DIVIDEND POLICY AS STRATEGIC TOOL OF FINANCING IN CORPORATE ORGANIZATIONS

(A CASE STUDY OF FIRST BANK PLC AND ECO BANK NIGERIA PLC)

ABSTRACT

This study investigated dividend policy as a strategic tool of financing in corporate organizations in Nigeria. Specifically, it examined the nature of relationship between dividend payments and the value of the firms.

The study employed secondary annual data, collected from two selected commercial banks operating in Lagos State over a period of twenty years from 1988 to 2008. The secondary annual data were sourced from annual reports and statement of Accounts of the selected commercial banks and the central Bank of Nigeria

(Various issues). The study employed ordinary Least squares method to examine the effects of dividend policy on capital structure of corporate organizations in Nigeria. Simple Regression Analysis was also employed to analyze the relationship between dividend policy and capital structure of the sample commercial banks.

The empirical results showed that there is a relationship between earnings per share and dividend payout with co-efficient values of 138.200 (∞t= 8.120, P< 0.05). Also, the results revealed that payout ratio has a positive relationship with profit after tax with coefficient value of 30708.728 (∞t= 6.297, P< 0.05).

The study concludes that dividend policy decision is not a decision of the board of directors alone. The shareholders should be given recognition in "a policy like this because they are directly affected by the policy.

TABLE OF CONTENT

CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

1.2      Statement of the problem

1.3      Research Questions

1.4      Objective of the study

1.5      Statement of Hypothesis

1.6      Methodology of the Study

1.7      Significance of the Study

1.8      Limitation and Scope of the Study

1.9      Definition of Terms

References

CHAPTER TWO

LITERATURE REVIEW

2.0      Introduction

2.1      Concept of Dividend and Dividend Policy

2.2      Forms of Dividend

2.3      Theoretical Viewpoint

2.3.1   Dividend Relevant Theory: Walter's Model

2.3.2   Criticism of Walter's Model

2.3.3   Dividend Relevant: Gordon's Model

2.3.4   Dividend and Uncertainty: The Bird-In-The Hand Argument

2.4      Dividend Irrelevant Theory

2.4.1   Criticisms ofM &M Theory of Dividend Irrelevance

2.5      Implication of the Theories on Dividend Decision

2.6      Practical Factors Determining Dividend Policy

2.7      Concept of Capital Structure

2.8      Capital Structure Theories

2.8.1   Modigliani and Miller Approach to Capital Structure

2.8.2   Durand View on the Effect of Capital StructureOn Firm's Value and Cost Of Capital

2.8.3   Traditional Approach

2.9      Recent Theories on Optimal Capital Structure

2.10    Empirical Tests of Dividend Theories

Reference

CHAPTER THREE RESEARCH METHODOLOGY

3.1      Introduction

3.2      Variable and Data Sources

3.3      Re- statement of Research Hypothesis

3.4      Sources of Data

3.5      Model Specification

3.6      Model Estimation Technique.

3.7      Analytical Techniques

3.8      Limitation of Methodology

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF DATA

4.1      Introduction

4.2      Data Presentation

4.3      Empirical Result and Interpretation

4.4      Summary of Findings

4.5      The Implication of Findings

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

5.2 Conclusion

5.3 Recommendations

Bibliography

CHAPTER - ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY

The topic of dividend policy continues as one of the most challenging and controversial issues in corporate finance and financial economies. Research into dividend policy has, shown not only that a general theory of dividend policy remains elusive, but also that corporate dividend varies over time between firms.

For a firm, which encounters financial difficulties, reliance is placed on retained earnings and accordingly results in lower payout ratios.

However, shareholders have been enthusiastic interest in the outcome of their investments. These outcomes are expressed in terms of earnings and capital gains.

These two ingredients are in turn affected by the quality of policies made by the management team of the enterprises. Among the most important decisions that management of an enterprise must take which has direct bearing on firm’s continuity, earning potentials, investors' satisfaction and share price gain is the decision to withhold or distribute net earnings as retained profit or dividends.

Pandey (1999), stated firmly that "Dividend policy is a decision by the financial manager whether the firm should distribute all profit or retain them or to distribute a portion and retain the balance. Payments made to stockholders from a firms earnings, whether those earning were generated in the current period or in previous periods. Dividend policy is an important aspect of corporate finance and dividends are major cash outlays for many corporations.

Garrison (1999) defined dividend policy as payments made to stockholders from a firm's earnings', whether those earnings were generated in the current period or in the previous period. Dividend could also be referred to as that part of the enterprise earning that is given to shareholders as interest on' their investment. Also, itrepresents the return to investors who put their money at risk in the company.

Company pays dividend to reward existing shareholders and encourage others that are prospective shareholders to buy new issues of the common stock at high price.

However, many seem obvious that a firm would always want to give as much as possible to its shareholders by paying dividends. It might seem equally obvious that a firm can always invest the money for its shareholders instead of paying itout. The heart of dividend policy question is should the firm payout money to its shareholders or should the firm take the money and invest it for shareholders into the enterprise business.

Valuation is considered the heart of finance, understanding what determines the value of a firm, and how to estimates that value seems to be a prerequisite for making sensible decisions (Damodaran, 2006). Company valuation is a delicateconcoction of both science and art. The former takes the shape of quantitative risk- return model, and latter, experience and judgment on the part of the appraiser - intuitive elements that belong to the artistic realm (Pereiro, 2002). In general, there are four approaches to valuation (Damodaran, 2006). Quantitatively oriented valuation techniques include the discountedcash flow based method (DCF) and the real options model. The traditional fundamental valuation technique is the discounted' cash flow (DCF) based method, which relies on the capital asset pricing (CAPM) to compute the cost of capital. And attractive technique for valuing future opportunities is the real options framework. This method is used when there is a reasonable chance of reserving the rights of exploration for the investments undertaken (Pereiro, 2002). A third model for valuation is based in relative valuation and involves computing value multiples for a representative sample of comparable companies or transactions similar to the target under appraisal

(Pereiro, 2002). Excess return models have their roots in capital budgeting and the net present value rule with its widely used variant, the Economic Value Added (EVA (R).

(EVA (R) is a registered trade mark of stem steward &co. EV A (R) is a measure of the surplus value created by an investment or a portfolio of investments. It is computed as the product of the "excess return" made on an investment(s) and the capital invested in thatinvestments) (Damodaran, 2006).

Moreover, it has been discovered that the .dividend policy of a firm always have short term or long term effect on the market price of its shares. It shall be found out in the course of this research, the actual relationship between the dividend payout and dividend policy of companiesi.e payout ratio of the firm is a percentage of dividends to earnings.

It is quite difficult to clearly identify the· effects of payout on firm's valuation. The valuation of a firm is a reflection of so many factors that the long run effect of payout is quite difficult to separate. J.S. Kehinde (2001) viewed dividend policy as "the dividend policy of a firm accounts for how a firm divides its income between retained earnings and dividends. It states the policy measure of how much dividend to the declared, in what form should the dividend be declared- either as a cash dividend or as stock dividends. By dividend .policy the corporate organization, strike a balance between current income tothe shareholders and a future income.

Income can be retained and reinvested' into available profitable investment opportunities. The retained earnings provide the cheapest source of financing. This research is to examine empirically the dividend policy of all quoted companies (banks) in Nigeria and to present evidence on what determines corporate payout policy this market. In addition, it tends to identify the impact of dividend policy on company valuation and the various approaches to dividend payment to stakeholders as against retaining it for re-investment.

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