Report on Dividend policy

Case analysis on Bank

EXECUTIVE SUMMARY

A dividend is a usually distributed in cash form to stock holders of a corporation

approved by the board of director. It may also include stock dividend or other forms of

payment. A stock dividend represents a distribution of additional shares to common

stockholders. Dividends are only cash payments regularly made by corporations to their

stockholders.

The dividend policy such as the payment of dividend affects the market price of share. If

there is a debate in this issue, this theory is commonly accepted. In this report the

relationship between dividend and the market price of share is proved in the banking

sector of Bangladesh. But it is also revealed that dividend is not the only variable to

affect share price.

The result shows a significant relationship between dividend and share price. Some other

factors such as profit, EPS, growth rate, retained earnings, money supply etc.

CONTENTS

Introduction

1

Objective

2

Methodology

2

Literature Review

3

Overview of the Companies

9

Related Financial Data Analysis

Limitations

25

Conclusion & Recommendation

25

INTRODUCTION

As Bangladesh is a developing country, the corporate culture is growing very slightly in

our country. Dividend policy is a major financing decision that involves with the payment

to shareholders in return of their investments. Every firm operating in a given industry

follows some sort of dividend payment pattern or dividend policy and obviously it is a

financial indicator of the firm. Thus, demand of the firm’s share should to some extent,

dependant on the firm’s dividend payment pattern.

Many investors like to watch the dividend yield, which is calculated as the annual

dividend income per share divided by the current share price. The dividend yield

measures the amount of income received in proportion to the share price. If a company

has a low dividend yield compared to other companies in its sector, it can mean two

things: (1) the share price is high because the market reckons the company has

impressive prospects and isn't overly worried about the company's dividend payments, or

(2) the company is in trouble and cannot afford to pay reasonable dividends. At the same

time, however, a high dividend yield can signal a sick company with a depressed share

price. Dividend yield is of little importance for growth companies because, retained

earnings will be reinvested in expansion opportunities, giving shareholders profits in the

form of capital gains.

So, the study will investigate the relationship between dividend and the market price of

share Bangladesh. In our detailed study, we will examine with some real life sample (five

banks) that whether the dividend policy has any effect on the firm’s share price

determinants are many in members other than the dividend payment pattern, we just

focus on the specific factor; the dividend policy.

OBJECTIVE

Objective guides the thinking of any set of operation either directly or indirectly. It works

as a lamp-post in a dark night to find out the right way. Our objective in this study is to

find out whether the dividend policy has any impact on share price of that company. For

this purpose we have given a term paper named, “Impact of Dividend on Share Price”.

And that’s why though there are many variables creating impact on share price, our main

focus is on dividend & its policy.

Besides, as students of MBA program, the objective of this study is to acquire knowledge

about share price, share price, share market, dividend, and policy of company on

retention on dividend payment, through our field work.

METHODOLOGY

Primary Data: Primary data is collected by interviewing with some officials of these

banks. Md. Abu Tayeb (Senior Vice President), Mohammad Jashim Uddin (Senior Asst.

Vice President) and Md. Monowar Hossain (Senior Officer) all these persons are the

staffs of DBBL help us to provide different data on this related topic.

Secondary Data: The main source of data for this report is Annual Reports. We have

also collected data from the securities market, different websites, different books and

different journals.

LITERATURE REVIEW

Gittman (2004, pp. 312) divided stock into two types, such as common stock and

preferred stock. He also showed that dividends are the outcome of investment. So,

common stocks are an ownership claim against primarily real or productive asset

(Higgins, 1995), but he also said that if the company prospers, stockholders are the chief

beneficiaries, if it falters, they are the chief losers. Smith (1988) presented that stocks are

one of the most popular forms of investment. People buy stocks for various reasons:

some are interested in the long-term growth of their investment by buying low priced

stock of a new company in the hope of substantially growth of share price over the next

few years. Another reason he suggested that in a well established firm stockholders

expect the stock growth will be stable over the long run. (Smith,1988).

Stockholders expect dividend but it is not promised (Gittman, 2004). Common stocks are

hold by true owners of the business. Sometimes they are known as ‘residual owners’ as

they receive whatever left after winding up of the company (Gittman, 2004; Higgins

1995). Another type of stock is known as publicly owned stock. Common stock owned

by a broad group of unrelated investors or institutional investors is called as publicly

owned stock. However, all common stock of a firm owned by a small group of investors

is denoted as closely owned stock. When all the stock is owned by a single person is

known as privately owned stock. Due to the limit of number of share, stock can be

classified in to four types. Such as authorize share, outstanding share, treasury stock and

issued stock (Gittman, 2004). Authorized shares represent the maximum number of

shares a firm allows to issue. Outstanding shares are hold by public. Treasury stock is

repurchased by firm itself and it is no longer considered as outstanding share. Issued

shared are the shares that have been put into circulation. Recently stock repurchase option

is very popular as it is able to increase stock value by decreasing outstanding stock

number (Port, 1976). Port also suggested that firms should avoid issuing stock to pay

dividend as they slow down company growth.

According to Short and Welsch (1990), Johns (1998) and Port (1976), a dividend is a

usually distributed in cash form to stock holders of a corporation approved by the board

of director. It may also include stock dividend or other forms of payment. A stock

dividend represents a distribution of additional shares to common stockholders (Higgins,

1995).On the other hand, Ross et al. (2005) divided earnings into two parts; either it is

retained or paid as dividend. Whereas Wild et al. (2001), Johns (1998) and Kieso et al.

(2004) argued that retained earnings are the primary source of dividend distribution to the

stockholder. Dividends are only cash payments regularly made by corporations to their

stockholders (Johns, 1998). He also specified that they are decided upon the declaration

by the board of the directors and can range from zero to virtually any amount the

corporation can afford to pay.

Jones (2005) said that dividends are the only cash payment a stockholder receives

directly from firm and these are the foundation of valuation for common stocks. Stock

price response to an unexpected dividend change announcement is related to the dividend

preferences of the marginal investor in that firm where other things remaining same

(Denis et al., 1994). In addition, a company, which changes dividend policy, is expected

to experience upward or downward trends in share returns (Gunasekarage et al., 2006).

They also said that for the initiating firms, the share prices continued to rise even after the

initial public offering (IPOs). Higgins (1995) said that if the company will have less

money to invest, or it will have to raise more money from external sources to make the

same investments stockholders claim on future cash flow, which reduces share price

appreciation. Moreover, during dividend announcement period stock price also fluctuate

due to announcement of dividend. Mulugetta et al. (2002) examined the impact of

Standard and Poor’s ranking changes on stock prices. In addition, Affleck-Graves &

Mendenhall (1992) found that stock price reacts after 8 days on average up to 54 days of

such earning announcement.

With this believe, Hampton (1996) said that value of stock increase by more dividend and

share remain undervalued by lower dividend policy. In addition, he also showed that

there are two schools of thought regarding with the effect of dividend on stick price, one

is dividends do not affect market price and the another one is dividend policies have

profound effects on a firm’s position in the stock market. . Benartzi et al. (1997), Ofer

and Siegel’s (1987) and Bae (1996) found a positive correlation between share price and

dividend. Furthermore, Campbell and Shiller (1988) found a relationship between stock

prices, earnings and expected dividends and he drives a conclusion that earnings and

dividends is powerful in predicting stock returns over several years. Wilkie analyzed a 76

months share price index and dividend announced. He found a correlation coefficient,

which was under 0.7 for the period 76 months and he also get that the maximum value of

the regression coefficient being reached after 79 months. Moreover, Shiller (1984, 1989)

recommended investors in his study to buy the stocks when price is low relative to

dividends and to sell stocks when it is high payoffs. On the other hand to their opinion,

Jensen and Johnson (1995) suggested that, dividend cut results reduction in share price.

More interesting matter is that if capital markets are perfect, dividends have no influence

on the share price (Miller and Modgliani, 1961). Miller and Modgliani (1961) also states

that if the market is imperfect, dividend may affect stock price.

OVERVIEW OF THE COMPANIES

ISLAMI BANK BANGLADESH LTD. (IBBL)

Islamic banking started in Bangladesh through establishment of the

ISLAMI BANK BANGLADESH Ltd. (IBBL), which is considered to be the

first interest-free bank in Southeast Asia. It was incorporated on 13

March 1983 as a public limited company under the COMPANIES ACT

1913. In December 2001, IBBL had 121 branches; its authorized capital

was Tk 1000 million and paid up capital Tk 640 million.

Listing Year: 1985 Market Category: A

Outstanding Capital in BDT* (mn) 3802.0

Face Value  1000.0Total no. of Securities 3801600

Share Percentage: 

Sponsor/Director 40

Govt.0 Institute 0 Foreign 0 Public 60

Graph-1: The Market Price of Share of IBBL in 2006-2007 (Highest value: 6930 Lowest value: 3408.75)

DUTCH-BANGLA BANK LIMITED (DBBL)

Dutch-Bangla Bank Limited (the Bank) is a scheduled commercial bank. The Bank was

established under the Bank Companies Act 1991 and incorporated as a public limited

company under the Companies Act 1994 in Bangladesh with the primary objective to

carry on all kinds of banking business in Bangladesh. The Bank is listed with Dhaka

Stock Exchange Limited and Chittagong Stock Exchange Limited. DBBL- a Bangladesh

European private joint venture scheduled commercial bank commenced formal operation

from June 3, 1996

Listing Year: 2001 Market Category :AOutstanding Capital in BDT* (mn) 202.0Face Value  100.0Total no. of Securities 2021350

Share Percentage: 

Sponsor/Director 64

Govt.0 Institute 0 Foreign 26 Public 10

Graph-2: The Market Price of Share of DBBL in 2006-2007 Highest value: 6576.5, Lowest value: 1600

BANK ASIA

Bank Asia a public limited banking company incorporated on 28 September 1999. It

started banking business on 27 November 1999 with equity participation from 22

promoters. The authorised and paid up capital of the bank is Tk 800 million and Tk 218

million respectively. The paid up capital is divided into 2,180,000 ordinary shares of Tk

100 each fully paid by the sponsors.

Listing Year: 2004 Market Category : AOutstanding Capital in BDT* (mn) 1395.0 Face Value  100.0 Total no. of Securities 13950000

Share Percentage: 

Sponsor/Director 52

Govt.0 Institute 17 Foreign 0 Public 31

Graph-3: The Market Price of Share of Bank Asia in 2006-2007 Highest value: 517.25, Lowest value: 334

INTERNATIONAL FINANCE, INVESTMENT AND COMMERCE BANK LIMITED (IFIC)

IFIC Bank (International Finance, Investment and Commerce Bank Limited)

originally named as International Finance and Investment Company, was

formed in October 1976. It obtained certificate of commencement on 28

February 1977 as an INVESTMENT BANKING company. The company was

established mainly to carry out banking and other financial business outside

Bangladesh (especially in the oil-rich Middle-Eastern countries) either singly

or in collaboration with other companies, banks and financial institutions.

BANGLADESH BANK allowed IFIC to transform itself into a banking company

and accordingly, it was renamed and after completion of required legal

formalities, it started full-fledged commercial banking operations on 24 June

1983.

Listing Year: 1986 Market Category : ZOutstanding Capital in BDT* (mn) 671.0 Face Value  100.0 Total no. of Securities 6706995

Share Percentage: 

Sponsor/Director 18 Govt.35 Institute 0 Foreign 0 Public 47

Graph-4: The Market Price of Share of IFIC in 2006-2007 Highest value: 1198, lowest value: 0

ARAB BANGLADESH BANK LTD

AL BARAKA BANK Ltd often called the second Islamic bank of Bangladesh,

commenced banking business on 20 May 1997. It is a joint-venture enterprise

of Al-Baraka Investment and Development Company, a renowned financial

and business house of Saudi Arabia, Islamic Development Bank, a group of

eminent industrialists of Bangladesh, and the government of Bangladesh. The

authorized capital of the bank is Tk 600 million and its paid up capital is Tk

259.55 million. The bank has now 35 branches in different parts of the

country.

Listing Year: 1983 Market Category: AOutstanding Capital in BDT* (mn) 743.0Face Value 100.0Total no. of Securities 7432618Share Percentage: 

Sponsor/Director 50

Govt.1 Institute 0 Foreign 0 Public 49

Graph-5: The Market Price of Share of AB Bank in 2006-2007 Highest value: 3236.75, Lowest value: 684.75

Related Financial Data Analysis

The financial data we gathered to find out the relationship between various variables with

price of five different banks are given. We attempted to explore some conclusion on the

behavioral pattern of changing the share market price. The data are extracted from annual

reports of five selected banks that are Arab Bangladesh (AB) Bank, Bank Asia (BA),

232.98

121.485

121.8925

103.718

39.1040

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007

Year

To

tal

Div

iden

d P

aid

3688.2846

4544.1524

5113.2974

4103.9648

2590.7376

0

1000

2000

3000

4000

5000

6000

2001 2002 2003 2004 2005 2006 2007Year

Sha

re P

rice

(Mkt

.)

Dutch Bangla Bank Ltd (DBBL), International Finance and Investment Corporation

(IFIC) and Islami Bank Bangladesh Ltd. (IBBL). The annual data of these banks has been

taken from the annual reports and other annual publications of Dhaka Stock Exchange.

ISLAMIC BANK BANGLADESH LTD (IBBL)

YEAR EPSP/E RATIO

SHARE PRICE (MKT)

DIVIDEND

CASHBONUS SHARE

TOTAL

2002 931.92 2.78 2590.7376 232.98 0 232.982003 195.52 20.99 4103.9648 0 39.104 39.1042004 518.59 9.86 5113.2974 0 103.718 103.7182005 487.57 9.32 4544.1524 0 121.8925 121.8932006 485.94 7.59 3688.2846 72.891 48.594 121.485TOTAL 2619.54 50.54 20040.4368 305.871 313.3085 619.18AVERAGE 523.908 10.108 4008.08736 61.1742 62.6617 123.836

Table-1: Financial data of IBBL from 2002-2006

Graph-6: Trend of Market Price of Share and payment of total Dividend from 2002-

2006

2187.76031840.1786

1850.6349

945.0873

431.3926

0

500

1000

1500

2000

2500

2001 2002 2003 2004 2005 2006 2007Year

Shar

e Pr

ice

(Mkt

.) 44.795

45.4925

26.30925

20.79417.572

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007

Year

To

tal

Div

iden

d P

aid

DUTCH BANGLA BANK LTD. (DBL)

YEAR EPSP/E RATIO

SHARE PRICE(MKT)

DIVIDEND

CASH BONUS SHARE

TOTAL

2002 87.86 4.91 431.3926 17.572 0 17.5722003 103.97 9.09 945.0873 20.794 0 20.7942004 116.93 18.71 2187.7603 26.30925 0 26.309252005 181.97 10.17 1850.6349 45.4925 0 45.49252006 179.18 10.27 1840.1786 44.795 0 44.795TOTAL 669.91 53.15 7255.0537 154.96275 0 154.96275AVERAGE 133.982 10.63 1451.01074 30.99255 0 30.99255

Table-2: Financial data of DBBL from 2002-2006

Graph-7: Trend of Market Price of Share and payment of total Dividend from 2002-2006

BANK ASIA

YEAR EPSP/E RATIO

SHARE PRICE (MKT)

DIVIDEND

CASHBONUS SHARE

TOTAL

2002 48.51 0 0 0 0 02003 35.98 11.56 415.9288 0 8.6352 8.63522004 39.48 12.35 487.578 0 9.87 9.872005 34.36 8.11 278.6596 3.436 6.872 10.308

951.2658

572.792

407.077

222.2352

467.4596

0100200300400500600700800900

1000

2001 2002 2003 2004 2005 2006 2007Year

Shar

e Pr

ice

(Mkt

.)

2.024

14.9904

1.6091.5841.46325

0

2

4

6

8

10

12

14

16

2001 2002 2003 2004 2005 2006 2007Year

Tota

l Div

iden

d Pa

id

428.0052

278.6596

487.578

415.9288

0

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 2007

Year

Shar

e Pr

ice

(Mkt

.)

8.6352

0

9.87

10.308 10.6575

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007

YearTo

tal D

ivid

end

Paid

2006 42.63 10.04 428.0052 0 10.6575 10.6575TOTAL 200.96 42.06 1610.1716 3.436 36.0347 39.4707AVERAGE 40.192 8.412 322.03432 0.6872 7.20694 7.89414

Table-3: Financial data of Bank Asia from 2002-2006

Graph-8: Trend of Market Price of Share and payment of total Dividend from 2002-2006

INTERNATIONAL FINANCE AND INVESTMENT CORPORATION (IFIC)

YEAR EPSP/E RATIO

SHARE PRICE (MKT)

DIVIDEND

CASHBONUS SHARE

TOTAL

2002 19.51 23.96 467.4596 1.46325 0 1.463252003 15.84 14.03 222.2352 0 1.584 1.5842004 16.09 25.3 407.077 0 1.609 1.6092005 20.24 28.3 572.792 0 2.024 2.0242006 62.46 15.23 951.2658 0 14.9904 14.9904TOTAL 134.14 106.82 2620.8296 1.46325 20.2074 21.67065AVERAGE 26.828 21.364 524.16592 0.29265 4.04148 4.33413

Table-4: Financial data of IFIC from 2002-2006

2842.6632

500.3001

363.9819

385.1793

223.3392

0

500

1000

1500

2000

2500

3000

2001 2002 2003 2004 2005 2006 2007Year

Sh

are

Pri

ce (

Mkt

.)

2.841

27.924

0.90950.1815

0.867

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007

Year

To

tal d

ivid

end

Pai

d

Graph-9: Trend of Market Price of Share and payment of total Dividend from 2002-2006

ARAB BANGLADESH BANK (AB BANK)

YEAR EPSP/E RATIO

SHARE PRICE (MKT)

DIVIDEND

CASHBONUS SHARE

TOTAL

2002 5.78 38.64 223.3392 0 0.867 0.8672003 3.63 106.11 385.1793 0 0.1815 0.18152004 18.19 20.01 363.9819 0 0.9095 0.90952005 28.41 17.61 500.3001 0 2.841 2.8412006 93.08 30.54 2842.6632 0 27.924 27.924TOTAL 149.09 212.91 4315.4637 0 32.723 32.723AVERAGE 29.818 42.582 863.09274 0 6.5446 6.5446

Table-5: Financial data of AB Bank from 2002-2006

Graph-10: Trend of Market Price of Share and payment of total Dividend from 2002-2006

TOTAL INDUSTRY (TOTAL ACCUMULATED DATA)

YEAR EPSP/E RATIO

SHARE PRICE (MKT)

DIVIDEND

CASHBONUS SHARE

TOTAL

2002 218.716 14.058 3074.709528 50.40305 0.1734 50.576452003 70.988 32.356 2296.887728 4.1588 9.90094 14.059742004 141.856 17.246 2446.448576 5.26185 23.2213 28.48315

2005 150.51 14.702 2212.79802 9.7857 26.7259 36.51162006 172.658 14.734 2543.942972 23.5372 20.43318 43.97038TOTAL 754.728 93.096 12574.78682 93.1466 80.45472 173.6013AVERAGE 150.9456 18.6192 2514.957365 18.62932 16.090944 34.72026

Table-6: Financial data of total 5 Banks from 2002-2006

LIMITATION

1. Sample size of the study is fixed and too short (n=25).

2. Many companies do not give cash dividend.

3. Dividend is not the only variable which affect on share price.

4. It is assumed that the capital market is organized.

5. It is assumed that there is no inflation or deflation in the economy

6. It is assumed that money supply in the market is fixed.

7. Companies on which the study is made do not disclose the market position of

their share.

8. Straight line equation is used but there are different variables which affect share

price.

9. Sampling error in the study is considered.

10. Due to lack real life experience, the level best effort may not be presented

dynamically.

CONCLUSION & RECOMMENDATION

The dividend policy of a company determines what proportion of earnings is distributed

to the shareholders by way of dividends, and what proportion is ploughed back for

reinvestment purposes. Since the main objective of financial management is to maximize

the market value of equity shares, one key area of study is the relationship between the

dividend policy and market price of equity shares.

According to this model founded by Graham and Dodd, the market price of the shares

will increase when a company declares a dividend rather than when it does not.

According to James Walter, the dividend policy of a company has an impact on the share

valuation. On the other hand according Myron Gordon, the dividend policy of the

company has an impact on share valuation.

But according Miller and Modiliani, the market price of the share does not depend on the

dividend payout, i.e. the dividend policy is irrelevant. When profits are used to declare

dividends, the market price increases. But at the same time there is a fall in the reserves

for reinvestment. Hence for expansion, the company raises additional capital by issuing

new shares. Increase in the overall number of shares, will lead to a fall in the market price

per share. Hence the shareholders would be indifferent towards the dividend policy.

From the above models confuses as the impact of dividend on share price. In our study

we make the co relation of different variables and try to compare which variables has the

significant impact on share price. After the study we have revealed dividend has a

significant impact on share price.

From our study we recommend the following issues:

1. Most of the investors are irrational. SEC should take different initiative to make

them rational.

2. Both cash and stock dividend should be paid consistently

3. Sometimes capital market is affected by different fake information which also

affect share price. SEC should take initiatives for this condition.

4. The company should disclose the overall market price of their share in the annual

report.

5. SEC should take initiative for the companies which are making significant losses.

6. Money supply has an effect on share price. SEC should take initiatives on this

issue.

7. Political, general economic, financial and stock market conditions, particularly

where the company operates or is listed

8. Perceptions of investors about the different factors should be implemented.