Dividend Policy and Firms Performance: Study on Malaysia Listed Company

2008-2009

CHAPTER 1: INTRODUCTION

Dividend policy has become one of the major areas of research amongst the finance scholars since 1950s. It is obvious from the research results of these scholars that dividend decision is the most elusive and controversial in financial decision making, hence remained unsolved with puzzles (Black, 1976). The dividend decision of a firm involves retaining a proportion of net earnings for investment needs in the future while distributing the rest as dividend to shareholders. A good dividend policy not only attracts investors and facilitates fund raising from the stock market; it also caters for the future investment needs of the firm. The association between dividend decision, earnings and future investment needs therefore makes dividend announcement a source of information to the investors in accessing the future prospects of a firm. In other words, dividend signals information to investors.

In Malaysia, dividend payment matters. Several studies have shown that an announcement of dividend increase (decrease) was followed by an increase (decrease) in share prices (Norhayati, 2005, and Nur-Adriana et al., 2002). With the proliferation of unit trusts in Malaysia, investors were made more aware of returns in the form of dividends. Furthermore these funds represent an important investing arm that invests in shares that give good returns in the form of capital gains and dividend payments. Nevertheless, the impact of a firms dividend policy on its value is an unresolved issue. Modigliani and Miller (1961) have shown that investors may be indifferent about the amount of dividend as it has no influence on the value of a firm. The lack of information on dividend policy of public listed companies in Malaysia provides the motivation of this study.

In Malaysia, there is no standard policy or procedure governing dividend payments. As such, companies are free to decide when and how much to pay out in dividends for a specific financial business year as long as they comply with Companies Act, 1965. Section 365 of the Act states that No dividend shall be 1|Page

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payable to the shareholders of any company except out of profits or pursuant to Section 60. In other words, the Act requires that dividends of a company can only be distributed from the profits of the company except pursuant to Section 60 of the Act. Since there is a dearth in the academic literature that describes the dividend policy for Malaysian companies, this paper is set to fill the gap by examining the dividend policy for public listed companies in Malaysia. Thus, the objectives of this study are:

To analyze the dividend policy as well as performance of firms listed on the Bursa Malaysia by looking at the dividend yield and dividend payout ratio.

To identify the relationship between dividend policy and firms performance.

This study is divided into five chapters. Chapter two below, is review of relevant literature. Chapter three, details our data and methodology. The following chapter, Chapter 4, presents the results and analysis. The final chapter, Chapter five is conclusions.

CHAPTER 2: LITERATURE REVIEW

How firms determine their dividend policy has been a puzzle to financial economists for many years. Many theories and models have been put forth to examine the numerous facets of dividend study. The seminal article by Miller and Modigliani (1961) is probably the watershed in the theoretical modeling of dividends, which first proposed dividend irrelevance. On the other hand, theories which support dividend relevance include tax preference, signaling, and agency explanations. Other researchers have developed and empirically tested various models to explain dividend behavior. Some conducted surveys of corporate managers to learn the most important determinants of corporate dividend activity. 2|Page

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The first empirical study of dividend policy was performed by Black (1976) in his study concluded with this question: What should the corporation do about dividend policy? We dont know. Researchers have proposed many different theories about the factors that influence a firms dividend policy. A number of factors have been identified in previous empirical studies to influence the dividend policy decisions of the firm. To, enumerate few profitability, risk, cash flows, agency cost, growth, taxes, price earnings ratio etc. Profits have long been regarded as the primary indicator of the firms capacity to pay dividends.

Then, Lintner (1956) through his interview with managers of 28 selected companies, he discovered that managers tend to value stable dividend policies, dividends are increased gradually and rarely cut and that most companies have reasonably definitive target payout ratios. Over the years, the company will adjust the dividends at a particularly speed of adjustment, so that the actual payout ratio moves closer to the target payout ratio. According to Pruitt and Gitman (1991) find that risk (year to year variability of earnings) also determine the firms dividend policy. A firm that has relatively stable earnings is often able to predict approximately what its future earning will be. Such a firm is more likely to pay a higher percentage of its earnings than firm with fluctuating earnings.

Dividend policy of a firm can be measured using 2 methods: (1) dividend yield and dividend payout ratio (Damodaran, 2001; Investopedia online). Changes in these 2 measures provide some information in relation to risks and future growth in earnings of the company. Previous research studies showed that shares with high dividend yields will result in excess returns, after adjusting for the market performance and risk (Damodaran, 2001). Dividend payout ratio is used in estimating future dividends and expected growth in earnings. When dividend payout ratio increases, the amount of free cash flow decreases and fewer investments can be made from the available cash flow, therefore the firm is expected to have lower growth in earnings. In other words, high retention ratio (13|Page

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dividend payout ratio) will result in higher growth in earnings (Damodaran, 2001).

In Malaysia, there is not much academic literature that describes the dividend policy for Malaysian companies, except for a survey conducted by Minority Shareholder Watchdog Group and University of Technology MARA (MSWG, 2006). They examine top 100 companies as per market capitalization on 31 December 2005. The survey examines the companies behavior on dividend distribution over a three-year period of 2002-2004. The survey found that most of the companies paid dividends in the three-year period. By examining the characteristic of the dividend payers and non-dividend payers, the survey proposed that profitability and liquidity are two essential ingredients for a healthy, dividend-paying public listed company. Companies with these two healthy components send out signals that they are able to sustain their dividend payment in the future.

CHAPTER 3: DATA AND RESEARCH METHODOLOGY

This study focuses on the dividend policies as well as performance of firms listed under three sectors in Bursa Malaysia. The annual reports of the three sectors namely consumer product, plantation and trading or services for the year 2008 to 2009 were chosen for this study. The three sectors are randomly selected from companies listed on the Main Board of Bursa Malaysia.

In order to analyze the dividend policies as well as performance of a firm or organization; the financial ratio analysis can be done. Financial statement will only reflect the profit and the financial position of the firm. There are two types of ratio, which are dividend payout ratio and dividend yield. This financial ratio analysis involves the methods of calculating and interpreting to evaluate the firm performance. 4|Page

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DPR is calculated as = Dividend per Share (DPS) Earnings per Share (EPS) DY is calculated as = Dividend per Share (DPS) Market Price per Share (MPS) There are two methods of ratio analysis that can be used in order to measure the performance of the firm or institution. The first method is comparative or cross sectional analysis. This method is used by comparing the financial ratio of a particular firm with those of other similar firm in the same industry or with an industry average.

Another method used in ratio analysis is time series analysis. This method will be applied to this research. Time series analysis means that we had to computing the financial ratio of a particular firm for a period of time and then compare the ratio overtimes. Time series analysis can help the firm to find out their strength and weaknesses by compare the firm performance over the year. The analysis is done in order to assess the firms performance in terms of their dividend policy.

Linear regressions analysis is used in this study when independent variables correlated with one another and with the dependent variable. The estimated regression model can be used to analyze the expected relationship between dependent variable and independent variables.

CHAPTER 4: RESULT AND ANALYSIS

This chapter discusses the finding on the analysis of the collected data based on the company listed under three sectors on the Main Board of Bursa Malaysia. The data collected are from companys audited annual reports from the year 2008 to 2009. There are two types of ratio, which are dividend payout ratio and dividend

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Dividend Policy and Firms Performance: Study on Malaysia Listed Company

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yield. This financial ratio analysis involves the methods of calculating and interpreting to evaluate the firm performance.

The first objective is to analyze the dividend policy as well as performance of firms listed on the Bursa Malaysia by looking at the dividend yield and dividend payout ratio. The table below will be data on the dividend payout ratio (DPR) and dividend yield (DY) for each company over two years beginning from year 2008 to 2009. Year 2008
Sector Consumer product 1. Nestle (M) Bhd 2. Fraser & Neave Holdings Bhd 3. Apollo Holdings Bhd 4. Mamee-Double Decker (M) Bhd 5. Spritzer Bhd average Plantation 1. IOI Corpration Bhd 2. Genting (M) Berhad 3. IJM Plantations Bhd 4. Sarawak Plantations 5. Hap Seng Plantations Holdings Bhd average Trading/services 1. KFC Holdings (M) Bhd 2. Telekom Malaysia Bhd 3. Parkson Holdings Bhd 4. Aeon Co. (M) Bhd 5. Sime Darby Bhd average 29.7% 98.8% 35.29% 20.06% 82.17% 53.204% 2.5% 6.4% 4.2% 1.8% 4.13% 3.806% 41.9% 20.26% 50.42% 59.46% 61.16% 46.64% 2.2% 1.89% 4.1% 5.0% 6.0% 3.838% 119.99% 85.68% 69.85% 60% 25% 72.104% 5.8% 4.5% 7.8% 7.1% 2.2% 5.48% Dividend Payout Ratio Dividend Yield

Table 1: the result of DPR and DY via sectors for year 2008 6|Page

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In the calculation shown in table 1, the results of current study found that in terms of dividend payout ratio (DPR), the consumer product sector has the highest result with average 72.104%, followed by trading/services sector until the lowest DPR result is the plantation sector with average 46.64%. In term of dividend yield (DY), the consumer product sector has the highest result with average 5.48%, followed by plantation sector until the lowest DY result is the trading/services sector with average 3.806%. Year 2009
Sector Consumer product 1. Nestle (M) Bhd 2. Fraser & Neave Holdings Bhd 3. Apollo Holdings Bhd 4. Mamee-Double Decker (M) Bhd 5. Spritzer Bhd average Plantation 1. IOI Corpration 2. Genting (M) Berhad 3. IJM Plantations Bhd 4. Sarawak Plantations 5. Hap Seng Plantations Holdings Bhd average Trading/services 1. KFC Holdings (M) Bhd 2. Telekom Malaysia Bhd 3. Parkson Holdings Bhd 4. Aeon Co. (M) Bhd 5. Sime Darby Bhd average 29.67% 150.90% 18.45% 20.00% 53.51% 54.506% 2.8% 6.5% 1.4% 2.1% 2.73% 3.106% 29.84% 28.92% 51.04% 53.57% 71.94% 47.062% 1.9% 1.14% 3.3% 3.4% 7.5% 3.448% 97.99% 80.15% 69.75% 55.1% 32.26% 67.05% 5.1% 4.8% 8.4% 7.3% 2.9% 5.7% Dividend Payout Ratio Dividend Yield

Table 2: the result of DPR and DY via sectors for year 2009

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Dividend Policy and Firms Performance: Study on Malaysia Listed Company

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In the calculation shown in table 2, the results of current study found that in terms of dividend payout ratio (DPR), the consumer product sector has the highest result with average 67.05%, followed by trading/services sector until the lowest DPR result is the plantation sector with average 47.062%. In term of dividend yield (DY), the consumer product sector has the highest result with average 5.7%, followed by plantation sector until the lowest DY result is the trading/services sector with average 3.106%.

Overall, the study on dividend policy as well as performance of firm shows that the Telekom Malaysia Bhd has the highest performance in term of Dividend Payout Ratio (DPR). It shows that the firm has well in growing their line of business with get high revenue and profit as well as pay high dividend payment to their shareholders. Then, in term of Dividend Yield (DY), the Apollo Holding Bhd shows that the firm gets highest result comparing the other firms. It shows that the firm pays out in high dividends each year relative to its share price or return on investment for a stock.

The second objective is to identify whether there is a significant relationship between Dependent Variable (DPR) with Independent Variable (DY). This section presents the interpretation of Linear Regression, Coefficient of Determination (R2), Regression Coefficient and Analysis of Variance (F-Stat). In calculate and analyzed the data, Statistical Package for Social Science (SPSS) Version 13 and Microsoft Excel 2007 was used. All the data were represent with tables and figures.

The table below shows the regression analysis result for observations from the year 2008 to 2009 by using SPSS.
Model 1 R 0.869 R 0.756

Table 3: The result of Coefficient of determination, R 8|Page

Dividend Policy and Firms Performance: Study on Malaysia Listed Company

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From the table 3, it shows that the R value is 0.756. It means that 75.6% of the variation or changes in Dividend Payout Ratio (DPR) can be explained by the independent variable such as Dividend Yield (DY). The other 24.4% of changes in Dividend Payout Ratio (DPR) is explained by other factors or independent variables which are not included in the model. This relationship can be considered as a strong correlation because it is more than 50%.

Variable DY

Coefficient 8.412

Table 4: The regression coefficient result From the table above, it shows that when Dividend Yield (DY) increased by 1% the Dividend Payout Ratio increased by RM8.412 million. Thus, there is a positive relationship between the Dividend Payout Ratio (DPR) and Dividend Yield (DY).

Variable DY

T - Statistics 3.517

T - Distribution 2.132

Relationship insignificant

Table 5: The T Statistics result The table 5 shows the result of t statistics which is the degree of freedom is, 6 1 1 = 7, refer the t distribution table is 2.132. Therefore, at a 95% confidence interval and at a significance level of 0.05, the calculated t value or t statistics is greater than the t distribution table (3.517 > 2.365). The Dividend Yield (DY) is said to be significant. From the hypothesis, H1 will be accepted and H0 will be rejected. So, there is a significant relationship between the Dividend Payout Ratio (DPR) and Dividend Yield (DY). So the model appears to be useful and more accurate for predicting Dividend Payout Ratio (DPR) as well as performance of firm.

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CHAPTER 5: CONCLUSION

This chapter presents the conclusions based on the findings and analysis obtained from the previous chapters. This study was conducted to analyze the dividend policy as well as performance of firms listed under three sectors on the Main Board of Bursa Malaysia. The study covered the period from 2008 to 2009 annually. There are three sectors which are consumer product, plantation and trading or services sector.

There are two objectives that need to be answered in this study. The first objective is to analyze the dividend policy by looking at the dividend yield and dividend payout ratio paid by the three sectors from year from 2008 to 2009 annually. From the analysis, the study on DPR and DY of three sectors shows that the consumer product gets the highest result compare with plantation and trading or services sector. It shows that the consumer product sector has well performance even though our economy gets effect from the global and domestic economic situation.

In this study on dividend policy as well as performance of firm shows that the Telekom Malaysia Bhd has the highest performance in term of Dividend Payout Ratio (DPR). It shows that the firm had try to give the best dividend to their shareholders by implementing certain dividend policy Then, in term of Dividend Yield (DY), the Apollo Holding Bhd shows that the firm gets highest result comparing the other firms. It shows that the firm pays out in high return on investment for a stock to ensure shareholders confidence can be maintained at the highest level.

The second objective is to identify the relationship between the independent variables (DY) with the dependent variable (DPR). After analyzing the data thoroughly, various results have been produced for all the three sectors. The current study found that, the overall Dividend Yield (DY) has significant 10 | P a g e

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positively relationship with Dividend Payout Ratio (DPR). Besides that, the result was significant for all three sectors in the present study because the independent variable used can be generalized since each company used different items treatment in their annual report.

Finally, from the conclusions it can be concluded that the dividend policy is a very important elements that help company to sustain in the long run. Companies are recommended to be aware of current domestic and global economic condition so that they can find alternative to maintain good dividend rate to the shareholders even the companys profit is fall. This is important because the dividend rate is a picture of the companys health. If companies fail to distribute promised dividend rate, the shareholders and public will lose their confidence to the companys ability.

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References
Aeon Co. (Malaysia) Berhad annual reports (2008-2009) Apollo Holdings Berhad annual reports (2008-2009) Black, F., 1976. The dividend puzzle. Journal of Portfolio Management 2, 5-8. Damodaran, Aswath (2001), Corporate Finance: Theory and Practice, United States: John Wiley & Sons Inc. Fraser & Neave Holdings Berhad annual reports (2008-2009) Genting (Malaysia) Berhad annual reports (2008-2009) Hap Seng Plantations Holdings Berhad annual reports (2008-2009) IJM Plantations Berhad annual reports (2008-2009) IOI Corpration Berhad annual reports (2008-2009) KFC Holdings (Malaysia) Berhad annual reports (2008-2009) Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46, 97-113. Mamee-Double Decker (Malaysia) Berhad annual reports (2008-2009) Miller, M. and Modigliani, F. (1961). Dividend policy, growth and the valuation of shares. Journal of Business, 34, 411-433. Nestle (Malaysia) Berhad annual reports (2008-2009) Norhayati, M. (2005). Information signalling and dividend policies in Malaysia.Unpublished Ph.D. Thesis, Universiti Putra Malaysia. Nur-Adiana, H. A., Rosemaliza, A. R. and Yusnidah, I. (2002). The effect of dividend announcements on stock returns for companies listed on the main board of the Kuala Lumpur Stock Exchange. Proceedings, MFA 4th Annual Symposium. Parkson Holdings Berhad annual reports (2008-2009)

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2008-2009

Pruitt, S. W. and Gitman, L. J. (1991). The interactions between the investment, financing, and dividend decisions of major US firms. Financial Review, 26(3), 409-430. Sarawak Plantations Berhad annual reports (2008-2009) Sime Darby Berhad annual reports (2008-2009) Spritzer Berhad annual reports (2008-2009) Telekom Malaysia Berhad annual reports (2008-2009)

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