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 beteen 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 shos a significant relationship beteen dividend and share price. !ome other
factors such as profit, "#!, groth rate, retained earnings, money supply etc.
CONTENTS
Introduction
1
Objective
2
Methodolo!
2
"iter#ture Revie$
%
Overvie$ o& the Co'(#nie)
*
Rel#ted +in#nci#l ,#t# An#l!)i)
"i'it#tion)
2-
Conclu)ion . Reco''end#tion
2-
INTRO,UCTION
As Bangladesh is a developing country, the corporate culture is groing very slightly in
our country. Dividend policy is a ma$or financing decision that involves ith the payment
to shareholders in return of their investments. "very firm operating in a given industry
follos 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 e&tent,
dependant on the firm%s dividend payment pattern.
'any investors like to atch the dividend yield, hich is calculated as the annual
dividend income per share divided by the current share price. The dividend yield
measures the amount of income received in proportion to the share price. If a company
has a lo dividend yield compared to other companies in its sector, it can mean to
things( )*+ the share price is high because the market reckons the company has
impressive prospects and isn,t overly orried about the company,s dividend payments, or
)-+ the company is in trouble and cannot afford to pay reasonable dividends. At the same
time, hoever, a high dividend yield can signal a sick company ith a depressed share
price. Dividend yield is of little importance for groth companies because, retained
earnings ill be reinvested in e&pansion opportunities, giving shareholders profits in the
form of capital gains.
!o, the study ill investigate the relationship beteen dividend and the market price of
share Bangladesh. In our detailed study, e ill e&amine ith some real life sample )five
banks+ that hether the dividend policy has any effect on the firm%s share price
determinants are many in members other than the dividend payment pattern, e $ust
focus on the specific factor. the dividend policy.
O/0ECTIVE
/b$ective guides the thinking of any set of operation either directly or indirectly. It orks
as a lamp0post in a dark night to find out the right ay. /ur ob$ective in this study is to
find out hether the dividend policy has any impact on share price of that company. 1or
this purpose e have given a term paper named, 2Impact of Dividend on !hare #rice3.
And that%s hy though there are many variables creating impact on share price, our main
focus is on dividend 4 its policy.
Besides, as students of 'BA program, the ob$ective of this study is to ac5uire knoledge
about share price, share price, share market, dividend, and policy of company on
retention on dividend payment, through our field ork.
MET1O,O"O2Y
3ri'#r! ,#t#4 #rimary data is collected by intervieing ith some officials of these
banks. 'd. Abu Tayeb )!enior 6ice #resident+, 'ohammad 7ashim 8ddin )!enior Asst.
6ice #resident+ and 'd. 'onoar 9ossain )!enior /fficer+ all these persons are the
staffs of DBB: help us to provide different data on this related topic.
Second#r! ,#t#4 The main source of data for this report is Annual Reports. ;e have also
collected data from the securities market, different ebsites, different books and different
$ournals.
"ITERATURE REVIE5
<ittman )-==>, pp. ?*-+ divided stock into to types, such as common stock and
preferred stock. 9e also shoed that dividends are the outcome of investment. !o,
common stocks are an onership claim against primarily real or productive asset
)9iggins, *@@A+, but he also said that if the company prospers, stockholders are the chief
beneficiaries, if it falters, they are the chief losers. !mith )*@BB+ presented that stocks are
one of the most popular forms of investment. #eople buy stocks for various reasons(
some are interested in the long0term groth of their investment by buying lo priced
stock of a ne company in the hope of substantially groth of share price over the ne&t
fe years. Another reason he suggested that in a ell established firm stockholders
e&pect the stock groth ill be stable over the long run. )!mith,*@BB+.
!tockholders e&pect dividend but it is not promised )<ittman, -==>+. Common stocks are
hold by true oners of the business. !ometimes they are knon as Cresidual oners% as
they receive hatever left after inding up of the company )<ittman, -==>. 9iggins
*@@A+. Another type of stock is knon as publicly oned stock. Common stock oned by
a broad group of unrelated investors or institutional investors is called as publicly oned
stock. 9oever, all common stock of a firm oned by a small group of investors is
denoted as closely oned stock. ;hen all the stock is oned by a single person is knon
as privately oned stock. Due to the limit of number of share, stock can be classified in
to four types. !uch as authoriDe share, outstanding share, treasury stock and issued stock
)<ittman, -==>+. AuthoriDed shares represent the ma&imum number of shares a firm
allos to issue. /utstanding 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 )#ort, *@EF+. #ort
also suggested that firms should avoid issuing stock to pay dividend as they slo don
company groth.
According to !hort and ;elsch )*@@=+, 7ohns )*@@B+ and #ort )*@EF+, 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 )9iggins,
*@@A+./n the other hand, Ross et al. )-==A+ divided earnings into to parts. either it is
retained or paid as dividend. ;hereas ;ild et al. )-==*+, 7ohns )*@@B+ and Gieso et al.
)-==>+ 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 )7ohns, *@@B+. 9e also specified that they are decided upon the declaration
by the board of the directors and can range from Dero to virtually any amount the
corporation can afford to pay.
7ones )-==A+ said that dividends are the only cash payment a stockholder receives
directly from firm and these are the foundation of valuation for common stocks. !tock
price response to an une&pected dividend change announcement is related to the dividend
preferences of the marginal investor in that firm here other things remaining same
)Denis et al., *@@>+. In addition, a company, hich changes dividend policy, is e&pected
to e&perience upard or donard trends in share returns )<unasekarage et al., -==F+.
They also said that for the initiating firms, the share prices continued to rise even after the
initial public offering )I#/s+. 9iggins )*@@A+ said that if the company ill have less
money to invest, or it ill have to raise more money from e&ternal sources to make the
same investments stockholders claim on future cash flo, hich reduces share price
appreciation. 'oreover, during dividend announcement period stock price also fluctuate
due to announcement of dividend. 'ulugetta et al. )-==-+ e&amined the impact of
!tandard and #oor%s ranking changes on stock prices. In addition, Affleck0<raves 4
'endenhall )*@@-+ found that stock price reacts after B days on average up to A> days of
such earning announcement.
;ith this believe, 9ampton )*@@F+ said that value of stock increase by more dividend and
share remain undervalued by loer dividend policy. In addition, he also shoed that
there are to schools of thought regarding ith 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. . BenartDi et al. )*@@E+, /fer
and !iegel%s )*@BE+ and Bae )*@@F+ found a positive correlation beteen share price and
dividend. 1urthermore, Campbell and !hiller )*@BB+ found a relationship beteen stock
prices, earnings and e&pected dividends and he drives a conclusion that earnings and
dividends is poerful in predicting stock returns over several years. ;ilkie analyDed a EF
months share price inde& and dividend announced. 9e found a correlation coefficient,
hich as under =.E for the period EF months and he also get that the ma&imum value of
the regression coefficient being reached after E@ months. 'oreover, !hiller )*@B>, *@B@+
recommended investors in his study to buy the stocks hen price is lo relative to
dividends and to sell stocks hen it is high payoffs. /n the other hand to their opinion,
7ensen and 7ohnson )*@@A+ suggested that, dividend cut results reduction in share price.
'ore interesting matter is that if capital markets are perfect, dividends have no influence
on the share price )'iller and 'odgliani, *@F*+. 'iller and 'odgliani )*@F*+ also states
that if the market is imperfect, dividend may affect stock price.
OVERVIE5 O+ T1E COM3ANIES
IS"AMI /AN6 /AN2"A,ES1 "T,7 8I//"9
Islamic banking started in Bangladesh through establishment of the I!:A'I BAHG
BAH<:AD"!9 :td. )IBB:+, hich is considered to be the first interest0free bank in
!outheast Asia. It as incorporated on *? 'arch *@B? as a public limited company under
the C/'#AHI"! ACT *@*?. In December -==*, IBB: had *-* branches. its authoriDed
capital as Tk *=== million and paid up capital Tk F>= million.
:isting Iear( *@BA 'arket Category( A
/utstanding Capital in BDTJ )mn+ ?B=-.=
1ace 6alue *===.=
Total no. of !ecurities ?B=*F==
!hare
#ercentage(
!ponsorKDirector
>=
<ovt.= Institute = 1oreign = #ublic F=
2r#(h:14 The M#r;et 3rice o& Sh#re o& I//" in 2<<=:2<<>
81ihe)t v#lue4 F@?= "o$e)t v#lue4 ?>=B.EA+
,UTC1:/AN2"A /AN6 "IMITE, 8,//"9
Dutch0Bangla Bank :imited )the Bank+ is a scheduled commercial bank. The Bank as
established under the Bank Companies Act *@@* and incorporated as a public limited
company under the Companies Act *@@> in Bangladesh ith the primary ob$ective to
carry on all kinds of banking business in Bangladesh. The Bank is listed ith Dhaka
!tock "&change :imited and Chittagong !tock "&change :imited. DBB:0 a Bangladesh
"uropean private $oint venture scheduled commercial bank commenced formal operation
from 7une ?, *@@F
:isting Iear( -==* 'arket Category (A
/utstanding Capital in BDTJ )mn+ -=-.=
1ace 6alue *==.=
Total no. of !ecurities -=-*?A=
!hare
#ercentage(
!ponsorKDirector
F>
<ovt.= Institute = 1oreign -F #ublic *=
2r#(h:24 The M#r;et 3rice o& Sh#re o& ,//" in 2<<=:2<<>
1ihe)t v#lue4 FAEF.A, "o$e)t v#lue4 *F==
/AN6 ASIA
Bank Asia a public limited banking company incorporated on -B !eptember *@@@. It
started banking business on -E Hovember *@@@ ith e5uity participation from --
promoters. The authorised and paid up capital of the bank is Tk B== million and Tk -*B
million respectively. The paid up capital is divided into -,*B=,=== ordinary shares of Tk
*== each fully paid by the sponsors.
:isting Iear( -==> 'arket Category ( A
/utstanding Capital in BDTJ )mn+ *?@A.=

1ace 6alue *==.=

Total no. of !ecurities *?@A====
!hare
#ercentage(
!ponsorKDirector
A-
<ovt.= Institute *E 1oreign = #ublic ?*
2r#(h:%4 The M#r;et 3rice o& Sh#re o& /#n; A)i# in 2<<=:2<<>
1ihe)t v#lue4 A*E.-A, "o$e)t v#lue4 ??>
INTERNATIONA" +INANCE? INVESTMENT AN,
COMMERCE /AN6 "IMITE, 8I+IC9
I1IC Bank )International 1inance, Investment and Commerce Bank :imited+ originally
named as International 1inance and Investment Company, as formed in /ctober *@EF.
It obtained certificate of commencement on -B 1ebruary *@EE as an IH6"!T'"HT
BAHGIH< company. The company as established mainly to carry out banking and other
financial business outside Bangladesh )especially in the oil0rich 'iddle0"astern
countries+ either singly or in collaboration ith other companies, banks and financial
institutions. BAH<:AD"!9 BAHG alloed I1IC to transform itself into a banking company
and accordingly, it as renamed and after completion of re5uired legal formalities, it
started full0fledged commercial banking operations on -> 7une *@B?.
:isting Iear( *@BF 'arket Category ( L
/utstanding Capital in BDTJ )mn+ FE*.=
1ace 6alue *==.=
Total no. of !ecurities FE=F@@A
!hare
#ercentage(
!ponsorKDirector *B <ovt.?A Institute = 1oreign = #ublic >E

2r#(h:@4 The M#r;et 3rice o& Sh#re o& I+IC in 2<<=:2<<>
1ihe)t v#lue4 **@B, lo$e)t v#lue4 =
ARA/ /AN2"A,ES1 /AN6 "T,
A: BARAGA BAHG :td often called the second Islamic bank of Bangladesh, commenced
banking business on -= 'ay *@@E. It is a $oint0venture enterprise of Al0Baraka
Investment and Development Company, a renoned financial and business house of
!audi Arabia, Islamic Development Bank, a group of eminent industrialists of
Bangladesh, and the government of Bangladesh. The authoriDed capital of the bank is Tk
F== million and its paid up capital is Tk -A@.AA million. The bank has no ?A branches in
different parts of the country.
:isting Iear( *@B? 'arket Category( A
/utstanding Capital in BDTJ )mn+ E>?.=
1ace 6alue *==.=
Total no. of !ecurities E>?-F*B
!hare
#ercentage(
!ponsorKDirector
A=
<ovt.* Institute = 1oreign = #ublic >@
2r#(h:-4 The M#r;et 3rice o& Sh#re o& A/ /#n; in 2<<=:2<<>
1ihe)t v#lue4 ?-?F.EA, "o$e)t v#lue4 FB>.EA
Rel#ted +in#nci#l ,#t# An#l!)i)
The financial data e gathered to find out the relationship beteen various variables ith
price of five different banks are given. ;e attempted to e&plore some conclusion on the
behavioral pattern of changing the share market price. The data are e&tracted from annual
reports of five selected banks that are Arab Bangladesh )AB+ Bank, Bank Asia )BA+,
Dutch Bangla Bank :td )DBB:+, International 1inance and Investment Corporation
)I1IC+ and Islami Bank Bangladesh :td. )IBB:+. The annual data of these banks has been
taken from the annual reports and other annual publications of Dhaka !tock "&change.
IS"AMIC /AN6 /AN2"A,ES1 "T, 8I//"9
YEAR E3S
3AE
RATIO
S1ARE
3RICE 8M6T9
,IVI,EN,
CAS1
/ONUS
S1ARE
TOTA"
2<<2 @?*.@- -.EB -A@=.E?EF -?-.@B = -?-.@B
2<<% *@A.A- -=.@@ >*=?.@F>B = ?@.*=> ?@.*=>
2<<@ A*B.A@ @.BF A**?.-@E> = *=?.E*B *=?.E*B
2<<- >BE.AE @.?- >A>>.*A-> = *-*.B@-A *-*.B@?
2<<= >BA.@> E.A@ ?FBB.-B>F E-.B@* >B.A@> *-*.>BA
TOTA" -F*@.A> A=.A> -==>=.>?FB ?=A.BE* ?*?.?=BA F*@.*B
AVERA2E A-?.@=B *=.*=B >==B.=BE?F F*.*E>- F-.FF*E *-?.B?F
T#ble:14 +in#nci#l d#t# o& I//" &ro' 2<<2:2<<=
2r#(h:=4 Trend o& M#r;et 3rice o& Sh#re #nd (#!'ent o& tot#l ,ividend &ro' 2<<2:
2<<=
,UTC1 /AN2"A /AN6 "T,7 8,/"9
YEAR E3S
3AE
RATIO
S1ARE
3RICE8M6T9
,IVI,EN,
CAS1
/ONUS
S1ARE
TOTA"
2<<2 BE.BF >.@* >?*.?@-F *E.AE- = *E.AE-
2<<% *=?.@E @.=@ @>A.=BE? -=.E@> = -=.E@>
2<<@ **F.@? *B.E* -*BE.EF=? -F.?=@-A = -F.?=@-A
2<<- *B*.@E *=.*E *BA=.F?>@ >A.>@-A = >A.>@-A
2<<= *E@.*B *=.-E *B>=.*EBF >>.E@A = >>.E@A
TOTA" FF@.@* A?.*A E-AA.=A?E *A>.@F-EA = *A>.@F-EA
AVERA2E *??.@B- *=.F? *>A*.=*=E> ?=.@@-AA = ?=.@@-AA
T#ble:24 +in#nci#l d#t# o& ,//" &ro' 2<<2:2<<=
2r#(h:>4 Trend o& M#r;et 3rice o& Sh#re #nd (#!'ent o& tot#l ,ividend &ro' 2<<2:
2<<=
/AN6 ASIA
YEAR E3S
3AE
RATIO
S1ARE
3RICE 8M6T9
,IVI,EN,
CAS1
/ONUS
S1ARE
TOTA"
2<<2 >B.A* = = = = =
2<<% ?A.@B **.AF >*A.@-BB = B.F?A- B.F?A-
2<<@ ?@.>B *-.?A >BE.AEB = @.BE @.BE
2<<- ?>.?F B.** -EB.FA@F ?.>?F F.BE- *=.?=B
2<<= >-.F? *=.=> >-B.==A- = *=.FAEA *=.FAEA
TOTA" -==.@F >-.=F *F*=.*E*F ?.>?F ?F.=?>E ?@.>E=E
AVERA2E >=.*@- B.>*- ?--.=?>?- =.FBE- E.-=F@> E.B@>*>
T#ble:%4 +in#nci#l d#t# o& /#n; A)i# &ro' 2<<2:2<<=
2r#(h:B4 Trend o& M#r;et 3rice o& Sh#re #nd (#!'ent o& tot#l ,ividend &ro' 2<<2:
2<<=
INTERNATIONA" +INANCE AN, INVESTMENT COR3ORATION
8I+IC9
YEAR E3S
3AE
RATIO
S1ARE
3RICE 8M6T9
,IVI,EN,
CAS1
/ONUS
S1ARE
TOTA"
2<<2 *@.A* -?.@F >FE.>A@F *.>F?-A = *.>F?-A
2<<% *A.B> *>.=? ---.-?A- = *.AB> *.AB>
2<<@ *F.=@ -A.? >=E.=EE = *.F=@ *.F=@
2<<- -=.-> -B.? AE-.E@- = -.=-> -.=->
2<<= F-.>F *A.-? @A*.-FAB = *>.@@=> *>.@@=>
TOTA" *?>.*> *=F.B- -F-=.B-@F *.>F?-A -=.-=E> -*.FE=FA
AVERA2E -F.B-B -*.?F> A->.*FA@- =.-@-FA >.=>*>B >.??>*?
T#ble:@4 +in#nci#l d#t# o& I+IC &ro' 2<<2:2<<=
2r#(h:*4 Trend o& M#r;et 3rice o& Sh#re #nd (#!'ent o& tot#l ,ividend &ro' 2<<2:
2<<=
ARA/ /AN2"A,ES1 /AN6 8A/ /AN69
YEAR E3S
3AE
RATIO
S1ARE
3RICE 8M6T9
,IVI,EN,
CAS1
/ONUS
S1ARE
TOTA"
2<<2 A.EB ?B.F> --?.??@- = =.BFE =.BFE
2<<% ?.F? *=F.** ?BA.*E@? = =.*B*A =.*B*A
2<<@ *B.*@ -=.=* ?F?.@B*@ = =.@=@A =.@=@A
2<<- -B.>* *E.F* A==.?==* = -.B>* -.B>*
2<<= @?.=B ?=.A> -B>-.FF?- = -E.@-> -E.@->
TOTA" *>@.=@ -*-.@* >?*A.>F?E = ?-.E-? ?-.E-?
AVERA2E -@.B*B >-.AB- BF?.=@-E> = F.A>>F F.A>>F
T#ble:-4 +in#nci#l d#t# o& A/ /#n; &ro' 2<<2:2<<=
2r#(h:1<4 Trend o& M#r;et 3rice o& Sh#re #nd (#!'ent o& tot#l ,ividend &ro'
2<<2:2<<=
TOTA" IN,USTRY 8TOTA" ACCUMU"ATE, ,ATA9
YEAR E3S
3AE
RATIO
S1ARE
3RICE
8M6T9
,IVI,EN,
CAS1
/ONUS
S1ARE
TOTA"
2<<2 -*B.E*F *>.=AB ?=E>.E=@A-B A=.>=?=A =.*E?> A=.AEF>A
2<<% E=.@BB ?-.?AF --@F.BBEE-B >.*ABB @.@==@> *>.=A@E>
2<<@ *>*.BAF *E.->F ->>F.>>BAEF A.-F*BA -?.--*? -B.>B?*A
2<<- *A=.A* *>.E=- --*-.E@B=- @.EBAE -F.E-A@ ?F.A**F
2<<= *E-.FAB *>.E?> -A>?.@>-@E- -?.A?E- -=.>??*B >?.@E=?B
TOTA" EA>.E-B @?.=@F *-AE>.EBFB- @?.*>FF B=.>A>E- *E?.F=*?
AVERA2E *A=.@>AF *B.F*@- -A*>.@AE?FA *B.F-@?- *F.=@=@>> ?>.E-=-F
T#ble:=4 +in#nci#l d#t# o& tot#l - /#n;) &ro' 2<<2:2<<=
"IMITATION
*. !ample siDe of the study is fi&ed and too short )nM-A+.
-. 'any companies do not give cash dividend.
?. Dividend is not the only variable hich affect on share price.
>. It is assumed that the capital market is organiDed.
A. It is assumed that there is no inflation or deflation in the economy
F. It is assumed that money supply in the market is fi&ed.
E. Companies on hich the study is made do not disclose the market position of
their share.
B. !traight line e5uation is used but there are different variables hich affect share
price.
@. !ampling error in the study is considered.
*=. Due to lack real life e&perience, the level best effort may not be presented
dynamically.
CONC"USION . RECOMMEN,ATION
The dividend policy of a company determines hat proportion of earnings is distributed
to the shareholders by ay of dividends, and hat proportion is ploughed back for
reinvestment purposes. !ince the main ob$ective of financial management is to ma&imiDe
the market value of e5uity shares, one key area of study is the relationship beteen the
dividend policy and market price of e5uity shares.
According to this model founded by <raham and Dodd, the market price of the shares
ill increase hen a company declares a dividend rather than hen it does not.
According to 7ames ;alter, the dividend policy of a company has an impact on the share
valuation. /n the other hand according 'yron <ordon, the dividend policy of the
company has an impact on share valuation.
But according 'iller and 'odiliani, the market price of the share does not depend on the
dividend payout, i.e. the dividend policy is irrelevant. ;hen profits are used to declare
dividends, the market price increases. But at the same time there is a fall in the reserves
for reinvestment. 9ence for e&pansion, the company raises additional capital by issuing
ne shares. Increase in the overall number of shares, ill lead to a fall in the market price
per share. 9ence the shareholders ould be indifferent toards the dividend policy.
1rom the above models confuses as the impact of dividend on share price. In our study
e make the co relation of different variables and try to compare hich variables has the
significant impact on share price. After the study e have revealed dividend has a
significant impact on share price.
1rom our study e recommend the folloing issues(
*. 'ost of the investors are irrational. !"C should take different initiative to make
them rational.
-. Both cash and stock dividend should be paid consistently
?. !ometimes capital market is affected by different fake information hich also
affect share price. !"C should take initiatives for this condition.
>. The company should disclose the overall market price of their share in the annual
report.
A. !"C should take initiative for the companies hich are making significant losses.
F. 'oney supply has an effect on share price. !"C should take initiatives on this
issue.
E. #olitical, general economic, financial and stock market conditions, particularly
here the company operates or is listed
B. #erceptions of investors about the different factors should be implemented.