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
Panasonic Corporation, is a Japanese multinational corporation headquartered in Kadoma, Osaka, Japan. Its main business is in electronics manufacturing and it produces products under a variety of names including Panasonic and Technics. Since its founding in 1918, it grew to become the largest Japanese electronics producer. In addition to electronics, Panasonic offers nonelectronic products and services such as home renovation services. Panasonic was ranked the 89th-largest company in the world in 2009 by the Forbes Global 2000 and is among the Worldwide Top 20 Semiconductor Sales Leaders. Panasonic was founded in 1918 by Konosuke Matsushita first selling duplex lamp sockets. In 1927, it produced a bicycle lamp, the first product it marketed under the brand name National. It operated factories in Japan and other parts of Asia through the end of World War II, producing electrical components and appliances such as light fixtures, motors, and electric irons. After World War II, Panasonic regrouped and began to supply the post war boom in Japan with radios and appliances, as well as bicycles. Matsushita's brother-in-law, Toshio Iue founded Sanyo as a subcontractor for components after WWII. Sanyo grew to become a competitor to Panasonic. In November 1999, the Japan Times reported that Panasonic planned to develop a "next generation first aid kit" called the Electronic Health Checker. At the time, the target market was said to be elderly people, especially those living in rural areas where medical help might not be immediately available, so it was planned that the kit would include support for telemedicine. The kits were then in the testing stage, with plans for eventual overseas distribution, to include the United States. In recent years the company has been involved with the development of high-density optical disc standards intended to eventually replace the DVD and the SD memory card.

On January 19, 2006 Panasonic announced that, starting in February, it will stop producing analog televisions (then 30% of its total TV business) to concentrate on digital TVs. On November 3, 2008 Panasonic and Sanyo were in talks, resulting in the eventual acquisition of Sanyo. The merger is to be completed by September 2009, and will result in one mega-corporation with revenues over 11.2 trillion (around $110 billion). As part of what will be Japan's biggest electronics company, the Sanyo brand and most of the employees will be retained as a subsidiary.

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 thats 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 Poors 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 firms position in the stock market. . Benartzi et al. (1997), Ofer and Siegels (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 Outstanding Capital in BDT* (mn) Face Value Total Share no. of Securities Sponsor/Director Govt.0 Percentage: 40

Market Category: A 3802.0 1000.0 3801600 Public 60

Institute 0

Foreign 0

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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Sponsor/Director Govt.0 Percentage: 64

Market Category :A 202.0 100.0 2021350 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 Outstanding Capital in BDT* (mn) Face Value Share Percentage:

Market Category : A 1395.0 100.0

Sponsor/Director Govt.0 52

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 COMMERCE BANK LIMITED (IFIC)

AND

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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Sponsor/Director 18 Percentage: Market Category : Z 671.0 100.0 6706995 Institute 0 Foreign 0 Public 47

Govt.35

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 Outstanding Capital in BDT* (mn) Face Value Total no. of Securities Share Sponsor/Director Govt.1 Percentage: 50 Market Category: A 743.0 100.0 7432618 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), 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)

DIVIDEND BONUS CASH SHARE 232.98 0 0 39.104 0 103.718 121.892 0 5

YEAR 2002 2003 2004 2005

EPS 931.92 195.52 518.59 487.57

P/E SHARE RATIO PRICE (MKT) 2.78 20.99 9.86 9.32 2590.7376 4103.9648 5113.2974 4544.1524

TOTAL 232.98 39.104 103.718 121.893

2006

485.94 2619.5 TOTAL 4 523.90 AVERAGE 8

7.59 50.54 10.108

3688.2846 20040.4368 4008.08736

72.891 305.871 61.1742

48.594 313.308 5 62.6617

121.485 619.18 123.836

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

Total Dividend Paid

Share Price (Mkt.)

6000 5000 5 1 1 3 .29 7 4 4000 4 1 0 3 .96 4 8 3000 2000 1000 0 2001 25 9 0 .7 37 6 4 5 4 4 .1 5 2 4 3 6 88 .2 8 4 6

250 232.98 200

150 103.718 100

121.485

121.8925

50 39.104 0 2001 2002 2003 2004 2005 2006 2007

2002

2003

2004

2005

2006

2007 Ye ar

Year

Graph-6: Trend of Market Price of Share and payment of total Dividend from 20022006

DUTCH BANGLA BANK LTD. (DBL)

YEAR 2002 2003 2004 2005 2006 EPS 87.86 103.97 116.93 181.97 179.18 DIVIDEND P/E SHARE BONUS RATIO PRICE(MKT) CASH SHARE 4.91 431.3926 17.572 0 9.09 945.0873 20.794 0 18.71 2187.7603 26.30925 0 10.17 1850.6349 45.4925 0 10.27 1840.1786 44.795 0

TOTAL 17.572 20.794 26.30925 45.4925 44.795

TOTAL AVERAGE

669.91

53.15

7255.0537

154.9627 5

154.96275 30.99255

133.98 10.63 1451.01074 30.99255 0 2 Table-2: Financial data of DBBL from 2002-2006
Total Dividend Paid 50 45 40 35 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 20.794 17.572 26.30925

2500 Share Price (Mkt.) 2 1 8 7 .7 6 0 3 2000 1500 1000 500 1 8 4 0 .1 7 8 6 1 8 5 0 .6 3 4 9

44.795 45.4925

9 4 5 .0 8 7 3 4 3 1 .3 9 2 6

0 2001 2002 2003 2004 2005 2006 2007 Ye ar

2007 Year

Graph-7: Trend of Market Price of Share and payment of total Dividend from 20022006

BANK ASIA
DIVIDEND YEAR EPS BONUS CASH SHARE 2002 48.51 0 0 0 0 2003 35.98 11.56 415.9288 0 8.6352 2004 39.48 12.35 487.578 0 9.87 2005 34.36 8.11 278.6596 3.436 6.872 2006 42.63 10.04 428.0052 0 10.6575 TOTAL 200.96 42.06 1610.1716 3.436 36.0347 AVERAGE 40.192 8.412 322.03432 0.6872 7.20694 Table-3: Financial data of Bank Asia from 2002-2006 P/E RATIO SHARE PRICE (MKT)
600
Total Dividend Paid 12

TOTAL 0 8.6352 9.87 10.308 10.6575 39.4707 7.89414

Share Price (Mkt.)

500 400 300 200 100 0

487.578

9.87 10 8 6 4 2 0 0 2001 2002 2003 2004 2005 2006 2007 Ye a r 8.6352 10.308 10.6575

428.0052

415.9288 2 7 8 .6 5 9 6

0 2001 2002 2003 2004 2005 2006 2007 Ye a r

Graph-8: Trend of Market Price of Share and payment of total Dividend from 20022006

INTERNATIONAL FINANCE AND INVESTMENT CORPORATION (IFIC)

DIVIDEND YEAR EPS BONUS CASH SHARE 2002 19.51 23.96 467.4596 1.46325 0 2003 15.84 14.03 222.2352 0 1.584 2004 16.09 25.3 407.077 0 1.609 2005 20.24 28.3 572.792 0 2.024 2006 62.46 15.23 951.2658 0 14.9904 TOTAL 134.14 106.82 2620.8296 1.46325 20.2074 AVERAGE 26.828 21.364 524.16592 0.29265 4.04148 Table-4: Financial data of IFIC from 2002-2006 P/E RATIO SHARE PRICE (MKT)
1000 951.265 8 900 800 700 600 46 7.4596 500 57 2.792 400 407 .077 300 200 22 2.2352 100 0 2001 2002 2003 2004 2005 2006 2007 Y e ar
16

TOTAL 1.46325 1.584 1.609 2.024 14.9904 21.67065 4.33413

Total Dividend Paid

Share Price (Mkt.)

14 12 10 8 6 4 2 0 2001 2002 2003 2004

1 .4 6 3 2 5 1 .5 8 4 1 .6 0 9

1 4 .9 9 0 4

2 .0 2 4

2005

2006

2007

Y e ar

Graph-9: Trend of Market Price of Share and payment of total Dividend from 20022006

ARAB BANGLADESH BANK (AB BANK)

YEAR EPS P/E SHARE DIVIDEND

RATIO 2002 2003 2004 2005 2006

PRICE (MKT)

CASH

5.78 38.64 223.3392 0 3.63 106.11 385.1793 0 18.19 20.01 363.9819 0 28.41 17.61 500.3001 0 93.08 30.54 2842.6632 0 149.0 TOTAL 212.91 4315.4637 0 32.723 9 29.81 AVERAGE 42.582 863.09274 0 6.5446 8 Table-5: Financial data of AB Bank from 2002-2006
Total dividend Paid
Share Price (Mkt.) 3000 2842.6632 2500 2000 1500 1000 500 223.3392 363.9819 385.1793 500.3001

BONUS SHARE 0.867 0.1815 0.9095 2.841 27.924

TOTAL 0.867 0.1815 0.9095 2.841 27.924 32.723 6.5446

30 27.924 25 20 15 10 5 0.867 0.9095

0.1815 2003

2.841 2007 Ye ar

0 2001 2002 2003 2004 2005 2006 2007 Y e ar

0 2001 2002

2004 2005 2006

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

TOTAL INDUSTRY (TOTAL ACCUMULATED DATA)

YEAR 2002 2003 2004 2005 2006 TOTAL EPS 218.716 70.988 141.856 150.51 172.658 754.728 P/E RATIO 14.058 32.356 17.246 14.702 14.734 93.096 SHARE PRICE (MKT) 3074.70952 8 2296.88772 8 2446.44857 6 2212.79802 2543.94297 2 12574.7868 DIVIDEND BONUS CASH SHARE 50.4030 0.1734 5 4.1588 5.26185 9.7857 23.5372 93.1466 9.90094 23.2213 26.7259 20.43318 80.45472

TOTAL 50.57645 14.05974 28.48315 36.5116 43.97038 173.6013

2 150.945 2514.95736 18.6293 AVERAGE 18.6192 16.090944 34.72026 6 5 2 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.