Assignment on dividend policy on Bata Shoe, Bangladesh

An Overview of Bata Shoe, Bangladesh

The Bata Shoe Organization was founded in 1894 by Czech businessman Tomas Bata in the city of Zlin, what was then Czechoslovakia. Coming from a family of shoemakers with a long heritage of eight generations and over three hundred years, Tomas Bata capitalized on knowledge, expertise and skills to propel his newly founded company forward. The introduction of factory automation, long distance retailing and modernized shoe making ensured the profitability of the company from the very beginning. It is now the worlds largest manufacturer and marketer of footwear operating across the globe.

Today the Bata Shoe Organization is a sprawling geo-centric company encompassing operations in more than 70 countries around the world and is managed by 3 Meaningful Business Units (MBU) across five continents. It serves over 1 million customers per day, employs more than 50,000 people, operates more than 5,000 retail outlets, manages retail presence in over 70 countries and runs 27 production facilities across 20 countries.

In Bangladesh, Bata started its operation in 1962. The company is one of the largest tax paying corporate bodies contributing Tk. 1.2 billion (year 2009) which represents approximately 70% of tax paid by the entire footwear sector of Bangladesh. Currently Bata Shoe Company (Bangladesh) Limited operates two manufacturing facilities one in Tongi and the other in Dhamrai. With a production capacity of 110,000 pairs of shoes daily, the company also has a modern tannery facility with an output of 5 million square feet of leather annually. Annual shoe sales currently stand at slightly more than 30 million pairs with a turnover for the year 2009 of Tk 5 billion.

Bata is playing a pivotal role in developing the leather industry of the country. Bata has a firm commitment to eco-friendly business and a state of the art Effluent Treatment Plant

(ETP) has been set up to provide a pollution free environment for both workers and the locality.

Fashion would never be complete without a well-designed pair of shoes. This marketing insight has prompted Bata to introduce a number of designers collections for men, women and children. Internationally renowned brands such as Bata Comfit, Marie Claire, Hush Puppies, Scholl, Nike, Bubblegummers, Sandak, Weinbrenner and Bfirst are a few names that testify to the momentous change towards branded shoe marketing in Bangladesh. Specialized shoe categories such as athletic shoes have been targeted through development of the Power brand. Uncompromising quality with striking designs have put Bata shoes in a key position to appeal to different segments of consumers.

Another major change in the Bata business policy is the segmentation of retail outlets according to profiles of different market segments and the introduction of novel concepts such as Bata City Stores. These selective outlets, in conjunction with other types of outlets such as Bata Bazar and Bata Family Stores, are adding a new level of consumer satisfaction. The City Stores incorporate spacious floor space allowing a comfortable shopping experience, modern interior dcor enriched with novel shelving systems, fittings, fixtures and lighting that can be found in the large retail shops in the Far Eastand Europe. Bata has a network of 242 retail outlets located strategically in different parts of the country. These retail outlets are an integral part of our brand marketing. This extensive retail network is supplemented by an equally extensive network of depots and dealers. Bata has 13 Wholesale depots covering Bangladesh. Under these depots 390 RWD (Registered Wholesale Dealers) and 553 DSP (Dealer Support Program) stores are operating. Bata Bangladesh has already developed its vision up to 2013 showing significant business growth as well as increased market share. One of the critical areas associated with external shareholders and the community at large is the Corporate Social Responsibility Program of the company. From supporting nationwide sports sponsorships and disabled persons to addressing environmental concerns, scholarship programs, charity contributions etc Bata has always supported individuals and communities in

need. Partnerships with other voluntary and charitable organizations are another prominent feature of Batas corporate social responsibility.

Bata, in partnership with CARE, extends assistance to over two thousand rural women in order to become independent entrepreneurs in the Rajshahi, Comilla and Chittagong division selling shoes from door to door under its Rural Sales Programme. Since its inception, Bata Shoe Company (Bangladesh) Ltd. has strived towards one goal customer satisfaction. With the vision of building a worldwide family of satisfied customers and dedicated workers the legacy of Tomas Bata continues strong and unabated to this day the tradition is safe.

Listing of Bata Bangladesh in Stock Exchange

Dhaka Stock Exchange Chittagong Stock Exchange

Dividend Theories
Dividend Irrelevance Theory
A theory put forth by Metorn H. Millar & Franco Modigliani (M&M) that in a perfect world, the value of a firm is unaffected by the distribution of dividends and is determined solely by the earnings power and risk of its assets. Bata shoe Bangladesh does not follow this theory.

Bird-in-the Hand theory

A theory developed by Myron J. Gordon & Linter that tells Stockholders prefer current dividend. It also tells that there is a direct link between Dividend Policy of the firm and its market value. Fundamental to this proposition is that Bird-in the-Hand argument suggests that investors are risk averse & attach less risk to current as opposite to future dividends or capital gains.

We can determine which Dividend Policy is being followed by Bata Shoe after analyzing some of its financial data for the last 5 years.

Year

% Dividend

Stock Price in DSE (TK)

NET INCOME(TK) 277,022,059 324,849,273 449,415,702 449,406,445 543,970,530

2006 2007 2008 2009 2010

235.00 250.00 220.00 220.00 250.00

121.4 223.6 320.70 528.30 645

Table 1: Dividend %, Stock Price and net Income of Bata Shoe

According to available data of Bata Shoe BD from 2006 to 2010, it is clear that Bata Shoe is following Bird-in -The Hand Theory which is developed by Myron J. Gordon & Linter. Myron J. Gordon & Linter said that a company may declare higher dividend because of the following reason:

Stockholders Prefer current dividend Direct link between Dividend Policy of the firm and its market value Investors are risk averse & attach less risk to current as opposite to future dividends or capital gains. Investors believe that a bird in the hand is worth two in the bush Cash Dividend reduce uncertainty causing earning at a lower rate Fail to provide conclusive evidence in support of dividend relevance arguments Financial manager & stockholders believe that dividends are relevant.

Bata Shoe follows Bird-in -the Hand Theory: From last few years, Bata Shoe declared higher dividend and retained less earnings in order to attract those risk averse investors who prefer current dividend and think that declaration of higher dividend minimize the uncertainty of the company therefore share price of its also increases up to certain level of pay-out ratio that is the indication of Bird-in -the Hand theory.

Dividend Policies
Constant- Pay-out ratio
The dividend policy ratio indicates the percentage of if each amount earned that is distributed to the owners in the form of cash. It is calculated by Dividend payout ratio = Cash Dividend Per Share / E.P.S. With a constant-payout-ratio dividend policy, the firm established that a certain percentage of earnings are paid to owners in each dividend period. The problem with this policy is that if the firms earnings drop or if a loss occurs in a given period, the dividends may be low or even nonexistent which could adversely affect the firms share price.

Regular Dividend Policy

The regular dividend policy is based on the payments of a fixed amount dividend in each period. This policy provides the owners with generally positive information, thereby minimizing uncertainty. Often, firms that use this policy increase the regular dividend once a proven increase in earnings has occurred. Under this policy, dividends are never decreased.

Low-Regular-And- Extra Dividend Policy

Some firms establish a low-regular-and-extra dividend policy, paying a low regular dividend supplemented by an additional dividend when earnings are higher than normal in a given period. By calling the additional dividend an extra dividend, the firm avoids

giving shareholders false hopes. This policy is especially common among companies that experience cyclical shifts in earnings.

Key Components of Discussion

Net Income
YEAR NET INCOME(TK) 2005 2006 206,638,315 277,022,059 ----(277,022,059 - 206,638,315) / 206,638,315 * 100 = 34.06% 2007 324,849,273 (324,849,273 - 277,022,059) / 277,022,059 * 100 = 17.26% 2008 449,415,702 (449,415,702 - 324,849,273) / 324,849,273 * 100 =38.35% 2009 449,406,445 (449,406,445 - 449,415,702)/449,415,702 * 100 = (0.00206)% GROWTH (%)

2010

543,970,530

(543,970,530-449,406,445)/ 449,406,445*100 = 21.04%

Table 2: NI and its growth in the last 5 years

Interpretation:
Growth in net income is even more important than sales because net income tells the investor how much money is left over after all of the operating costs are subtracted from sales. From the above table, we can see that Bata Shoe Bangladesh has earned profit in the years 2006, 2007, 2008 and 2010. But in the year 2009 it had a negative growth rate

of (0.00206) % in profit. In 2009, the growth of Bata shoe was significantly affected because of global economic recession. Therefore, consumers concentrated more on essential consumable items instead of footwear. Moreover, electricity shortage throughout the country has interrupted production. This is why growth was negative.

Earnings per Share

An Earnings per Share (EPS) is the amount of money earned by a company expressed in per share. Following table provides the information of EPS of Bata Shoe in different years. It shows that from 2005 to 2008, EPS is increasing but the rate of increasing is not same. It is fluctuating in this time period. EPS in 2008 and 2009 is same. So the, growth rate for 2010 is 21%.

YEAR 2006 2007 2008 2009 2010

EPS 20.25 23.75 32.85 32.85 39.76

GROWTH (%) 20.25 - 15.11 / 15.11 * 100 = 34% 23.75 - 20.25 / 20.25 * 100 = 17% 32.85 - 23.75 / 23.75 * 100 = 38% 32.85 - 32.85 / 32.85 * 100 = 0% 39.76- 32.85 / 32.85 * 100 = 21%

Table 3: EPS and its growth in the last 5 years

Interpretation:
From the above chart, we can see that the Earning per share is increasing each year, which is good for both the firm and for the shareholders.

Information Regarding Dividend, Bata Bangladesh

a. Dividend Payout Ratio
Dividend payout ratio = Cash Dividend per Share / E.P.S.
Dividend payout ratio says the % of EPS that is paid as dividend. It helps us to determine whether it is following dividend relevance theory or dividend irrelevance theory.

YEAR (1) 2006 2007 2008 2009 2010

CASH DIVIDEND PER SHARE (2) 23.50 25.00 22.00 22.00 22.00

EPS (3) 20.75 23.75 32.85 32.85 39.76

DIVIDEND PAY OUT RATIO (4)= (2)/(3) 113.25% 106.26% 66.97% 66.97% 55.33%

Table 4: Dividend Payout ratio for last 5 years

Interpretation:
From the above table, we can see that the dividend payout ratio is decreasing each year. This is due to the increase in Cash Dividend is not as much as the increase in EPS. This indicates that Bata Shoe is trying to retain its earning for future expansion needs.

b. Dividend payout & Retention ratio

YEAR 2006 Dividend payout ratio 113.25% Retention ration (1payout ratio) 0%

2007 2008 2009 2010

106.26% 66.97% 66.97% 55.33%

0% 33.03% 33.03% 44.67%

Table 5: Dividend Payout and retention ratio for last 5 years

Interpretation:
In 2006 & 2007 retention ratio was 0 (zero), but Bata shoe company retained 33.03 % of their earning in 2008 & 2009 consecutively. However, they raised the portion of their retained earnings in 2010 and that was 44.67%, which shows us they are now following dividend irrelevance theory for their future growth.

c. Stock Dividend
After analyzing % Dividend of the last 5 years, we found out that Bata Shoe had not declared any Stock Dividend to its shareholders. A stock dividend is paid when a company needs to preserve funds to finance rapid growth. Since, Bata is an established firm; it has numerous sources for funding. So, it does not required to use Stock Dividend instead of Cash dividend. This could send a positive signal to investors thinking that Bata has enough financing power for future growth, which we can see by observing the increase in its share price for the last 5 years.

Year 2006 2007 2008 2009 2010

% Dividend 235.00 250.00 220.00 220.00 250.00

Stock Price in DSE (TK) 121.4 223.6 320.70 528.30

648.00

Table 6: Percentage of Dividend Payments

Interpretation:

From the above table, we could see that the rates at which Bata Shoe is offering Cash Dividend to its shareholders is quite attractive. This activity can be attributed to the cause that Bata Shoe is trying to attract more investors to invest in Bata Shoe. For this reason, they are trying to give a positive signal to the stock market through high percentage of dividend payments. We can say that Bata has been able to attract more investors just by looking at its yearly increase in stock price.

d. Relation between Dividend Rate and Market Price of Stock

The Chart given below depicts that market price was low when rate of dividend was lower in 2006. Then the increasing rates of dividend results gradually increase of market price. Highest the market price growth rate occur from 2007 to 2010. At this time it has reduced payout ratio substantially. Here we can comment according to dividend irrelevance theory as it says dividend should be paid whatever is left after meeting all available investment decision. In last two years firm follow dividend irrelevance theory and was able to increase shareholders value.

Figure 3: Relationship between Dividend and Share Price

Interpretation:
We can see from the above line graph that the price of Bata Shoe stock is increasing each year as the % of dividend payments is quite stable.

e. A comparison of year end P/E ratio for 5 years

Year 2005 2006 2007 2008 2009 2010 Year End P/E 8.22 6.00 9.42 9.76 16.08 16.46 % Dividend 120.00 235.00 250.00 220.00 220.00 250.00 % Dividend Yield 8.06 19.36 11.18 6.86 4.16 3.83

Table 7: P/E ratio for 5 years

Interpretation:
It is seen that year end P/E ratio has been increasing in 5 years which is a good sign for the future growth and prospect of the company, which will encourage the investors for investing in the company.

Findings
The findings of the study are as follows.

During 2008 to 2010 Bata Shoe Company paid on an average 63.09% of their net income as dividend where in 2006 & 2007 those were 113.25% and 106% respectively. That is more than their net income. In that year firm finance this extra dividend amount from their retained earnings. According to our theory we can assume that for reducing dividend payout ratio the stock price of Bata Shoe Company may fall. But the management team was able to convince the stockholder that they cut their payout for increasing growth and running recession. For this reason their stock price goes up. Clientele effect means the tendency of a firm to attract a set of investors who like its dividend policy .If the large number of investors of the particular company prefer high dividend then company must pay more dividends to the investors. On the other hand, if large number of investors of the particular company do not prefer high amount of dividend then company must retain most of their earnings inside the organization. I n c a s e o f B a t a S h o e C o m p a n y m o s t o f t h e i n v e s t o r s p r e f e r m o r e d i v i d e n d s because the company has small number of wealthy investors. The company believes that the investors are irrational and they like bird-in the-hand theory but after a certain payout it started to follow dividend irrelevance theory. In last five years they did not pay any stock dividend. The analysis shows that dividend was not stable over time.

In the year 2008 and 2009 the firm used the residual dividend model to set payout ratio at a level that will permit the firm to meet its Financing requirements with retained earnings. It is not following any particular dividend policy. As it is paying varying amount of increasing dividend rate.

Recommendation
Bata should continue to follow dividend irrelevance theory for their future growth. They should follow any particular dividend policy so that investors can assume their expected return on the basis of their preference (Short term or Long term).

Bata Shoe is currently trading at 12.5 P/E. With a BDT 542.57 million in 2010 earnings and BDT 96.57 2010 Net Asset Value per Share, Current price of share is BDT 526.4. So it can easily be said that the dividend policy adopted by Bata Bangladesh is effective enough. They usually pay cash dividend instead of stock dividend which satisfy its investors who want instant income or gain.

Appendix
o o o

http://www.batabd.com/ http://www.dsebd.org/displayCompany.php?name=BATASHOE Ahsan, A 2008, Security price relation to dividend announcement: evidence from Dhaka stock exchange Ltd. viewed 18 July 2011,

http://www.bdresearch.org/home.