Ngwoke Ogechukwu Maria

International Journal of Advanced Research in ISSN: 2278-6236
Management and Social Sciences Impact Factor: 7.065
EFFECT OF DIVIDEND POLICY ON FINANCIAL PERFORMANCE OF

MANUFACTURING FIRMS IN NIGERIA
NGWOKE OGECHUKWU MARIA, Department of Accounting Godfrey Okoye

University Enugu
ABSTRACT: This paper examined the effect of dividend policy on financial performance of
manufacturing firms in Nigeria. The effect of dividend policy on firm’s performance has been a
really big controversial issues among scholars in financial management. As many factors affect
the performance of firms and dividend policy poses as one of those factors. The study had two (2)
specific objectives, two (2) research questions and two (2) hypotheses. The study had a population
of 31 manufacturing firms under the consumer and industrial goods segment quoted in Nigeria
Stock Exchange. Judgmental sampling technique was employed to arrive at our sample size of five
(5) firms which included Cadbury Nigeria PLC, Nigerian Breweries PLC, Dangote Cement PLC,
CAP PLC and PZ Cusson Nigeria PLC. Secondary panel data were pooled from the audited
financial statements of these companies ranging from the period of 2015-2018. Regression
analysis were carried out on the data with the aid of E-views package. The result of the data
analysis showed that dividend per share, and dividend payout ratio exert a positive but
insignificant effect on return on Asset. The study therefore concluded that dividend policy has no
significant effect on financial performance of manufacturing firms in Nigeria. One of the
recommendations of this study is that dividend payout ratio should be drastically reduced as to
ensure that a major part of the earnings of the company is not paid out as dividends but rather
ploughed back into the firms to be reinvested or as part of the cash reserves.
KEYWORDS: Divided yield, Dividend payout ratio, Return on Asset.
Vol. 10 | No. 9 | July 2021 www.garph.co.uk IJARMSS | 38

INTRODUCTION
A company’s dividend policy dedicates the amount of dividends paid by the company to its
shareholders and the frequency with which the dividends are paid out. When a company makes a
profit, they need to make a decision on what to do with it. They can either retain the profits in the
company (retained earnings on the balance sheet), or they can distribute the money to the
shareholders in the form of dividends.
Dividend decision are important because they determine what portion of a firm’s profits is to be
distributed to investors and what portion is to be retained by the firms for further investment
(Ross, Westerfield & Jaffe, 2002).
The financial manager has to come up with dividend policy that will be beneficial to both the firm
and the shareholder.The objective of dividend policy should be to maximize the shareholder's
return so that the value of investment is maximized (Akinsulire, 2011).
There has been variety of opinion exist on the dividend policy issue as to whether claims on
dividends are relevant.The patterns of corporate dividend policies differ over time and across
countries, especially between manufacturing firms in developed and emerging economies (Amidu,
2007). It has been observed that dividend payout ratios in the developing countries were only about
two thirds of that of developed countries (Amidu, 2007).
Statement of the Problem

The effect of dividend policy on firm’s performance has been a really big contentious issues among
scholars in financial management. As many factors affect the performance of firms and dividend
policy poses as one of those factors. Dividend policy serves as a mechanism for control of
managerial opportunism. Regardless of the numerous empirical researches the controversy
between dividend policy and financial performance remains unresolved.
Due to lack of transparency and poor corporate governance, it is quite difficult for researchers to
determine the effect of dividend policy on the financial performance of Nigerian firms.
More so the position of Eyigege (2015) that Nigerian manufacturing companies had hither-to
recorded unstable trend in the payment of dividend to their shareholder, supporting an observation
that Nigerian manufacturing sector had not been consistent in dividend distribution over time,
brought to mind the possibility of the inconsistencies in dividend payment to disrupt the true nature
of the effect of dividend policy on financial performance of manufacturing firms observed by

previous studies.
In Nigeria most studies have focused on the relationship between dividend policy and share price
of the firm without considering profitability. The macroeconomic reforms over the years have the
objective of repositioning the Nigerian business environment to attract investors and maximize
shareholders wealth. This poses a problem which examination of effect of dividend policy can be
helpful in tackling the macroeconomic reforms. All these shows necessity to examine the effect of
dividend policy on the financial performance of manufacturing firms in Nigeria.
Objectives of the Study
The main objective of this study is to examine the effect of dividend policy on the financial
performance of manufacturing firms in Nigeria. The specific objectives include;
1. To examine the effect of dividend yield on returns on asset.
2. To determine the effect of dividend pay-out ratio on returns on asset.
Research Questions
This study seeks to answer the following question
1. How does dividend yield affect returns on asset?
2. How does dividend pay-out ratio affect returns on asset?
Research Hypotheses
HO1. Dividend yield has no significant effect on return on asset of manufacturing firms in Nigeria.
HO2. Dividend payout ratio has no significant effect on return on asset of manufacturing firms in
Nigeria
Significance of the Study
The findings of this study will be beneficial to a lot of people namely: financial managers,
investors, manufacturing firms, and future researchers.
Scope of the Study
This study covers only five (5) manufacturing firms in Nigeria registered with the Nigerian Stock
Exchange. These firms were randomly selected. These firms for this study include; Cadbury
Nigeria PLC, Nigerian Breweries PLC, Dangote Cement PLC, CAP PLC and PZ Cusson Nigeria
PLC. This study covered the four (4) years (2015-2018) audited statements of manufacturing firms
in Nigeria.

LITERATURE REVIEW
Conceptual Frame work
Dividend Policy
Nwude (2003) defines dividend policy as the guiding principle for determining the portion of a
company's net profit after taxes to be paid out to the residual shareholders as a dividend during a
particular financial year. He said that the purpose of dividend policy should be maximize
shareholders wealth which is dependent on both current dividends and capital gains.
Banerjee (2012) describes dividend policy as one that comprises one the major decision areas of
financial management. He stated that the ultimate choice would however, depend on the effect of
the decision on maximization of the value of the firm or that of its shares. Financial managers are
concerned with how our long-term decisions affects the value of common stock and dividend
decision is clearly an integral part of that concern, and it is important in considering the effect of
dividends to be aware which trade-offs are explicitly or implicitly being made.
There are four broad dividend policies in practice including residual payment policy, stable
predictive dividend policy, Constant payout ratio policy, Low plus extra or bonus dividend policy
(Yusuf, 2015)
Types of Dividend Policy
1. Stable Dividend Policy:
This is a policy of dividend payment that remains unchanged over the years. For instance, if a
company pays a fixed dividend today and follows the same dividend pattern in future years in
respective of the fluctuation of its earnings. It is also referred to as Regular payment of fixed
dividend rate.
2. Constant/fixed dividend per share:
This policy involves the company paying regularly a particular fixed amount of dividend per share
irrespective of the level of the company earnings, but does not mean that management will
forever remain in a fixed pattern of dividend throughout the life time of the company. This type
of dividend policy is usually good for persons and institutions that depend upon the dividend
income for their daily needs (Shukla, 2011).

3. Constant payout ratio:

This policy involves the company setting aside a specific percentage of the profit for dividend
while the balance is transferred to reserve. The payout ratio for dividend under this policy is usually
a fixed percentage of the net earnings every year. No dividend is paid when the company
experience loss. For instance, a company may choose a 60 percent payout ratio, which implies a
60 percent of net earnings of the company will be paid as dividend and 40 percent remaining will
be transferred to Reserve. Generally, most companies prefer this policy because it shows the ability
of the company to pay dividends, but the opposite is the case of the shareholders, because the
policy will cause fluctuation in their returns especial in period when the company makes huge loss.
4. Policy of No Immediate Dividend:
The policy involves the Management avoiding any payment of dividend in the beginning of its
business life because, it requires substantial fund for its expansion and rapid growth or because
they may be experiencing financial difficulties. It also involves management providing reasonable
explanation that can reduce any misunderstanding about the financial position of the company
which may exit among its shareholders, and also, problem with the share price which may arise as
a result of non-payment of dividend for a long time. It is also advisable that the company should
arrange to issue bonus share from its reserve or split its shares into small amount so that the future
rate of dividend can be regained in a faster way. (Shukla, 2011).
5. Policy of Irregular Dividend:
When the firm refuses to pay dividend regularly, we can call this an irregular dividend policy. It
a policy with an unstable dividend payment pattern and the changes are often reflection of the
amount of earning generated by company every year. It is majorly based on management belief
that dividend is only worth paying when earning and liquidity of the company has the capability
to do so. Firm having unstable dividend policy are usually involved with sale of Luxurious goods
and Services.
6. Policy of Regular Dividend plus Extra Dividend:
This is common in firms with cyclical earning and limited growth opportunities. The process
under this method involves declaring extra dividend in good Earning years. But Shareholder, are
made to understand that the designation ‘extra ‘only become relevant when the company make

extra profit which may not continue in the future. However, when the earning of the coming have
permanently increased, the word extra can be merged with the word regular and thus leading to a
surge in amount of dividend paid.
Dividend and Its Classification

Dividend Yield
Dividend yield can be described as profitability indicator shown as a cash dividend per share for
common stocks divided by the per share market value. It can also be simply determined as dividend
per share divided by the market value per share.
Dividend Payout Ratio
Dividend payout has been described by Ramadan (2013) as the ratio of total cash dividend
distributable to common shareholders over the available net income for the shareholders.
Investopedia defines dividend payout ratio as the percentage of earnings paid to shareholders in
dividends. The amount that is not paid to shareholders is retained by the company to pay off debt
or reinvest in core operations. It is sometimes simply referred to as the payout ratio.
The dividend payout ratio provides an indication of how much money a company is returning to
shareholders versus how much it is keeping on hand reinvest in growth, pay off debt, or add to
cash reserves (retained earnings). DPR for this study will be calculated by dividing dividend paid
by net income, that is
Dividend paid
Net income
Theoretical Framework
Irrelevance Theory
The dividend irrelevance theory was propounded by Miller and Modigliani in 1961. This school
of thought holds that a firm's dividend policy has no effect either on the value of its stock or on its
or on its cost of capital. Miller and Modigliani (1961) model, the M-M model provided the most
articulated argument on this school of thought. The M-M hypothesis argued that under a perfect
market, tax-free, flotation cost-free and hitch-free share sales situations shareholders are
indifferent between dividends and capitals and the value of a company is determined by the earning
power of its assets and investments. They argued that if a company with investment opportunities

decides to pay a dividend so that retained earnings are insufficient to finance all the investment;
obtaining additional funds from outside sources at no transaction costs will make up the shortfall
in funds.
The Bird- In- The- hand Argument
This argument was put forward by Kirshman (1933) this way: ‘of two stocks with identical
earnings record and prospects the one paying a large dividend than the other would undoubtedly
command a higher price merely because stockholders prefer present to future values.
Lintner (1956) and Gordon (1959) argued here that dividend is preferred to capital gains due to
their certainty. They argued that investors will prefer to receive a certain dividend payment now
rather than leaving the equivalent amount in an investment whose future value is uncertain. Current
dividends, on this analysis, represent a more reliable return than future capital gains. In relation to
the above, this theory underpinning the variation of dividend sustainability proxies with dividend
payout ratio on performance of manufacturing firms in Nigeria.
This research work centers on two theories which are irrelevance theory and bird in hand theory.
These theories are the main theories of this research work is because the two major schools of
thought on dividend policy emphasizes that dividend is irrelevant which is in agreement with
Irrelevance theory, while the other school of thought on dividend policy emphasizes that
dividend is relevant which is in agreement with the Bird in Hand theory.
Empirical Review
Simon-Oke and Ologunwa (2016) conducted a study evaluating the effect of dividend policy
corporate firms in Nigeria. Time series data were generated from secondary sources through the
publication of Nigeria Stock Exchange and financial statement of the company under review. This
study employed Ordinary Least Square (OLS) multiple regression analytical techniques. The
findings revealed that dividend policy in Nigeria still remains a function of strong dynamic
variables as Return on Investment, Earnings per Share and Dividend per Share.
Akinleye and Ademiloye (2018) examined the impact of dividend policy on performance of quoted
manufacturing firms in Nigeria with the focus of five (5) manufacturing firms. The study made
use of panel data estimation techniques. The result revealed that dividend per share exert an
insignificant positive impact on firm’s performance measured in terms of return of capital
employed and that of the impact of dividend payout on firm’s performance is negative and

insignificant. Therefore, dividend policy does not play on significant role in the determination and
or adjustment of performance of manufacturing firms in Nigeria.
Williams and Duro (2017) investigated the impact of dividend policy on performance of quoted
companies in a developing economy. The sample size of this study was twenty (20) quoted firms
in a developing nation actively operating between 2005 to 2016 in the stock market. Regression
was used for data analysis. It was found out that there is a positive relation between dividend policy
and return on equity (ROE) and dividend per share (DPS).
Narang (2018) investigated the relationship between the financial performance and dividend
payout among listed firms in the National Stock Exchange. The annual reports for the period 2012-
2017 were utilized as the main sources of the data collection for 20 sampled firms. Correlation was
the technique for data analysis. The proxies for dividend policy which were earnings per share,
price earnings ratio and dividend payout were not significant correlated with return on equity and
return on asset which were the proxies for firms’ performance.
METHODOLOGY
The research design adopted is the ex post facto. The ex post facto design was used because the
data for the study are already available in the public domain. The geographical location of this
study is Nigeria. The firms for the study were selected from the manufacturing sub-sector of the
Nigeria Stock Exchange. Secondary data were sourced from the published audited financial
statement and accounts of sampled quoted firms. It is a time series data ranging from the year
2015-2018.
3.8.1 Model Specification
The model specification adopted in this study is based on the Ordinary Least Square (OLS)
multiple regression analysis which combines both the dependent and independent variable in order
to establish the relationship among the variable of dividend policy and manufacturing firm’s
financial performance in Nigeria.
Model specified in the study proxy’s dividend policy variable by Dividend Yield (DY) and
Dividend Payout Ratio (DPR) as specific independent variables, with firm's financial performance
measured in term of Return on Asset (ROA). Hence the model to be adopted for this study is
specified in the linear form below;
ROA t = βo + β1DYt= + β2 DPRt + µ

ROA- Return on Asset

DY- Dividend Yield
DPR- Dividend Payout Ratio
βo, β1, β2 and β3- Parameter estimates
µ- Stochastic error term
t- time series
DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation
The data for ROA proxied as our dependent variable (Y) for financial performance with DY and
DPR proxied as our independent variable (X) for dividend decisions. Data on these variables are
presented in Table 1 below;
Table 1: Computed ROA, DY and DPR for the sampled companies
Firms YEAR ROA DY DPR
Cadbury 2015 0.056 3.794 0.384
Cadbury 2016 -0.02 15.52 -2.665
Cadbury 2017 0.012 1.889 0.794
Cadbury 2018 0.044 2.87 0.22
Nig brew. 2015 0.153 0.002 0.227
Nig brew. 2016 0.104 0.002 0.32
NIg brew. 2017 0.122 1.489 0.172
Nig brew. 2018 0.076 2.307 0.27
Dangote 2015 0.169 7.692 0.543
Dangote 2016 0.118 9.196 0.753
Dangote 2017 0.174 7.391 0.5
Dangote 2018 0.1778 11.032 0.592
CAP 2015 0.754 5.207 0.267
CAP 2016 0.467 4.65 0.227
CAP 2017 0.435 6.803 0.371
CAP 2018 0.412 8.307 0.39
PZ Cusson 2015 0.097 5.624 0.488
PZ Cusson 2016 0.042 5.582 0.762
PZ Cusson 2017 0.053 5.257 0.406
PZ Cusson 2018 0.026 4.508 0.846
Source: Author’s computation, 2020

Analysis of Data
We used Ordinary Least Square multiple regression analysis for data analysis with the aid of E-
Views 10 software package.
Regression Model 1
This model has ROA as its dependent variable (Y) and DY as its independent variable (X)
Table 2: Model 1 regression analysis
Dependent Variable: ROI
Method: Least Squares
Date: 06/03/19 Time: 21:18
Sample: 1 20
Included observations: 20
Variable Coefficient Std. Error t-Statistic Prob.
C 0.158582 0.079675 1.990373 0.0620

DY 0.002751 0.012084 0.227624 0.8225
R-squared 0.002870 Mean dependent var 0.173590

Adjusted R-squared -0.052526 S.D. dependent var 0.194995
S.E. of regression 0.200050 Akaike info criterion -0.285855
Sum squared resid 0.720364 Schwarz criterion -0.186281
Log likelihood 4.858545 Hannan-Quinn criter. -0.266417
F-statistic 0.051813 Durbin-Watson stat 0.807510
Prob(F-statistic) 0.822504
Source: Author’s computation, 2020

From the result the estimated coefficient value of C and DY are 0.158582 and 0.002751
respectively. The constant term is estimated at 0.158582 which means that the model passes
through the point 0.158582 mechanically, if the independent variables are zero, DY would be
0.158582.
The estimated coefficient for DY is 0.002751 which implies that if other variables affect ROA are
held constant, a unit increase in DY will lead to a 0.002751 increase in ROA on the manufacturing
companies
The result also shows a R-squared of 0.002870 which is about 00.28%. as earlier explained the
purpose of the R2, therefore, since it is only 00.28%, it implies that about 00.28% change in the
dependent variable which is the ROA is explained by the independent variable being DY. The R2

indicates a weak positive linear relation between ROA and DY. The regression analysis also
indicates a standard error of 0.200050.
Regression Model 3
This model has ROA as its dependent variable (Y) and DPR as its independent variable (X)
Table 3: Model 2 regression analysis
Dependent Variable: ROI
Method: Least Squares
Date: 06/03/19 Time: 21:13
Sample: 1 20
Included observations: 20
Variable Coefficient Std. Error t-Statistic Prob.
C 0.164525 0.048163 3.416019 0.0031

DPR 0.030902 0.062811 0.491985 0.6287
R-squared 0.013269 Mean dependent var 0.173590

Adjusted R-squared -0.041550 S.D. dependent var 0.194995
S.E. of regression 0.199005 Akaike info criterion -0.296338
Sum squared resid 0.712851 Schwarz criterion -0.196765
Log likelihood 4.963378 Hannan-Quinn criter. -0.276900
F-statistic 0.242050 Durbin-Watson stat 0.806496
Prob(F-statistic) 0.628676
Source: Author’s computation, 2020.

From the result the estimated coefficient value of C and DPR are 0.164525 and 0.030902
respectively. The constant term is estimated at 0.164525 which means that the model passes
through the point 0.164525 mechanically, if the independent variables are zero, DPR would be
0.164525.
The estimated coefficient for DPR is 0.030902 which implies that if other variables affect ROA
are held constant, a unit increase in DPR will lead to a 0.030902 increase in ROA on the
manufacturing companies.
The result also shows a R-squared of 0.013269 which is about 01.32%. therefore, since it is only
01.32%, it implies that about 01.32% change in the dependent variable which is the ROA is
explained by the independent variable being DPR. The R2 indicates a weak positive linear relation
between ROA and DPR. The regression analysis also indicates a standard error of 0.712851.

Testing the Research Hypotheses

Test of Hypothesis One
HO1. Dividend yield has no significant effect on return on investment of manufacturing firms in
Nigeria.
Table 3 showed a t-ratio value of 0.227624 with a calculated p-value of 0.8225. The calculated p-
value is greater than our level of significance of 5% i.e. 0.05, indicating that the regression
coefficients are equal to zero. The null hypothesis HO1 is accepted. We therefore conclude that
DY has no significant effect on ROA of manufacturing firms in Nigeria.
Test of Hypothesis Two

HO2. Dividend payout ratio has no significant effect on return on investment of manufacturing
firms in Nigeria.
Table 4 showed a t-ratio value of 0.491985 with a calculated p-value of 0.6287. The calculated p-
value is greater than our level of significance of 5% i.e. 0.05, indicating that the regression
coefficients are equal to zero. The null hypothesis HO2 is accepted. We therefore conclude that
DPR has no significant effect on ROA of manufacturing firms in Nigeria.
Discussion of Findings
The study discovered that dividend yield has positive and insignificant effect on financial
performance of manufacturing firms in Nigeria due to the fact that the t-statistics was 0.227624
with a p-value of 0.8225 which was greater than our 0.05 level of significance. This discovery is
in agreement with the findings of Akani and Sweneme (2016) who found out that there a negative
and insignificant relationship between dividend yield and return on investment and net profit
margin.
The study finally discovered that dividend payout ratio has positive and insignificant effect on
financial performance of manufacturing firms in Nigeria due to the fact that the t-statistics was
0.491985 with a p-value of 0.6287 which was greater than our 0.05 level of significance. This
discovery is in agreement with the statement of Narang (2018) who found out that dividend payout
ratio was not significantly correlated with return on equity and return on asset, the researcher’s
proxy for financial performance. It was also in agreement to Akinleye and Ademiloye (2018) who

found out that dividend payout ratio is negative and insignificant on ROCE, the researchers’ proxy
for financial performance.
Summary of Findings
The findings of this study are summarized below
1. Dividend yield has no significant effect on return on asset.
2. The study also revealed that dividend payout ratio has no significant effect on return on asset.
Conclusion
This study concludes that dividend yield and dividend payout ratio have insignificant effect in
explaining return on asset.
Recommendation
1) Manufacturing firms in Nigeria should improve their dividend yield as it is used by
investors to show how their investment in stock is generating either cash flows in the form
of dividends or increases in asset value by stock appreciation.
2) Adoption of a dividend policy by the manufacturing companies particularly in Nigeria
should be strictly considered based on the unique circumstances of the companies and not
necessarily based on age long traditional factors often formulated by academics.
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manufacturing firms in Nigeria. International Journal of Scientific and Engineering
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Akinyomi, O. J. (2013). Managers’ perception of factors influencing dividend decisions in
Nigeria. International Journal of Advances in Management and Economics, 2(2), 135-140.
Amidu, M. (2007). How does dividend policy affect performance of the firm on Ghana stock
Exchange? Investment Management and Financial Innovations, 4(2), 104 – 112.
Banerjee, B. (2012). Financial policy and management accounting (8th ed). Connaught circus,
New Delhi: PHI learning privat ltd.

Eyigege, A. I. (2015). Dividend payout of manufacturing firms quoted on the Nigerian stock
exchange and its impact on financial performance. International Journal of Advanced
Research in Engineering & Management, 1(9), 60-86.
Investopedia http://www.investopedia.com
Kirshman, J. E. (1933). Principles of investment. McGraw Hill.
Lintner, J. (1956). Optimal Dividends and Corporate Growth under Certainty. The Quarterly
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Miller, M. H. & Rock, K. (1985). Dividend policy under asymmetric information. The Journal of
Finance, 4 https://doi.org/10.111/j.1540-6261.1985tb02362.x.
Miller, M., & Modigliani, F. (1961) Dividend policy, growth, and the valuation of shares, Journal
of Business; 34, 411-433.
Narang, M. (2018). Dividend policy and firms’ performance: A study of listed firms on National
stock exchange. International Journal of Advanced Educational Research, 3, 286-289.
Nwude, C. (2003). Basic principles of financial management, a second course. Enugu Nigeria:
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Sciences, 3(2), 15–22. Retrieved From: http://papers.ssrn.com
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2002). Corporate Finance. London: Mcgraw-Hill
Companies.
Shukla, O. (2011): Conceptual framework of dividend. Retrieved From:
http://shodhganga.inflibnet.ac.in/bitstream/10603/3313/8/08_chapter%202.pdf.
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International Journal of Advanced Research in ISSN: 2278-6236

Management and Social Sciences Impact Factor: 7.065

EFFECT OF DIVIDEND POLICY ON FINANCIAL PERFORMANCE OF

NGWOKE OGECHUKWU MARIA, Department of Accounting Godfrey Okoye

Vol. 10 | No. 9 | July 2021 www.garph.co.uk IJARMSS | 38

Statement of the Problem

of the effect of dividend policy on financial performance of manufacturing firms observed by

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3. Constant payout ratio:

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Dividend and Its Classification

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ROA- Return on Asset

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Variable Coefficient Std. Error t-Statistic Prob.

C 0.158582 0.079675 1.990373 0.0620

R-squared 0.002870 Mean dependent var 0.173590

Source: Author’s computation, 2020

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Variable Coefficient Std. Error t-Statistic Prob.

C 0.164525 0.048163 3.416019 0.0031

R-squared 0.013269 Mean dependent var 0.173590

Source: Author’s computation, 2020.

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Testing the Research Hypotheses

Test of Hypothesis Two

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