Determinants Of Dividend Policy And Profitability In Quoted Manufacturing Companies In Nigeria

Project and Seminar Material for Accountancy / Accounting

Abstract

Dividend policy is used by listed companies to choose an amount out of its profit to retain and/or pay as dividend to their shareholders. The decision on Dividend Policy is one of the very important decisions to make and it is dependent on some factors such as liquidity, investment opportunities, etc. Companies’ financial performance is a very good indicator of their sustainability and that is where the interest of investors lies. The purpose of this study was to determine the effect of dividend policy on the performance of Nigerian Quoted companies. One Hundred and Sixty-Nine (169) firms trading on the Nigerian Stock Exchange as at 31st December, 2020 formed the study population while a sample of 56 companies was used. In arriving at the sample size, the Krejere and Moryan (1970) formula was adopted after which a number of companies whose financial accounts were not up to 20 years were removed. The financial statements of the companies from 1999 to 2018 were used. The dividend policy attributes used in this study were: Form of Dividend Payments (FDP), Timing of Dividend Payments (TDP), Earnings per Share (EPS), Price Earnings Ratio (PER) and Dividend Yield (DY) (known as determining factors). The dependent variable of the company (firm performance) was assessed by Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q for a robustness check. Descriptive statistics, correlation matrix and panel regression analyses were conducted using the econometric analysis software E-views 9. The result revealed that FDP showed a positive but insignificant relationship with Return on Assets (3.13, p=0.1032); TDP showed a negative but significant relationship with ROA (-
4.80 p=0.025); while EPS, PER and DY showed a positive and significant relationship with ROA (0.03, p= 0.00; 0.001, p=0.00; and 3.24, p=0.03). With Return on Equity, FDP, EPS and PER showed a positive and significant relationship with ROE (15.585, p=0.01; 0.044, p=0.00 and 0.004, p=0.00); TDP showed a negative but significant relationship with ROE (-18.04, p=0.003), while DY showed negative and insignificant relationship with ROE (-1.70, p=0.635). With Tobin’s Q, EPS and PER showed a positive and significant relationship with Tobin’s Q (0.001639, p=0.002; 0.000307, p=0.007), TDP and DY showed a negative and insignificant relationship with Tobin’s Q (-0.90, p=0.41; -3.60, p=0.18) while FDP showed a positive but insignificant relationship with Tobin’s Q (0.706, p=0.49). The study concluded that FDP had positive but insignificant relationship with firm performance; TDP had negative but significant relationship with firm performance, EPS and PER had positive and significant relationship with firm performance; while DY had negative and insignificant relationship with firm performance. The study recommended that Earnings per Share should be increased steadily to sustain growth and investment in the organization because an increase in earnings per share is directly proportional to the robust performance of firms in Nigeria. The outcome of the study contributes to the existing knowledge on dividend policy and firm performance since it is evident that the form of the dividend payment is directly proportional to the growth of firms in Nigeria.

Keywords: Dividend Policy, Firms’ Performance, Return on Assets (ROA), Return on Equity (ROE), Tobin’s Q.

Chapter One

Introduction

1.1. Background to the Study

Dividend policy has remained one of the most controversial issues in corporate finance. The seminal paper by Miller and Modigliani (1961) established that dividend policy had no effect on shareholders’ wealth in a frictionless and perfect market with investment policy being held constant. This assertion tends to ignite the controversies that surround dividend policy (Olarewaju, Migiro & Sibanda, 2018). Hence, the prediction by Miller and Modigliani has led to an ongoing debate and a dilemma as to how firms should choose a suitable and implementable dividend policy especially in developing countries such as Nigeria where there is no perfect market condition. Choosing a suitable and implementable dividend policy led to the emergence of various competing theoretical and empirical researches which explained why firms paid or did not pay dividends (Idewele & Murad, 2019). After decades of non-stop research, Idewele and Murad (2019) stated that dividend policy was still listed as one of the top ten crucial unresolved issues in the world of finance. As opined by Uwuigbe, Jafaru and Ajayi (2012), dividend policy remains one of the most important financial policies not only from the viewpoint of the company, but also from that of the shareholders, consumers, employees, regulatory bodies and the Government.

Dividend policy is a statement which guides the payment or the appropriation of profit between a firm and its residual owners. It is a statement which clarifies the proportion of profit that should be paid out as a dividend to shareholders taking cognizance of the organization’s environment and the expectations of the shareholders (Oladipupo, 2017). According to Baker (1999), dividend policy is a statement that compromises the two extremes of zero percent dividend (retain all) and hundred percent dividend (pay-out all).

Dividend policy provides the management with the guidelines and regulations on how to determine the proportions of the firm’s returns to be retained and distributed to the shareholders as cash dividend (Alii, Khan & Ramirez as cited in Kimunduu, Mwangi, Kaijage & Ochieng, 2017). It is the schemes and rules followed by the management when rewarding the owners of the firm for investing their financial resources in the company (Nissim & Ziv, 2001)

Dividend or profit allocation decision is one of the four decision areas in finance which include investment, financing and working capital management decisions. Dividend is commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. It is the reward to the shareholders for investing in the shares of the company. When shareholders’ wealth is maximized, invariably the value of the firm is also maximized. Dividend decision is very important because it determines how much funds flow to investors and how much funds are retained by the firm for investment.

Dividend policy determines the division of earnings between payments to shareholders and reinvestment in the company. One of the most significant sources of funds for finance to foot corporate investment needs is retained earnings. Dividend payout invariably makes the firm to rely heavily on a new common stock issue for equity financing. Meanwhile, when earnings are retained, firms need not rely heavily on new common stock issue for equity financing. Although both growth and dividends are desirable, these goals are in conflict because a higher dividend rate means less retained earnings and consequently, a slower rate of growth in future earnings and share prices (Ogiedu, Erhagbe & Ibadin, 2009). This implies that there has to be a trade-off in setting a firm’s dividend policy.

As stated by Uwuigbe, Jafaru and Ajayi (2012), government fiscal policies tend to put some restrictions on the amount of dividend a company may pay. This encourages earnings to be ploughed back into the company. Section 379 (3) of the Company and Allied Matters Act (CAMA) 2004 Cap C20 (2006) provides that the general meeting shall have the power to decrease the dividend recommended by the directors but not to increase it. One of the reasons behind the dividend decision policy of the Nigerian government is to ensure that funds are available for a continuous investment in assets so that the companies will continue to operate on the going concern principle (Uwuigbe, Jafaru & Ajayi, 2012).

Management’s primary goal is to maximize shareholders’ wealth. This maximizes the value of the company as measured by the price of the company‘s common stock. This goal can only be achieved by giving the shareholders a fair payment on their investments. The main purpose of investors investing their funds in a company is to earn a reasonable income or a high rate of return. Dividend is one of the sources of such income circumstances as each company is forced to operate with high efficiency in order to maintain the quality and capability of competing to raise a net income with the best result (Velnampy, Nimalthasan & Kalaiarasi, 2014). Hence, dividend policy provides information to investors concerning the company’s performance. The impact of a firm’s dividend policy on firm performance is however, still unresolved.

The thrust of this study was to empirically investigate the effect of dividend policy on firms’ performance of Nigerian quoted companies for the period 1999 to 2018. The rest of the study was structured as follows: Chapter 2 reviewed the literature, Chapter 3 contained the methodology, Chapter 4 presented and interprets results, Chapter 5 discussed the findings, while Chapter 6 gave the summary, conclusion and recommendation of the study.

1.2. Statement of Research Problem

Several theories have been proposed over the years to ascertain whether there is a relationship between dividend policy and the financial performance of firms. Idewele and Murad (2019) stated that there had however, not been any consensus on it. For instance, Miller and Modigliani (1961) objected to the relevance of dividend policy, and thus, concluded that it did not affect firm value or financial performance. Meanwhile, Black (1976), in his study, argued that “the harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together”.

A number of local studies in the area of dividend policy have also been undertaken in Nigeria. For example, Uwuigbe, Jafaru and Ajayi (2012) investigated the relationship between the financial performance and dividend payout among listed firms in Nigeria. They looked at dividend policy as a factor of ownership structure, firm size and dividend payouts but not at the form and timing of dividend policy. Idewele and Murad (2019) conducted a study to investigate the relationship between dividend policy and financial performance of selected deposit money banks in Nigeria. The study however, only focused on dividend payout ratio and dividend yield. They did not look at timing and form of dividend payments. Ebire, Mukhtar and Onmonya (2018) investigated the effect of dividend policy on the performance of listed oil and gas firms in Nigeria. They focused on dividend payout ratio, retained earnings and dividend yield. They did not look at the timing and form of dividend payments. Simon-Oke and Ologunwa (2016) evaluated the effect of dividend policy on the performance of corporate firms in Nigeria. They focused on return on investment (ROI), earnings per share (EPS) and dividend per share (DPS). They did not look at dividend payout ratio, the timing and form of dividend payments. Oladipupo (2017) investigated the impact of dividend policy on shareholders wealth in Nigeria. He only concentrated on dividend payout but not on timing and form of dividend payments.

Regarding performance, there are three main approaches to firm performance in social science research: research based on market prices, accounting ratios and total factor profitability (Bocean & Barbu as cited in Pintea & Fulop, 2015.). Different previous studies used different measurements for firm performance. Majority of them employed the use of either market-based performance measures like Tobin’s Q, or any of the accounting-based performance measures like Return on Assets (ROA), Return on Equity (ROE) and Economic Value Added (EVA). The use of one of the above mentioned measures of firm performance has proved to be the reason for inconclusive results of majority of the empirical studies (Pintea & Fulop, 2015). This study employed the use of both accounting-based performance measures (ROA and ROE) and market-based performance measures (Tobin’s Q). The conflicting evidence may partly be explained by the fact that prior studies suffered from methodology problem, small unrepresentative sample sizes, unjustifiable choices for the proxy of firm performance, irrelevant time frames or shorter observation time spans (Tshipa, 2017). This thesis will bridge the knowledge gap created by the number of measures employed in measuring firm performance.

The findings of the study will not only contribute to academic discussions but also extend the body of existing literature. The main concern of this study was to examine the effect of dividend policy on the performance of companies listed on the Nigerian Stock Exchange using five basic dividend policy attributes (Form of Dividend Payments, Timing of Dividend Payments, Earnings per Share, Price Earnings Ratio and Dividend Yield) and three firms performance measures (ROA, ROE) and Tobin’s Q for a robustness check. It is expected that more research on this topical issue should be embarked upon in the nearest future.

1.3. Objectives of the Study

The main objective of the study was to examine the Determinants Of Dividend Policy And Profitability In Quoted Manufacturing Companies In Nigeria. The specific objectives of the study were:

To analyse the effect of the form of dividend payment (FDP) on the performance of Nigerian companies;
To evaluate the effect of the timing of dividend payments (TDP) on the performance of Nigerian companies.
To investigate the effect of earnings per share (EPS) on the performance of Nigerian companies;
To determine the effect of price earnings ratio (PER) on the performance of Nigerian companies; and
To ascertain the effect of dividend yield (DY) on the performance of Nigerian companies.

1.4. Research Questions

Specified below were some research questions that were inherent in the completion of this research work:

How does the form of dividend payment impact on the performance of Nigerian companies?
Does the timing of dividend payments have any positive effect on the performance of Nigerian companies?
To what extent do earnings per share impact on the performance of Nigerian companies?
How does price earnings ratio impact on the performance of Nigerian companies?
Is there any positive effect of dividend yield (DY) on the performance of Nigerian companies?

1.5. Research Hypotheses

The researcher attempted to test the following hypotheses stated in null form as follows:

H0:1 There is no positive effect of the form of dividend payment (FDP) on the performance of Nigerian companies.

H0:2 There is no positive effect of the timing of dividend payments (TDP) on the performance of Nigerian companies.

H0:3 There is no positive impact of earnings per share (EPS) on the performance of Nigerian companies.

H0:4 There is no positive effect of price earnings ratio (PER) on the performance of Nigeria companies.

H0:5 There is no positive effect of dividend yield (DY) on the performance of Nigerian companies.

1.6. Significance of the Study

Dividend policy is one of the most important corporate financial policies not only from the company’s point of view but also from that of the shareholders, the consumers, employees, regulatory bodies, the Government, etc.

This study will help the Boards of Directors and managers of firms in Nigeria to plan the proportion of profits that should be paid out as dividends to shareholders and the portion that should be retained. The amount of earnings that is retained after dividends are paid out to shareholders determines the managers’ ability to invest in projects because more dividends may mean less funds available for investments. This study will therefore, aid management and other policy makers to make better dividend decisions.

This study will also enable the shareholders to decide whether or not to receive dividends now or capital gain as a way of enhancing or creating value.

It will enable regulatory bodies such as the Securities and Exchange Commission, Nigerian Stock Exchange, Central Bank of Nigeria, Nigerian Insurance Commission, Pencom, etc. to develop not only a regulatory framework that will facilitate a suitable dividend policy but also regulate the activities of companies in overcoming agency problem.

In satisfying itself against the principle and canon of equity, this study will help the government to monitor the performance of firms listed on the Nigerian Stock Exchange for economic stability and decide whether to adjust the tax rate in consonance with firm performance in order to enhance efficiency in tax collection for revenue mobilization.

This study will further contribute to the available literature in the field and serve as a reference point to policy makers, researchers and other stakeholders in their quest to formulate policies and regulations to improve the operations of Nigerian companies.

1.7. Scope of the Study

The objective of this research work was to ascertain the relationship between dividend policy and firms’ performance measured by its ROE, ROA and Tobin’s Q. A population size of 169 companies listed on the Nigerian Stock Exchange as at 31st December, 2018 was considered for the analysis. The listed companies were considered here due to their credibility and the ease with which data were collated, cost time and other resource constraints that are associated with non-quoted companies. The corporate annual reports for the years 1999–2018 were examined.

The study used a sample size of 56 companies listed on the Nigerian Stock Exchange. It was ensured that the sampled companies possessed the following characteristics: they must either be financial or non-financial companies; their annual reports must have been audited as at 31st December, 2018; and their financial reports must consistently provide all the data required in this study. Applying the formula developed by Krejere and Moryan (1970) on the population, we got a total sample size of 117. The sample size of 117 was reduced by 61 because we observed that some of the companies did not have complete information and financial accounts up to the 20 years under review. While some were listed on the Nigerian Stock Exchange within the years under review, some had ceased to be in operation as at 31st December, 2018. Hence, the sample size of 56 was worked on. In order to achieve the study’s objectives, the researcher relied on secondary data from the 56 sampled companies listed on the Nigerian Stock Exchange as at 31st December, 2018. The study analysed the cross- sectional secondary data that were obtained from the financial statements of the sample for the period 1999 to 2018 with the use of descriptive statistic, correlation and regression analyses.

The study employed the accounting measures of performance: Return on Assets (ROA) and Return on Equity (ROE); and market-based measurements of performance: Tobin’s Q as the dependent variables whereas Form of Dividend Payment (FDP), Timing of Dividend Payments (TDP), Earnings per Share (EPS), Price Earnings Ratio (PER) and Dividend Yield (DY) were used as the measures for dividend policy. The Tobin‘s Q was employed to aid in checking for consistency of results and findings. It was calculated as the ratio of market value of equity to their book values.

1.8. Limitation of the Study

The challenge of the study was the availability of companies’ financial statements for the years under review which reduced the sample size. However, it did not affect the result of the study and so the number of unavailable financial statements of companies was insignificant.

1.9. Definition of Operational Terms

Dividend Policy:

Dividend policy is the scheme, rules and regulations followed by the management to determine the proportions of the firm’s returns to be retained and the proportion to be distributed to the shareholders as cash dividend respectively.

Dividend Yield (DY):

Dividend yield is one of the financial ratios that measure the cash dividends paid out to shareholders relative to the market value per share. In other words, it is a financial ratio that shows how much a company pays out as dividends to its shareholders each year relative to its share price.

Form of Dividend Payments:

These are different forms/types of dividends that companies pay out, all depending on each firm’s policy and liquidity position. They include: Cash Dividend, Bonus Shares, Stock Dividends, Share Splits, Script Dividend, Bond Dividend and Property Dividend.

Firm Performance:

This is the measurement of the efficiency of a company and also its operational environment. Some common firm performance measures include: revenue, return on equity, return on assets, profit margin, sales growth, capital adequacy, liquidity ratio, stock prices, etc.

Return on Assets:

Return on Assets measures the overall efficiency of management and gives an idea how efficiently management uses its assets to generate earnings. It is equal to a fiscal year’s profit before tax divided by its total assets expressed as a percentage.

Return on Equity:

Return on Equity is a ratio that presents the margin per one unit of the capital provided for a company by the shareholders. It is equal to a fiscal year’s profit after tax divided by its equity expressed as a percentage.

Timing of Dividend Payment:

Timing of Dividend Payment (TDP) measures the number of times a firm pays out dividends in a year.

Tobin’s Q:

The q is defined as the ratio of the market value of assets (defined as the book value of assets, plus the market value of common stock, minus the book value of common stock, minus deferred tax expense) to the book value of assets.

Listed Companies:

These are firms whose shares are registered and authorized by the Securities and Exchange Commission (SEC) to be traded on the Nigerian Stock Exchange.

Shareholders:

These are types of investors who invested in shares and are expected to earn or receive dividends as returns on their investments.

Earnings Per Share:

Earnings per Share (EPS) is a portion of a company’s earnings that is allocated to each share of common stock. It is calculated by dividing the profit after tax and preferred stock dividends of a company earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term.

Price Earnings Ratio:

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.

1.10 Organization of the Study

The study is categorized into five chapters. The first chapter presents the background of the study, statement of the problem, objective of the study, research questions and hypothesis, the significance of the study, scope/limitations of the study, and definition of terms. The chapter two covers the review of literature with emphasis on conceptual framework, theoretical framework, and empirical review. Likewise, the chapter three which is the research methodology, specifically covers the research design, method of data collection, method of data analysis, etc. The second to last chapter being the chapter four presents the data presentation and analysis, while the last chapter(chapter five) contains the summary, conclusion and recommendation.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary of Findings

The study has so far been able to explain the determinants of dividend policy and profitability in firm performance in Nigeria for the period 1999-2018 using cross-sectional data and panel least-square econometric technique (fixed effect and random effect) in estimating the variables. The study made use of three equations with return on asset (ROA), return on equity (ROE) and the Tobin’s Q (TBQ) as the dependent variables. Dividend yield (DY), forms of dividend payment (FDP), timing of dividend payment (TDP), earnings per share (EPS) and price earnings ratios (PER) were the independent variables. The Hausman Test was conducted to ensure that the right method of estimation was adopted. The Fixed Effect model appeared to be appropriate for the estimation of the panel least-square estimation technique for the three equations. The descriptive statistics as well as the Pearson correlation matrix was carried out in the process.

The findings from the first model with return on asset (ROA) as a dependent variable, forms of dividend payment (FDP) showed a positive but insignificant effect on ROA, timing of dividend payment (TDP) showed a negative but significant effect on ROA, earnings per share (EPS) showed a positive and significant effect on ROA, price earnings ratio (PER) showed a positive and significant effect on ROA, while dividend yield (DY) showed a positive and significant effect on ROA.

From the second model with return on equity (ROE) as a dependent variable, forms of dividend payment (FDP) showed a positive and significant effect on ROE, timing of dividend payment (TDP) showed a negative but significant effect on ROE, earnings per share (EPS) showed a positive and significant effect on ROE, price earnings ratio (PER) showed a positive significant effect on ROE, while dividend yield (DY) showed a negative and insignificant effect on ROE.

In the third model with Tobin’s Q (TBQ) as the dependent variable, forms of dividend payment (FDP) showed a positive but insignificant effect on TBQ, timing of dividend payment (TDP) showed a negative and insignificant effect on TBQ, earnings per share (EPS) showed a positive and significant effect on TBQ, price earnings ratio (PER) showed a positive and significant effect on TBQ, while dividend yield (DY) showed a negative and insignificant effect on TBQ. Policy implications were stated where necessary and recommendations were given below.
From the result of the analysis, the study established the regressions below:

ROA= 14.57540 +3.130455FDP -4.801319TDP +0.030221EPS +0.001180PER +3.24E- 05DY

ROE = 83.28543 +15.58488FDP -18.03771TDP +0.044497EPS +0.003929PER -1.70E- 05DY

TBQ = 34.66104 +0.706851FDP -0.903863TDP +0.001639EPS +0.000307PER -3.60E- 06DY

Based on the above regressions:

Form of Dividend Payment (FDP) had a positive effect on ROA, ROE and TBQ. This implied that an increase in FDP was associated with an increase in ROA, ROE and TBQ.
Timing of Dividend Payment (TDP) had negative but significant relationship with ROA and ROE but negative and insignificant relationship with Tobin’s Q.
The analysis showed that Earnings per Share (EPS) had significant relationship with Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q (TBQ) taking cognizance of the various proxies.
The analysis showed that Price Earnings Ratio (PER) had significant relationship with Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q (TBQ) taking cognizance of the various proxies.
Dividend yield showed a positive and significant relationship with return on asset.

The implication is that firms in Nigeria should ensure regular updates on dividend yields as it would enhance its growth and performance.

5.2 Conclusion

The study sought to assess the effect of dividend policy on firm performance in Nigeria and also determine the relationship and effects among the identified variables in the three models using return on asset (ROA), return on equity (ROE) and Tobin’s Q as dependent variables while forms of dividend payment (FDP), timing of dividend payment (TDP), earnings per share (EPS), price earnings ratios (PER) and dividend yield (DY), were the independent variables. The results of the variables showed different effects and relationships with the independent variables as revealed in the interpretations and summary above. We can therefore, conclude that dividend policy has both positive and negative effect on firm performance in Nigeria depending on the variables used in capturing dividend policy and firm performance at a particular time.

5.3 Recommendations

In line with the findings as stated in the policy implications and the summary of findings highlighted above, recommendations below were made:

Companies have to adopt the form of dividend payment that is favourable to the growth of the organization since the form of the dividend payment is directly proportional to the growth of firms in Nigeria.
Firms should be familiar with the timing of dividend payments to run with the number of times that is better and favourable to pay out dividends to investors. A dividend policy pattern that is not properly checked will invariably hamper the performance of a firm.
Earnings per share should be increased steadily to sustain growth and investment in the organization because an increase in earnings per share is directly proportional to the robust performance of firms in Nigeria.
The level of a company’s price earnings ratio, whether high or low determines how attractive a company would be to an investor. It is a determinant factor in the performance of firms in Nigeria. Therefore, firms should capitalize more on their earnings per share.
Dividend yield is a key factor in the return on assets of firms in Nigeria. Therefore, it is a key indicator to a great performance of firms in Nigeria.