EVALUATION 0F CORPORATIVE PERFORMANCE VARIABLES THAT DETERMINE DIVIDEND PAYOUT POLICES OF NIGERIA BREWERIES PLC [2009- 2014]
Abstract
In this research titled corporate performance variables that determines dividend payout policies of companies in Nigerian. The researcher examined the relationship between earnings per share and dividend per share of Nigerian companies. Evaluated the relationship between firm size and dividend payout ratio of Nigerian companies. Examined the relationship between return on asset and dividend per share of Nigerian companies. Data for the study was sourced through the annual report of the selected brewery companies (Nigeria Brewery Plc, Guinness Nig. Plc and Champions Brewery plc ) and journal articles related to the subjects matter. Eview was used in the data analysis. The result revealed that the maximum values of these series are 0.700000, 1.740000, 1.90E +09 and 0.990000 for dividend per share (DPS), Earnings per share (EPS), firm size and return on assets (ROS) respectively. The minimum values are 0.200000, 0.060000, 1.92E +08 and 0.150000 dividend per share (DPS) Earnings per share, firms size and return on assets respectively. Dividend per share and return assets have kurtosis coefficient of 3.880333 and 1.722689 respectively which are seriously out of range of normality. Dividend per share, earning per share firm size and return of assets (ROA) have reported significant probability Values 0.266546 and 0.812933 respectively while earnings per share and firm size have p-value of 0.66173 and 0.763668 respectively, for Jarque-Bera statistics. The researcher also observed that there is insignificant relationship between earnings per share dividend per share of Nigerian Brewery firms. It was also observed that there is no insignificant relationship between firm size and dividend payout ratio of Nigerian companies. The study equally observed that return on asset has insignificant effect on dividend per share of Nigerian companies. Based on the findings the researcher recommends that organizations should ensure that they have a good and robust dividend policy in place. This will enhance their profitability and attract investments to the organizations. Directors of corporate organizations should be made to update the records of shareholders including their next-of-kin to avoid a deliberate diversion or undue retention of unclaimed dividend warrants. Due procedures for the recognition and utilization of profit arising from investment of unclaimed dividend should be effected and properly accounted for. A more stringent level condition should be established to compel directors to only invest in profitable ventures, report the utilization of retention earnings through notes to the accounts.
TABLE OF CONTENT
Title ii
Certification iii
Approval iv
Dedication v
Acknowledgments vi
Abstract viii
CHAPTER ONE
1.2 Statement of the Problem 3
1.3 Objective of the Study 4
1.4 Research Questions 5
1.5 Statement of Hypotheses 5
1.6 Significance of the Study 5
1.7 Scope and limitation of the Study 6
1.8 Definition of Term 7
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 9
2.1.1 The Concept Of Dividend And Dividend Policy 9
2.1.2 Concept of Earnings per share 14
2.1.3 Concept of Return on Asset 16
2.1.4 Concept of firm size 17
2.1.5 Objectives Of Dividend Policy 18
2.1.6 Forms And Types Of Dividend Policy 19
2.1.7 Patterns Of Dividend Payments 20
2.2 Theoretical Framework 21
2.2.1 The Residual Theory 21
2.2.2 The Relevance Theory 22
2.2.3 The Irrelevance Theory 24
2.2.4 Pecking Order Theory 25
2.2.5 Dividend Policy And Agency Theory 27
2.3 Empirical Framework 29
2.3.1 Empirical Review on dividend pay policy 29
2.3.2 Empirical Review On Earnings Per Share and dividend payout ratio 38
2.3.3 Empirical Review of firm size and dividend payout ratio 45
2.3.4 Empirical Review on ROA and Dividend Payout 48
2.3.5 Irrelevance Of Dividend Payout To The Value Of Firm 53
2.3.6 Controversial Issues On Dividend Policy 54
2.4 Summary of Literature Review 60
CHAPTER THREE
METHODOLOGY
3.1 Research Design 62
3.2 Area Of The Study 62
3.3 Population of Study 62
3.4 Sampling Technique 62
3.5 Sources of Data 63
3.6 Description of variable 63
3.7 Model Specification 64
3.8 Test of Hypotheses 64
3.9 Analytical Technique/ procedure 64
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Data Presentation 65
4.2 Descriptive Statistics of the Variables 70
4.3 Regression Analysis Result 73
4.4 Group/Composite Data Analysis 87
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings 91
5.2 Conclusions 91
5.3 Recommendations 92
References
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
So many factors affect the performance of corporate organizations and one of those factors is dividend policy. Dividend policy serves as a mechanism for control of a managerial opportunism. Empirical studies show that firms in developing Countries (e.g. Nigeria) smooth on their income and therefore, their dividends. The pattern of corporate dividend policies not only varies over time but also across countries, especially between developed, developing and emerging Capital markets. If the value of a company is the function of its dividend payments, dividend policy will affect directly the firm’s cost of capital.
Dividend is the return that accrues to shareholders as a result of the money invested in acquiring the stock of a given company (Eriki and Okafor 2002). While dividend policy on the other hand is concerned with division of net profit after taxes between payments to shareholders (ordinary shareholders) and retention for reinvestment on behalf of the shareholders (Kempner 1980) a difficult decision for both public and private limited companies is to determine the appropriate level of dividend to be paid to shareholders, and to decide whether or not to offer non-cash alternatives such as scrip dividends.
According to Davidson (1990) the existence of some share price reactions on dividend announcement prompts an analysis of the evidence for both shareholder clienteles and possible interaction of firms’ dividend policies with key activities such as internal investments. An aspect of the theory of dividend policy is part of a continuum of control allocations between managers and investors, and hence cross-sectional variations in dividend policy are driven by an underlying factor. The allocation of controls between the manager and investors is important not because of agency or private information problems, but because of its potentially divergent beliefs that can lead to a disagreement about the value of project available to the firm. This underlying factor is “Corporate Performance”.‘Corporate performance is at the heart of the managerial function of an organization’ (Samuel 1989). Analysis of corporate performance is mainly concerned with the development of a modeling methodology to help in the diagnosis of past performance and thus provide a framework for evaluating the effect of changes in operating parameters as a guide for future planning. The performance of an Organization is measured by the choice of the management form of wealth to be held. If the performance of an organization is good there will be little or no disagreement between the management and the shareholders.
In evaluating Corporate Performance, the emphasis is on assessing the current behavior of the organization in respect to its efficiency and effectiveness. To measure overall corporate performance goals are set for each of these perspectives and specific measure for achieving such goals are determined. Each of these perspectives is critical and must be considered simultaneously, to achieve overall efficiency and effectiveness, and to succeed in the long-run. If any area is either over-emphasized or underemphasized, performance evaluation will become ‘unbalanced’. In this way, the aim of the concept is to establish a set of measures both financial and non-financial, through which, a company can control its activities and balance various measures to effectively track performance.
Modigliani and Miller (1961) observed that ‘The theoretical principles underlying the dividend policy and its impact on firms can be described either in terms of dividend irrelevance or dividend relevance theory’. Therefore, dividend policy is irrelevant for the cost of capital and the value of the firms in a world without taxes or transaction cost. This shows that when investors can create any income pattern by selling and buying shares, the expected return required to induce them to hold firm’s shares will be invariant to the way the firm packages its dividend payments and new issues of shares. It is to be observed that a firm’s assets, investments opportunities, expected future net cash flows and cost of capital are not affected by the choices of dividend policy.
Agrawal and Jayaraman (2004) observed that Dividend payments and leverage policy are substitute mechanism for controlling the agency cost of free cash flow hence, improves performance. If a firm’s policy is to pay dividend each year end to shareholders, the level of activity in the organization will increase to obtain more income and have excess retained earnings to meet the standard set.
Brockington (1987) observed that ‘Dividend policy has the effect of destabilizing dividend as only a prolonged increase or decrease in profits will affect the average sufficiency to have any appreciable effect on the size of the distribution’. Since it is a conservative dividend policy-in the long run, only one half of all profits will be distributed and there will be substantial buildup of retained earnings. This will certainly reinforce further, the consistency of dividends, which could for a while, be maintained even in the face of actual losses. It may also relieve the company of having recourse to external sources of finance. The retention under this policy bears no relationship to the availability of profitable investment opportunities. The risk is that projects yielding less than the true cost of capital will be undertaken in order to absorb funds which would otherwise lie idle. Samuels and Wilkes (2005) stated that the shareholders are entitled to a revenue stream of dividends. The value of the share corresponds to the present value of this stream of dividend payments.
1.2 Statement of the problems
The importance of dividend payments as one of the determinants of a firm's economic performance has for long been recognized by developing economies (Oyejide, 1976). In Nigeria, early studies on dividend policy attempted to highlight the dividend policy pursued by Nigerian firms during the period of indigenization. Uzoaga and Alozienwa (1974); Inanga (1975) and Soyode (1976). These studies fall short of utilizing the conventional dividend models in their investigation. Subsequent studies such as Oyejide (1976), Izedonmi and Eriki, (1996) and Adelegan, (2000 and 2001) have tested the application of Lintner's model and the modified Lintner-Britain model as adopted by Charitou and Vafeas (1998), in an attempt to explain the dividend policy of Nigerian firms at different periods. Most of these studies however, recognized the dynamic nature of the Nigerian economy and the need for further research in order to validate the conclusion that emanated from the studies.
The Financial Sector as a catalyst to economic development has not witnessed substantial research studies on its dividend policy. This study develops an empirical basis that will reveal the growth pattern and the determinants of dividend policy in Nigerian Deposit Money Banks (DMBs). This is expected to provide useful explanation on the dividend policy of Deposit Money Banks (DMBs) in Nigeria based on the explanatory variables identified from prior studies and legal considerations. The study also examines the effect of and relationship between dividend growth patterns and the Deposit Money Bank's stock valuation.
Legally, dividend decisions in Nigeria are at the discretion of the directors, there are of course constraints that limit the directors. Some of the constraints are imposed by legal rules while others are imposed by financial factors. The level of influence of these constraints and factors are been evaluated to provide a guide to Board of directors in exercising their discretion in respect of making sound dividend decision.
1.3 Objectives of the study
The aim of this researcher work is to examine corporate performance variables that determines dividend payout policies of companies in Nigerian. The specific objectives of this research work includes the following;
1. To examine the relationship between earnings per share and dividend per share of Nigerian companies.
2. To evaluate the relationship between firm size and dividend payout ratio of Nigerian companies.
3. To examine the relationship between return on asset and dividend per share of Nigerian companies.
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