight and conservative attitude would declare lower

dividend and major part of the profit would be kept in business to strengthen its financial

position. The management with liberal attitude would be liberal in dividend policy. Prudent

management would always adopt a bit conservative dividend policy.

in this study, only dividend and profit is considered.

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DATA ANALYSIS

Three companies were examined to determine the level of relationship between the profit and

dividend attributable to shareholders over five years. It was discovered that there is a serious

relationship between the profit and dividend attributable to shareholders. The three companies

examined are:

1. Wema Bank Nigeria PLC

2. Oando plc

3. Julius Berger Nigeria PLC

LIST OF VARIABLES

X – Profit After tax (independent variable)

Y – Dividend (dependent variable)

Since we want to find the relationship between these two variables, coefficient of correlation

(r) will be used.

Coefficient of correlation helps to establish the degree and extent of relationship that exist

between two variables under study. It may be positive, negative, or there may be no

relationship at all. The economic model will be used instead of the conventional statistical

formula. The formula is r = ∑ xy √∑ x2√∑ y2

Where ∑ xy = EXY- 1/n EXEY

Ex2= EX2- 1/n (EX)2

Ey2= EY2- 1/n (EY)2

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N = no of years

To measure the interpretation of correlation coefficient that is used to determine the variance

between known and unknown factors which affects the variables that are explained in this

study, coefficient of determination is used. It is expressed as the % square of Coefficient of

correlation (r2). The variation that is not explained by the factor known is (1- (r2).

WEMA BANK PLC

YEAR X Y XY X2 Y2

PAT DIV

1997

202,602.00

77,886.00 15779859372.00 41047570404.00 6066228996.00

1998

291,805.00

103,848.00 30303365640.00 85150158025.00 10784407104.00

1999

418,962.00

129,811.00 54385876182.00 175529157444.00 16850895721.00

2000

251,498.00

202,505.00 50929602490.00 63251244004.00 41008275025.00

2001

619,554.00

337,508.00

209104431432.0

0 383847158916.00

113911650064.0

0

1,784,421.00

851,558.00

360503135116.0

0 748825288793.00

188621456910.0

0

r = ∑ xy √∑ x2√∑ y2

EXY 360503135116.00

EX

1,784,421.00

EY

851,558.00

EXEY 1519537977918.00

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1/n EXEY 303907595583.60

Exy=EXY- 1/n EXEY 56595539532.40

EX2 748825288793.00

EX

1,784,421.00

(EX)2

3,184,158,305,241.

00

1/n( EX)2

636,831,661,048.2

0

Ex2= EX2- 1/n (EX)2

111,993,627,744.8

0

sqrt Ex2

334,654.49

EY2 188621456910.00

EY

851,558.00

(EY)2

725,151,027,364.0

0

1/n( EY)2

145,030,205,472.8

0

Ey2= EY2- 1/n (EY)2

43,591,251,437.20

20


sqrtEy2 208785.1801

sqrtEX2 * sqrtEy2

69,870,897,993.28

r=Exy/(sqrtEX2*sqrtE

y2)

0.81

r2

0.66

81% shows that the relationship between the profit after tax and dividend of Wema Bank plc is

positive and the coefficient of correlation is very high. This implies that the increase in profit

will definitely increase dividend.

Coefficient of determination implies that 66 % of the variation in dividend is due to the profit

after tax. The % variation that is not explained due to other factors is 1- 0.66 =0.34. ie. 34%

OANDO PLC

YEAR X Y XY X2 Y2

PAT DIV

2005 1,773,643 1,144,602 2030115325086.00 3145809491449.00 1310113738404.00

2006 3,075,068 1,430,752 4399659691136.00 9456043204624.00 2047051285504.00

2007 5,480,415 2,289,203 12545782459245.00 30034948572225.00 5240450375209.00

2008 8,343,325 7,242,056 60422826876200.00 69611072055625.00

52447375107136.0

0

2009 10,096,979 2,713,139 27394507507081.00

101948984926441.0

0 7361123233321.00

28,769,430

14,819,75

2

106792891858748.0

0

214196858250364.0

0

68406113739574.0

0

21


r = ∑ xy √∑ x2√∑ y2

EXY 106792891858748.00

EX 28,769,430

EY 14,819,752

EXEY 426355817781360.00

1/n EXEY 85271163556272.00

Exy=EXY- 1/n EXEY 21521728302476.00

EX2 214196858250364.00

EX 28,769,430

(EX)2 827680102524900.00

1/n( EX)2 165536020504980.00

Ex2= EX2- 1/n (EX)2 48660837745384.00

sqrt Ex2 6975732.058

EY2 68406113739574.00

EY 14,819,752

(EY)2 219625049341504.00

1/n( EY)2 43925009868300.80

Ey2= EY2- 1/n (EY)2 24481103871273.20

sqrtEy2 4947838.303

sqrtEX2*sqrtEy2 34514794267211.20

r= Exy/sqrtEX2sqrtEy2 0.62

r2 0.388815626

22



positive and the coefficient of correlation is high. This implies that the increase in profit will

definitely increase dividend.

Coefficient of determination implies that 39% of the variation in dividend is due to the profit


JULIUS BERGER NIGERIA PLC

YEAR X Y XY X2 Y2

PAT DIV

2005

626,865.00

210,000.00

131,641,650,000.00

392,959,728,225.00

44,100,000,000.00

2006

1,119,047.0

0

270,000.00

302,142,690,000.00

1,252,266,188,209.00

72,900,000,000.00

2007

1,763,706.0

0

375,000.00

661,389,750,000.00

3,110,658,854,436.00

140,625,000,000.0

0

2008

2,452,427.0

0

2,100,000.0

0

5,150,096,700,000.0

0

6,014,398,190,329.00

4,410,000,000,000.00

2009

3,259,122.0

0

-

-

10,621,876,210,884.00

-

9,221,167.0

0

2,955,000.0

0

6,245,270,790,000.0

0

21,392,159,172,083.00

8,732,025,000,000.00

23


r = ∑ xy √∑ x2√∑ y2

EXY

6,245,270,790,000.00

EX

9,221,167.00

EY

2,955,000.00

EXEY

27,248,548,485,000.00

1/n EXEY

5,449,709,697,000.00

Exy=EXY- 1/n EXEY

795,561,093,000.00

EX2

21,392,159,172,083.00

EX

9,221,167.00

(EX)2

85,029,920,841,889.00

1/n( EX)2

17,005,984,168,377.80

Ex2= EX2- 1/n (EX)2

4,386,175,003,705.20

sqrt Ex2

2,094,319.70

EY2

8,732,025,000,000.00

EY

24


2,955,000.00

(EY)2

8,732,025,000,000.00

1/n( EY)2

1,746,405,000,000.00

Ey2= EY2- 1/n (EY)2

6,985,620,000,000.00

sqrtEy2

2,643,032.35

sqrtEX2*sqrtEy2

5,535,354,715,768.73

r=

Exy/sqrtEX2sqrtEy2

0.14

r2

0.02


positive and the coefficient of correlation is very low. This implies that the increase in profit will

definitely increase dividend at a relatively low rate.

Coefficient of determination implies that 2% of the variation in dividend is due to the profit


Policy implications of the findings

Possible public implications exist regarding the use of the model developed in this study. First,

the utility of the model in explaining and predicting the dividend behaviour of the sampled

firms in Nigeria has been clearly established. Given the fact that shareholders in practice usually

prefer firms with a stable and predictable dividend policy, the model in this study could be used

to predict a firm’s dividend stability or changes in dividend payment overtime. This could easily

25


be done using information available in a firm’s financial forecast with regards to its earnings,

previous dividend. The category of shareholders that usually favour regular cash dividend

payments and who may wish to predict their cash inflow would also find the model of this study

quite useful. This category includes small shareholders, retired and old persons and some

institutional investors.

The results of this study have provided insight into the predictor variables that have important

impact in explaining the variation in dividend changes of corporate firms in Nigeria. From the

perspective of the Board of Directors (BODs) of corporate firms, these findings should assist in

establishing a dividend policy that can be acceptable to the various stakeholders in the firms.

The results of the study indicate that earnings variable is the most important variable that can

be used to explain dividend changes. The relationship between the earnings variable and the

dividend policy factor has remained consistently positive. The important features of this

independent variable are that it is both short-run and long-run in its scope, and can be

manipulated by corporate management. These features thus suggest that dividend policy can

be established and manipulated to some extent by the board of directors of corporate firms to

suit the interest of the various stakeholders.

Previous dividend has also consistently appeared to be an important variable that can be used

to explain the dividend behaviour of corporate firms in Nigeria. The relationship between

previous dividend and dividend changes is however not consistent. There is a negative

relationship between previous dividend and dividend change. The explanation for this is that

changes in dividend payment over the years are negatively associated with previous dividend.

Thus a positive change in previous dividend will not necessarily be accompanied by a positive

change in dividend payment over a number of years. These results demonstrate the importance

of smoothed residual dividend policy. Corporate management could maintain a stable dividend

payment so that the equity portions of new capital expenditure are financed internally to the

degree possible. At the same time, the management could maintained both the target dividend

payout and target capital structure over time.

From the perspective of creditors who need protection against excessive dividend payments,

the model in this study should assist in checking compliance with the insolvency rule which is

26


contained in the Companies and Allied Matters Acts (CAMA) 1990. The rule provides that

corporations should only pay dividend when there are adequate reasons to believe that the fair

value of the corporation’s net current assets will remain positive after the payment of dividend.

The results further suggest the possibility of formulating and enforcing standard on dividend

payments by the accounting professional bodies. The standard is not only desirable but

imperative given the latitude currently granted to directors of companies to make dividend

decision. It will be easier for accounting professional bodies than the government, to assess

compliance with the rules that have been enacted to limit the discretion of directors where

such rules are complimented by accounting standards. This is because accountants are

responsible for auditing the end of year financial statements of corporate firms.

The ability of a firm to establish dividend policy using the variables in this study will thus

depend on whether the firm is a high growth or mature firm. The implication of this finding is

that in enacting laws or formulating standard on dividend payment, consideration needs be

given to firm-specific factors, especially a firm’s level of growth.

Conclusions and Recommendations

This paper examines whether current earnings, previous dividend, have significant aggregate as

well as separate impact on the dividend policy of firms quoted on the Nigerian Stock Exchange

(SEC).

Second, the study also provides evidence that earnings, previous dividend have significant

positive impact on the dividend policy of the quoted firms. These results confirm the robustness

of the two variables in explaining and predicting corporate dividend policy and underscore the

importance that firms place on maintaining the continuity of dividends in Nigeria. The results

further corroborate the works of Oyejide (1976), Izedonmi and Eriki (1996) and Adelegan

(2003).

27


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the impact of dividend policy on performance evaluation of firms quoted on the nigerian stock...

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