This study investigated dividend policy as a
strategic tool of financing in corporate organizations in Nigeria.
Specifically, it examined the nature of relationship between dividend payments
and the value of the firms.
The study employed secondary annual data, collected
from two selected commercial banks operating in Lagos State over a period of
twenty years from 1988 to 2008. The secondary annual data were sourced from
annual reports and statement of Accounts of the selected commercial banks and
the central Bank of Nigeria
(Various issues). The study employed ordinary Least
squares method to examine the effects of dividend policy on capital structure
of corporate organizations in Nigeria. Simple Regression Analysis was also
employed to analyze the relationship between dividend policy and capital
structure of the sample commercial banks.
The empirical results showed that there is a
relationship between earnings per share and dividend payout with co-efficient
values of 138.200 (∞t= 8.120, P<
0.05). Also, the results revealed that payout ratio has a positive relationship
with profit after tax with coefficient value of 30708.728 (∞t= 6.297, P< 0.05).
The study concludes that dividend policy decision is
not a decision of the board of directors alone. The shareholders should be
given recognition in "a policy like this because they are directly
affected by the policy.
1.1 Background of the Study
1.2 Statement of the problem
1.3 Research Questions
1.4 Objective of the study
1.5 Statement of Hypothesis
1.6 Methodology of the Study
1.7 Significance of the Study
1.8 Limitation and Scope of the Study
1.9 Definition of Terms
Concept of Dividend and Dividend
Forms of Dividend
2.3.1 Dividend Relevant Theory: Walter's Model
Criticism of Walter's Model
Dividend Relevant: Gordon's Model
Dividend and Uncertainty: The
Bird-In-The Hand Argument
Dividend Irrelevant Theory
Criticisms of M & M
Theory of Dividend Irrelevance
Implication of the Theories on
Practical Factors Determining
Concept of Capital Structure
Capital Structure Theories
Modigliani and Miller Approach to
Durand View on the Effect of Capital
Structure On Firm's Value and Cost Of Capital
Recent Theories on Optimal Capital
Empirical Tests of Dividend Theories
THREE RESEARCH METHODOLOGY
Variable and Data Sources
Re- statement of Research Hypothesis
Sources of Data
Model Estimation Technique.
Limitation of Methodology
AND ANALYSIS OF DATA
Empirical Result and Interpretation
Summary of Findings
The Implication of Findings
CONCLUSION AND RECOMMENDATIONS
CHAPTER - ONE
TO THE STUDY
The topic of dividend policy continues as one of the
most challenging and controversial issues in corporate finance and financial
economies. Research into dividend policy has, shown not only that a general
theory of dividend policy remains elusive, but also that corporate dividend
varies over time between firms.
For a firm, which encounters financial difficulties,
reliance is placed on retained earnings and accordingly results in lower payout
However, shareholders have been enthusiastic interest
in the outcome of their investments. These outcomes are expressed in terms of
earnings and capital gains.
These two ingredients are in turn affected by the quality
of policies made by the management team of the enterprises. Among the most
important decisions that management of an enterprise must take which has direct
bearing on firm’s continuity, earning potentials, investors' satisfaction and
share price gain is the decision to withhold or distribute net earnings as
retained profit or dividends.
Pandey (1999), stated firmly that "Dividend
policy is a decision by the financial manager whether the firm should
distribute all profit or retain them or to distribute a portion and retain the
balance. Payments made to stockholders from a firms earnings, whether those
earning were generated in the current period or in previous periods. Dividend
policy is an important aspect of corporate finance and dividends are major cash
outlays for many corporations.
Garrison (1999) defined dividend policy as payments
made to stockholders from a firm's earnings', whether those earnings were
generated in the current period or in the previous period. Dividend could also
be referred to as that part of the enterprise earning that is given to
shareholders as interest on' their investment. Also, it represents the
return to investors who put their money at risk in the company.
Company pays dividend to reward existing shareholders
and encourage others that are prospective shareholders to buy new issues of the
common stock at high price.
However, many seem obvious that a firm would always
want to give as much as possible to its shareholders by paying dividends. It
might seem equally obvious that a firm can always invest the money for its shareholders
instead of paying it out.
The heart of dividend policy question is should the firm payout money to its shareholders
or should the firm take the money and invest it for shareholders into the
Valuation is considered the heart of finance, understanding
what determines the value of a firm, and how to estimates that value seems to
be a prerequisite for making sensible decisions (Damodaran, 2006). Company
valuation is a delicate concoction of both science and art. The former takes
the shape of quantitative risk- return model, and latter, experience and
judgment on the part of the appraiser - intuitive elements that belong to the artistic
realm (Pereiro, 2002). In general, there are four approaches to valuation
(Damodaran, 2006). Quantitatively oriented valuation techniques include the
discounted cash flow based method (DCF) and the real options model. The
traditional fundamental valuation technique is the discounted' cash flow (DCF)
based method, which relies on the capital asset pricing (CAPM) to compute the
cost of capital. And attractive technique for valuing future opportunities is
the real options framework. This method is used when there is a reasonable
chance of reserving the rights of exploration for the investments undertaken
(Pereiro, 2002). A third model for valuation is based in relative valuation and
involves computing value multiples for a representative sample of comparable
companies or transactions similar to the target under appraisal
(Pereiro, 2002). Excess return models have their
roots in capital budgeting and the net present value rule with its widely used
variant, the Economic Value Added (EVA (R).
(R) is a registered trade
mark of stem steward & co. EV A (R) is a measure of the surplus value created by an
investment or a portfolio of investments. It is computed as the product of the
"excess return" made on an investment(s) and the capital invested in
that investments) (Damodaran, 2006).
Moreover, it has been discovered that the .dividend
policy of a firm always have short term or long term effect on the market price
of its shares. It shall be found out in the course of this research, the actual
relationship between the dividend payout and dividend policy of companies i.e
payout ratio of the firm is a percentage of dividends to earnings.
It is quite difficult to clearly identify the·
effects of payout on firm's valuation. The valuation of a firm is a reflection
of so many factors that the long run effect of payout is quite difficult to
separate. J.S. Kehinde (2001) viewed dividend policy as "the dividend
policy of a firm accounts for how a firm divides its income between retained
earnings and dividends. It states the policy measure of how much dividend to
the declared, in what form should the dividend be declared- either as a cash dividend
or as stock dividends. By dividend .policy the corporate organization, strike a
balance between current income to the shareholders and a future income.
Income can be retained and reinvested' into
available profitable investment opportunities. The retained earnings provide
the cheapest source of financing. This research is to examine empirically the dividend
policy of all quoted companies (banks) in Nigeria and to present evidence on what
determines corporate payout policy this market. In addition, it tends to
identify the impact of dividend policy on company valuation and the various approaches
to dividend payment to stakeholders as against retaining it for re-investment.
Maximization of shareholder's wealth appears to be
the cardinal objective of most firms. The value of wealth to the shareholders
is represented by the market price of the firm's common stock, which is tum is
a reflection of the firm's investment, financing and dividend decision.
Dividend policy is thus assumed to have an influence
on the value of firm's common stock and hence its value. Despite the above
statement, the impact of dividend policy, especially dividend payout on the
valuation of firm's common stock is still open to academic debate.
This study thus intends to empirically investigate
whether the dividend pay-out ratios of firms quoted in the Nigerian Stock
Exchange, influence the process at which the stocks of these firms are being
sold. Also to be examined empirically is the extent to which the received
theory about traditional determinants of dividend decisions of business firms
serves in explaining the dividend behaviour of Nigerian companies (Van-Home,
Both Gordon and Miller-Modiglinai developed
theoretical models with which they argued their respective positions. These
models apart from being applicable under very restrictive conditions also lead
to estimated prices which may or may not correspond with the actual prices
obtainable in the market. This study hence intend to specifically test for
relationship between market prices as contrasted with estimated prices of stock
quoted in the Nigerian stock exchange and the dividend payout ratios of the
This research tends to investigate the following
which extent can dividend policy affect price of shares?
ii. To which extent can
retained earnings, affect the growth rate of a firm?
iii. What portion of total
earning should a firm distribute or
OF THE STUDY
The broad objective of this study is to analyze the
effects of dividend policy on the value of the firm while its specific
objectives include the following:
i. To examine the nature
of the' relationship between dividend payments and the value of the firm.
ii. To examine the long-term relationship between retained earnings
and growth rate of the selected banks.
STATEMENT OF THE HYPOTHESIS
The hypothesis tested in this study is stated below:
Ho: Payout ratio has no significant influence on the
value of the firm.
Hi: Payout ratio has significant influence on the
value of the firm.
Ho: Dividend policy of a firm is not determined by
its long-term payout ratio.
policy of a firm is determined by its long-term payout ratio.
METHODOLOGY OF THE STUDY
The data used were gathered from secondary sources.
Secondary data are reliable easy to understand and are of descriptive models.
These secondary data for this essay topic includes; Journal of Central Bank of
Nigeria (CBN), Economic and Financial Review (EFR) and the Nigerian Stock Exchange
The variable on which data was collected includes;
Dividend per share, profit after tax, payout ratio and earnings per share. The
earnings per share are used as a proxy for value of the firm while profit after
tax captures the firm's dividend policy. The variables identified would be
integrated into models to test the impact of dividend policy on the value of
the firm. The data covered periods of 1988 to 2008.
OF THE STUDY
This study will be of great benefit to individuals,
society, corporate organizations, government etc.
To individual, it would be of benefit in deciding'
on which company to invest - either to invest in a firm where higher dividend
are paid with a corresponding increase in the number of investors which tends
to increase the company's value or to invest in a firm with lower dividends and
returns inform of capital gain in the future.
To the society, the effect of higher dividend will
influence the number of individuals who are ready to subscribe for the firm’s
shares. It thus helps to increase investment in the economy and maximization of
the wealth of the society.
This study will also provide empirical evidence to prove
the relationship between firm values and dividend 'policy in terms of inter-dependence
that exist between them also, the fundamentals and importance of dividend in
maximizing shareholders’ value will be exposed.
LIMITATION AND SCOPE OF THE STUDY
This study of the effect of dividend policy on
company valuation will be restricted to the listed bank in the economy. The
study will focus on the relationship between dividend policies and the value of
Out of the various listed banks, two banks have been
chosen in the view of limitation and resource available.
These banks were chosen from a benchmark of a minimum
of 20 years quotation at the stock exchange as well as its spread across the
country. The banks to be used as case study of this project are First Bank of
Nigeria PIc and Union Bank of Nigeria PIc (UBN).
DEFINITION OF TERMS.
This is defined as the payment 'made to shareholders from .firm earnings, which
serve as an interest income, to their investment. Pandey, I. M. (1999).
Policy: This involves the decision to payout earnings or to
retain them for re-investment in the firm. It determines whether the firms
should payout dividend as current earnings or retain them as capital gains.
Dividend Pay Out Ratio: The
percentage of retained earnings, payment in the form of a cash dividend.
Optimal Policy: This is the
policy that strikes a perfect balance between current dividends and future
growth and thereby maximizes the price of the firms cost.
Dividend Yield: The ratio of the
current dividend to the current price of a share of stock. That is, the firms
expected dividend payment per share dividend by its current share price.
Dividend Re- Investment Plan: This
is a plan, which enables a stockholder to automatically re-invest dividends
received - back into the stock of the paying corporation.
Wealth Maximization: This
has to do with-maximizing the Net present value to a course of action. The net
present value of a course of action is the difference between the Gross Present
Value of the benefit of that action and the amount of investment required to
achieve those benefits.