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Dividend Policy
SQUARE TEXTILES LTD.

Company Overview
• The name of the company is Square Textiles Ltd. It incorporated as a public limited company in the year of 1994 • It is listed in DSE in 2002 with authorized capital of tk.1000 million with paid-up capital of 342.89 million. • Current Shares Outstanding is 34.29 millions

Vision • As means to the well being of the investors, stakeholders, employees and members of the society at large by creating new wealth in the form of goods and services Mission • Our mission is the pole star of our vision for maximization of production of quality life saving products and services strictly on ethical and moral standards at minimum costs to the society Corporate Governance • Good Corporate Governance is key to successful sustenance. The Corporate Governance of STL as follows: a) Top Management: (i) Board of Directors (ii) The Top Management b) Executive Management

Dividend Policy
Three key issues in Dividend policy: • What fraction of earnings should be distributed? • Should the distribution be in the form of cash or stock repurchases? • Should the firm maintain a steady, stable dividend growth rate?

Dividend Theories
There are three theories of dividends related to Investors • Miller and Modigliani developed the dividend irrelevance theory. • The bird-in-the-hand theory holds that the firm’s value will be maximized by a high dividend payment ratio. • The tax preference theory states investors prefer to have companies retain earnings rather than pay them out as dividends.

Dividend Theories
The company believes that the investors like bird-in-the-hand theory: the more the payout ratio the more the value of the firm but after a certain payout it follows contrary.

• The dividend payout rate has historically been increasing. • Price of the stock increases up to certain level of pay-out ratio (40%) increase. • After then it starts to decline as payout increases.

Years 2002 2003 2004 2005 2006

Po 26.9 43.1 138.3 81.7 75.6

Pay-out 32% 40% 40% 42.50% 45%

Types of dividends offered by the Company
Considering investors Preference it offers two types of dividends a. Cash Dividend; dividend paid in cash. b. Stock dividend; dividend paid in additional shares rather than in cash.

Cash Dividend Vs. Stock dividend
• Although the company paid cash dividend over last seven years, • Both type of dividends paid in the last four years of operation
Dividend Dividend Type Declared per share (Cash) 2000 2001 2002 2003 2004 2005 2006 10.00 3.00 3.20 3.00 3.00 3.00 3.00 Dividend Declared (stock) 10:1 10:1 08:1 100:15 Dividend Declar ed % 10 30 32 40 40 42.50 45

Source: Annual Report 2000-2006

Cash dividends: A closer Look FY2006
• • Dividends are declared in Annual General Meeting Notice. In view of earning per share of Tk. 10.17 (2006) and the available reserve surplus, the Board of directors has recommended cash dividend of Tk. 3 per share of Tk. 10 each. • The Board also recommended for declaration of stock dividend (Bonus Share) at the rate of 15(Fifteen) shares for every 100(Hundred) shares held • In sum, effective cash dividend is 41%.

Stock dividend
• Usage of stock dividend is a crucial company dividend policy. Stock dividends used on a regular basis will keep the stock price more or less constrained. • For example, if a firm’s earnings rises by 10 percent per year, its stock price would tend to go up at about the same rate and it would soon be outside the trading range. • A 10 percent annual stock dividend would maintain the stock price within the optimal trading range.

Stock dividend: A closer look
• • • When the stock price is lowest (tk.26.90) there was no stock dividend (-). As the stock prices increased in the market (DSE and CSE), 10 percent stock dividend was made by the year 2003 and 2004. Further it increased to 12.5 percent in 2005 and to 15 percent in 2006.
Type Dividend Declared (stock) 10:1 10:1 08:1 100:15 Stock Price/ share DSE 26.90 43.10 138.30 81.70 75.60 Stock Price/ share CSE 26.90 43.10 139.20 81.50 75.20

The reason is to make the stock affordable to trade. The stock prices in Dhaka Stock Exchange and in Chittagong Stock Exchange were roughly equal over the years under observation

2000 2001 2002 2003 2004 2005 2006

Source: Annual Report 2000-2006

Dividend Stability (Key Issue)
• Most observes believe that dividend stability is desirable and that investors prefer stocks that pay more predictable dividends to stocks that pay the same average amount of dividends but in a more erratic manner. This means that the cost of equity will be minimized and the stock price maximized if a firm stabilizes its dividends as much as possible.
T a ka 25 20 15 10 5 0 2002 Ye a r 2006 CFPS EPS DPS

E a rn in g s , C a s h F lo w s , & D iv id e n d s

2003

2004

2005

DPS, EPS, MP, & g Components: Comparison Over Year
Particulars/ Yrs FV Per share DPS MPPS (DSE) Dividends Yield Pay-out RR ROE Growth rate (g) Ks 2002 10 3.2 26.9 11.90% 32% 68% 7.12% 4.84% 16.74% 2003 10 3 43.1 6.96% 40% 60% 14.11% 8.47% 15.43% 2004 10 3 138.3 2.17% 40% 60% 15.38% 9.23% 11.40% 2005 10 3 81.7 3.67% 42.50% 58% 17.85% 10.26% 13.94% 2006 10 3 75.6 3.97% 45% 55% 21.24% 11.68% 15.65%

The graph depicts that from the year 2002 to 2003, the payout ratio was increased and after that with a slight decrease in 2004, it was increasing for the rest of the years. The graph depicts that from the year 2002 to 2003, the payout ratio was increased and after that with a slight decrease in 2004, it was increasing for the rest of the years. The graph represents the increasing trend of the G over the years from 2002 to 2006.

Plough Back R atio
80% 60% 40% 20% 0% 2 002 Y ear 2003 200 4 2005 2006 R R

Pay-out Ratio
50% 40% 30% 20% 10% 0% 2002

Pay-out

Y ear 2003 2004 2005 2006

G rowth R ate 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%

g 11.68%

8.47%

9.23%

10.26%

4.84%

2002

2003

2004

2005

2006

Y ear

ROE, RR & g
80% 60% 40% 20% 0% 2002 Year 2003 2004 2005 2006 RR ROE g

This curve shows that RR decreased throughout the year from 2002 to 2006 and the ROE increased as well. And the g also increased even though the RR decreased as the ROE’s constantly increasing offset the effect of RR.

D ividends Y ield 20.00% 15.00% 10.00% 5.00% 0.00% 2002 2003 2004

g

K s

2005

2006

Y ear

This graph shows that the dividend yield decrease dramatically from the year 2002 to 2004 which brought down the Ke despite increasing trend in g and increased from 2004 to 2006 which raises Ke as g does

Proportion of Earnings Distribution
• The firm uses the residual dividend model to set the long run target payout ratio at a level that will permit the firm to meet its equity requirements with retained earning. Hence, DPS in 2000 was tk.10, but in 2001 it went down to tk.03 only, again it raised to tk.03.20 in 2002 and subsequently it went down to tk.03 in 2003 and henceforth, it is tk.03. No wonder that it could decrease or increase again if the profit changes. Besides, no stock dividend was paid from year 2000-2002 as shown in table no.01. Yr. 2000 2001 2002 2003 2004 2005 2006 DPS (Cash) 10.00 3.00 3.20 3.00 3.00 3.00 3.00

Proportion of Earnings Distribution
• On the other hand, the company maintains fixed cash dividend in the last four years (tk.3/share) and the extent of stock dividend varied significantly (10:1 in 200304, 8:1 in 2005, 100:15 in 2006) over those years, indicating the maintenance of optimal dividend policy and usage of residual dividend model. If a firm use residual dividend model, it pays dividends only if more earnings are available than are needed to support the optimal capital budget.

Yr.

Dividend (stock 10:1 10:1 08:1 100:15

Dividend Declared % 10 30 32 40 40 42.50 45

2000 2001 2002 2003 2004 2005 2006

Proportion of Earnings Distribution
Pay-out Ratio
50% 40% 30% 20% 10% 0% 2002 Y ear 2003 2004 2005 2006 Pay-out

• The graph depicts that from the year 2002 to 2003, the payout ratio was increased and after that with a slight decrease in 2004, it was increasing for the rest of the years.

•Comparison of Earning, Cash flow, and Dividend
• The graph depicts that in 2002, the earnings of the company was around 80 million and it increased in 2003 and for the rest of the years. However the dividend in 2002 was around 75 million which was almost the same amount of that year’s earnings. But in 2003, dividend was almost 210 million where as earnings was around 160 million.
E a rn in g s & D iv id e n d s in M illio n
M illio n 400 350 300 250 200 150 100 50 0 2002 D ivid e n d s in M illio n E a rn in g s in M illio n

2003

2004

2005

Y ear 2006

•This was the critical situation that the company had to face to keep the target payout ratio. From the the year 2004 to 2006, the DPS was relatively stable while the EPS was increasing

Dividend Pattern of STL
Tk aa 2 5 2 0 1 5 1 0 5 0 20 02 Ya er 20 06 CP FS ES P DS P

E r i g , C s Fo s & i i e d ann s a h l w , Dvd n s

20 03

20 04

20 05

Particulars/ Years Cash Flow/share Earnings/share Dividends/share

2002 16.24 2.38 3.2

2003 14.47 4.9 3

2004 8.8 5.79 3

2005 1.82 7.45 3

2006 19.45 10.17 3

DETERMINING OPTIMAL DIVIDEND POLICY
• If the company increases the payout ratio, this increase expected dividends. This increase in the numerator, taken alone, would cause the stock price to rise. • However, if expected dividends are raised, then less money will be available for reinvestment, that will cause the expected growth rate to decline, and that will tend to lower the stock’s price. • Thus, any change in payout policy will have two opposing effects. • Therefore, the firm’s optimal dividend policy must strike a balance between current dividends and future growth so as to maximize the stock price. • The same thing happens in the company by the year 2004 where stock price is maximum, growth rate is stable, and Ks and the dividend yield is minimum in the year.

Stock Price and Pay-out R atio
Stock Price 10 5 10 0 5 0 0 3 2% P o

OPTIMAL PAYOUT RATIO
Years Po Ks % 16.74 D/Po Pay-out % % 11.90 32 G % 4.84

4 0%

4 0% Payo R ut atio

42 0% .5

45 %

K s 2 .0 % 0 0 1 .0 % 5 0 1 .0 % 0 0 5 0% .0 0 0% .0 3% 2 4% 0 4% 0 42 0 .5 % 4% 5 K s

2002

26.9

D idend Yield iv 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00%
% % % % 32 40 40 .5 0 42 45 %

2003

43.1

15.43

6.96

40

8.47

D /Po

2004

138.3

11.4
13.94

2.17

40 40
42.50 45

9.23

G w R te ro th a
Percent

2005

81.7

3.67

10.3

2006

75.6

15.65

3.97

11.7

1 .0 % 4 0 1 .0 % 2 0 1 .0 % 0 0 8 0 .0 % 6 0 .0 % 4 0 .0 % 2 0 .0 % 0 0 .0 % 3% 2 4% 0 4% 0 4 .5 % 2 0

P o tR ay u atio 4% 5

• •

We know that the firm’s optimal dividend policy must strike a balance between current dividends and future growth so as to maximize the stock price. The same thing happens in the company by the year 2004 . The top graph shows that stock price increases as the payout ratio increases. The stock price reaches maximum point when the payout ratio is 40%. After that stock price declines as payout increases. The 2nd graph shows that cost of equity decreases as the payout ratio increases. The cost of equity reaches minimum point when the pay-out ratio is 40%. After that, cost of equity increases as payout increases. The 3nd graph shows that dividend yield decreases as the payout ratio increases. The dividend yield reaches minimum point when the pay-out ratio is 40%. After that, dividend yield increases as payout increases. The bottom graph shows that the growth rate increases decreasingly as the payout increases, and reaches inflection point at 40% payout. After that, dividend growth increases increasingly as payout increases. So it is evident that optimal payout ratio of the company is 40%.

Who Gets What? Dividends?
• • • • • • Only 10 people dominate the company and enjoy dividends. If tk.100 is paid as dividend tk.53.94 goes to the sponsors. General public = 28% foreign investors of 11%, finally local institutions 7%. The irony is that among 10 people, most of them are single family members. A closer look reveals that the poor or middle class segment of our society participates dividends least. There are 5,464 out of 5,772 share holders owns share less than 500 shares. 95 percent shares holders enjoy only 2.90% of dividend declared and paid. Only 2 people hold (as per BO account one person) 54.85% of all shares and enjoys dividends accordingly.

• •

Findings
• The Corporate Focus is to fulfill strategic objectives with emphasis on lowest possible cost • The company believes that the investors like bird-inthe-hand theory but after a certain payout it follows contrary-MM dividend irrelevance theory. • Although the company paid cash dividend over last seven years, it paid stock dividend along with cash dividend in the last four years. • Stock dividends are used to keep the stock price more or less constrained.

Findings
• The analysis shows that dividend was stable over time. • The firm uses the residual dividend model to set the long run target payout ratio at a level that will permit the firm to meet its equity requirements with retained earning. • The optimal payout ratio of the company is 40% at which stock price is maximum(Tk.138.3)and cost of equity is minimum(11.4%). • Currently its payout ratio is 45%. The stock price decreases substantially and the Cost of equity rises to about 16% from 11%

Findings
• Only 10 people dominate the company and enjoy dividends and most of them are single family members. • 95 percent shares holders enjoy only 2.90% of dividend declared and paid. Only one person enjoys 54.85% of Dividend • Finally, Our RMG sector is vulnerable to foreign diplomacy- as seen recently though labor unrest and invisible hand.

Recommendation
• Although the optimal payout ratio of the firm is 40%, its current payout rate is 45% which substantially increases its cost of equity and reduces it stock price. So the company should maintain the optimal payout rate of 40%. • On the other hand, most dividends go to few rich people of our society which is upward bias of the firm. If possible the bias should be curbed. • Our government should take necessary steps to reduce such kind of diplomatic moves by foreign competitors.

THE END

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