THE DETERMINANT OF DIVIDENT POLICY

THE DETERMINANT OF DIVIDENT POLICY

(A CASE STUDY OF BANKING SECTOR PROFITABILITY IN NIGERIA)

ABSTRACT

There were several researchers who investigated dividend policy in developed countries like the USA (Chang and Rhee, 1990), the UK (Al-Najjar and Hussainey, 2009) Argentina (Bebzuk, 2005), Poland (Kowalewski et al., 2008) or Japan (Ho, 2003) and some authors studying this in developing countries such as Tunisia (Naceur et al., 2006) or Pakistan (Mehar, 2002) with widely different results but no researches have been done in Nigerian determinants of its dividend policy. Therefore the purpose of this paper is to examine the determinants of dividend policy in Nigerian, an emerging stock market that was officially established in July, 2000. The paper identifies whether firms’ characteristics and corporate governance affect their dividend payments. Firm’s characteristics include profitability, business risk, management ownership board composition. The author relies on a sample of 116 companies listed on the Nigeria stock exchange for the year of 2009 in Nigeria. Being similar to studies in US, the UK, Argentina, Tunisia and Poland, it is found that, Nigeria profitability influence positively and business risk impacts negatively on dividend disbursement. Moreover, there are relationship between capital base, liquidity position and asset size and dividend payment. This research contribute to Nigeria literature in asserting that profitability is the most important future to consider whether there should buy, hold or sell its shares.

CHAPTER ONE

1.0     Background of the study

Dividend payout has been a subject of debate in financial literature over the years. Academic and corporate scholars have developed various theoretical models describing the factors that managers should consider when making dividend policy decisions. Miller and Modiglani (2015) argue that given perfect capital markets, the dividend decision does not affect the firm value and is therefore irrelevant. Most financial practitioner and most academic scholars agree with this conclusion with surprise because the conformist wisdom at the time suggested that a properly managed dividend policy has an impact on share prices and shareholder’s wealth. Thus setting co-operate dividend policy remains debatable and involve judgment by decision makers. In addition there has been emerging consensus that there is no single explanation of dividend payment.

 There are many reasons as to why companies should pay or not to pay dividend, company’s income can be harvested in operating assets used to acquire securities, used to retire debt or distribute to shareholders in the form of cash dividends. Issues that arise if a company decides to distribute its income to shareholders include; the proportion of the after tax income that would be distributed to shareholders; whether the distribution should be cash dividends or the cash be passed on to shareholders by buying back some shares and how stable the distribution should be.

Black (2014) argue that “the harder we look at the dividend feature, the more it seems like a puzzle with pieces that just do not fit together. However, Allen and Michaely (2013) concluded that more empirical research on the subject of the dividend is required before a consensus can be reached. The issue of whether a dividend is relevant or irrelevant as much as the value of a firm is concern in a real world situation has called for an intensive research in the area. In Ghana and the world as a whole dividend payment matters. Several studies have shown that an announcement of dividend increase  (decrease) in share prices  (Norhayati, 2013, Handra 2014) with proliferation of unit trust, investors were made more aware of returns in the form of dividends. Furthermore these funds represent an important investing arm that invest in shares that give good return in the form of capital gains and dividend payments. Therefore a study on determinant of dividend policy will be a relevant decision in view of these observable facts.

1.2     Statement of the Research Problems

There has been a stream of studies on dividend policy puzzle that indicate that dividend policy is relevant in determining the value of the firm. Contemporary financial analysis also feels that consideration of a dividend policy is irrelevant because investors have the ability to create home-made dividends. They can do this by adjusting their personal portfolios to reflect their own preferences. Investors looking for a steady stream of income is more likely to invest in bonds (whose interest payment do not change over time) rather than a dividend paying stock whose value can fluctuate. Since their interest payment from bonds would not change. Those whose own bond will not care about a particular company’s dividend policy. However, some argue that dividend policy matters. Their studies on balance indicate that a high dividend payout is more important for investors because dividends  provide certainty about the company’s financial wellbeing and that dividends are also attractive for investors looking for secure current income.

1.3     Objective of the study

1. To examine the relationship between profitability and dividend policy of listed commercial banks in Nigeria.
2. To examine the relationship between liquidity position and dividend policy of listed commercial banks in Nigeria.

1.4     Research Question

1. To what extent does profitability affect dividend payout ratio of listed commercial Banks in Nigeria?
2. To what extent does liquidity position affect dividend payout ratio of listed commercial Banks in Nigeria?

1.5     Statement of Hypothesis

The following research hypothesis will be tested and investigated in the study in order to draw a conclusion on them.

Hypothesis 1

Ho: there is no significant relationship between profitability and dividend policy of listed commercial banks in Nigeria

Hi: there is a significant relationship between profitability and dividend policy of listed commercial banks in Nigeria.

Hypothesis 2

Ho: there is no significant relationship between liquidity position and dividend policy of listed commercial banks in Nigeria.

Hi: there is a significant relationship between liquidity position and dividend policy of listed commercial banks in Nigeria.

1.6     Significance of the study

Dividend policy decision is of interest of bank managers given that deciding on the amount of earnings to pay out as dividend is one of the major financial decision that a firm’s managers have to make as they pursue wealth maximization for the shareholders.

Managers have to decide whether to pay dividend or not and if they decide to pay dividend for a particular year, they are further faced with the question of how much they should pay for that year.

The study will also educate investors and management on useful consideration underpinning the dividend policy decision frameworks n Nigeria and the factors considered while making dividend policy decisions. As owners of a firm, shareholders would benefit from the study as it would help them understand the dividend payout decision adopted by their respective banks.

 The study contributes to the existing knowledge and would act as a reference point for future research.

1.7     Scope of the study

This study is covered from five (5) listed commercial banks for five (5) years

These listed commercial banks include;

UBA Bank plc

Skye Bank

Access Bank

First Bank plc

Guarantee Trust Bank (GTB) and this period vary from 2013-2017.

1.8     Definition of Terms

1. Dividend policy: dividend policy is the set of guidelines a company uses to decide how much of its earnings it will payout to shareholders. Some evidence suggests that investors are not concerned with a company’s dividend policy since they can sell a portion of their portfolio of equities if they want cash. It can also be referred to as it can also be referred to as financial decision that refers to the proportion of the firm earning to be paid out to shareholders. Dividends are major cash flow for companies.
2. Determinants: is a factor which decisively affects the nature or outcome of something of something. It can also be seen as a quantity, obtained by the square matrix according to a given rule.
3. Dividend payout ratio: the dividend payout ratio is the amount of dividend paid to stock holders relative to the amount of total net income of a company. The amount that is not paid out in dividends to stockholders is held by the company for growth. The amount that is kept by the company is called retained earnings

Formula for dividend payout ratio

This formula is used by some when considering whether to invest in a profitable company that pays out dividends versus a profitable company that has high growth potential.

• Profitability: the degree to which a business or activity yields profit or financial gains.  It is often measured by price of earning ratio. In accounting, profitability is the ability of the company to use its resources to generate revenue in excess of its expenses. In other words, this is a company’s capability of generating profit from expenses.
• Liquidity position: the liquidity position is the difference between the sum of liquid assets and incoming cash flows resulting from commitment on the other side, measured over a defined period, being the measure of thee liquidity risk. The related report is the liquidity risk analysis report. Liquidity has to do with a firm’s asset and liabilities, in particular liquidity looks at whether or not a firm can  pays its current debt with  its current asset.

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