KATHMANDU UNIVERISTY SCHOOL OF MANAGEMENT Identifying Most Suitable Dividend Policy for Nepalese Companies at Present Scenario Also includes individual analysis of four different companies of Nepal.
KATHMANDU UNIVERISTY SCHOOL OF MANAGEMENT Identifying Most Suitable Dividend Policy for Nepalese Companies at Present Scenario Also includes individual analysis of four different companies of Nepal.
KATHMANDU UNIVERISTY SCHOOL OF MANAGEMENT Identifying Most Suitable Dividend Policy for Nepalese Companies at Present Scenario Also includes individual analysis of four different companies of Nepal.
Submitted To: Mr. Sabin Panta Kathmandu University School of Management ACKNOWLEDGEMENT This financial term paper is the result of incessant effort and cooperation extended by many individuals. The report would not have been possible without the continuous support and assistance of various individuals. We express our sincere thanks to Mr. Sabin Bikram Panta, Assistant Professor at KUSOM for supervising and providing us his valuable time and inputs for the completion of this report. Our deepest appreciation goes to all those individuals who have directly or indirectly helped us in our accomplishment of the project. Abishu Rimal (13327) Dixa Shrestha (13331) Manjul Shrestha (13332) Santosh Dahal (13309)
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LIST OF FIGURES
Particulars Page Number 1. Motive behind Cash Dividend 6 2. Dividend Influence on Investment Decision 7 3. Mode of Income Distribution, Regularity and Stability of Dividend 7 4. Awareness of Residual Dividend Policy 8 5. Signaling Effect 9 6. Dividend or Capital Gain Preference 10 7. Line chart of DPS, EPS, DPR of Chilime Hydropower 16 8. Line chart of DPS, EPS, DPR of Butwal Hydropower Company 18 9. Line chart of DPS, EPS, DPR of Nepal Doorsanchar Company 19 10. Line chart of DPS, EPS, DPR of Everest Bank Ltd 21
LIST OF TABLES
Particulars Page Number 1. Motive behind Cash Dividend 6 2. Comparison of DPR of various years of Chilime Hydropower 16 3. Comparison of DPR of various years of Butwal Power Company 17 4. Comparison of DPR of various years of Nepal Doorsanchar Company 19 5. Comparison of DPR of various years of Everest Bank Limited 20
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EXECUTIVE SUMMARY Dividend policy decision is a very crucial decision made by any company. Once a company generates profit, management must decide on what to do with those profits. They could distribute the profit as dividend to the shareholders or continue to retain the profits within the company. None of the research has been taken regarding the best applicable dividend theory in the context of Nepal. Better understanding of whether to focus on dividend gain or capital gain, extent of the effect of the signals, reasons for cash dividend, and so on is necessary to have a clear view of the investment climate of Nepal. Some of the findings of the survey conducted are as follows: 1. Most of the investor has preference towards cash dividend. 2. Dividend decision has influence on investment decision of investors. 3. Investors prefer regular dividends. 4. Most of the investors are not aware of the residual dividend policy. 5. Dividend distribution has signaling effect. 6. Investors prefer of dividend gain over capital gain. 7. Dividend relevant theory is highly applicable in Nepal
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TABLE OF CONTENTS
ACKNOWLEDGEMENT ............................................................................................................. i LIST OF FIGURES ...................................................................................................................... ii LIST OF TABLES ........................................................................................................................ ii EXECUTIVE SUMMARY ......................................................................................................... iii INTRODUCTION......................................................................................................................... 1 Background ................................................................................................................................. 1 Problem Statement ...................................................................................................................... 1 Objectives of the Study ............................................................................................................... 2 Scope of the Study....................................................................................................................... 2 Literature Review ........................................................................................................................ 2 Methodology ............................................................................................................................... 3 Limitations of the Study .............................................................................................................. 5 RESULTS AND ANALYSIS OF INVESTORS RESULTS .................................................... 6 Findings of Investors Survey ..................................................................................................... 6 Motive behind Cash Dividend ................................................................................................. 6 Influence of Dividend on Investment Decision ....................................................................... 7 Mode of Income Distribution, Regularity and Stability .......................................................... 7 Residual Dividend Policy ........................................................................................................ 8 Signaling Effect ....................................................................................................................... 9 Analysis of Different Dividend Theories .................................................................................. 10 Dividend Irrelevant Theory ................................................................................................... 11 Dividend Relevant Theory ..................................................................................................... 11 Descriptive Theory of Dividend ............................................................................................ 12 Clientele Theory in Nepalese Investment Environment ........................................................ 12 Signaling Theory ................................................................................................................... 13 Dividend Theory and Dividend Puzzle ................................................................................. 13 DIVIDEND DISTRIBUTION TREND ANALYSIS OF FOUR NEPALESE COMPANIES ....................................................................................................................................................... 15 v
Analysis of Dividend Policy of Four Companies...................................................................... 15 Chilime Hydropower Company Limited ............................................................................... 15 Butwal Power Company (BPC) ............................................................................................. 17 Nepal Doorsanchar Company Ltd ......................................................................................... 18 Everest Bank Ltd ................................................................................................................... 20 CONCLUSION AND RECOMMENDATIONS ...................................................................... 22 Conclusion ................................................................................................................................. 22 Recommendations ..................................................................................................................... 23 Recommendation to Companies ............................................................................................ 23 Recommendation to Investors ............................................................................................... 23 BIBLIOGRAPHY ....................................................................................................................... 24
INTRODUCTION
Background Dividend policy decision is a very crucial decision made by any company. Once a company generates profit, management must decide on what to do with those profits. They could distribute the profit as dividend to the shareholders or continue to retain the profits within the company. The policy of a company on the division of its profit between distribution to shareholders and retention for its investment is known as dividend policy. Since, investors have different perceptions on present cash dividends and future a capital gain, coming up with a dividend policy is challenging for the directors and financial manager of a company. A confusion that arises is regarding the extent of effect that dividend has on the share price. Dividend policy is largely dependent on individual content or signaling hypothesis, investors perception and clientele effect. To solve this confusion in the context of dividend policy of Nepalese companies, this study has been carried out. Thus, this study focuses on the perception of Nepalese investors regarding dividend and dividend policy. Also, some major factors affecting the dividend policy has been figured out.
Problem Statement Dividend policy directly as well as indirectly plays a vital role in increasing or decreasing the shareholders value. Thus, a company should consider various aspects before making such decision. Some of the researches have been conducted in Nepal regarding corporate dividend policy and also on the relationship between dividend distribution and stock price. Better understanding of whether to focus on dividend gain or capital gain, extent of the effect of the signals, reasons for cash dividend, and so on is necessary to have a clear view of the investors perception regarding dividend policy. There is clearly some information content in dividend announcements: Stock prices tend to fall when dividends are cut, even if they dont always rise when dividends are increased. However, 2
this doesnt necessarily validate the signaling hypothesis since it is difficult to tell whether any stock price changes that follow changes in dividends reflect only signaling effects or both signaling and dividend preferences (Eugene & Michael, 2012, p. 645). Also, it was necessary to analyze and compare few of the companies regarding their dividend policy so that the investors perception on such Dividend Payout Ratio (DPR) can be better understood Thus, the problem statement of this paper is To identify the most suitable dividend policy for Nepalese companies at present scenario.
Objectives of the Study Some of the major objectives of the study are as follows: To view the applicability of different dividend theories in context of Nepal To understand the investors perspective regarding dividend and retention
Scope of the Study The study focuses on the effect of a companys dividend policy on the share price and also on identifying most suitable dividend policy for Nepalese companies. The scope of the study is as follows: Major factors that affect the dividend policy of companies in Nepal. Perception and preference of Nepalese investors towards dividend and dividend policy Dividend distribution trend analysis of four companies of three different industries banking, hydropower and networking.
Literature Review The term dividend policy refers to the practice that management follows in making dividend payout and retention decisions or, in other words, the size and pattern of cash distributions over time to shareholders (Lease et al., 2000, p.29). One of the major decisions that a company needs 3
to make is dividend decision. Miller and Modigliani (1961) have given a theory stating that the shareholders should be indifferent between amount distributed and retained in the firm. The better understanding of the payout depends on the investigation of the payout decisions of a firm in isolation from other financial decisions (Brealey, Myers and Allen, 2005). Miller and Modigliani theory (1961) propounded the dividend irrelevance theory suggesting the firms value is determined solely by the earning power and risk of its investments and the manner in which it splits its earnings streams between dividends and retained funds does not affect this value (Gitman, 2012). Gordon (1961; bird in hand Theory) focused on the so-called uncertainty resolution theory of dividends (bird in the hand theory). The belief in support of dividend relevance theory is that investors see current dividends as less risky than future dividends or capital gains. Besides these there are certain descriptive theories that explain the relevance of dividend Clientele Theory, Signaling Theory, behavior bias theory. Signaling theory suggests the relevance of the dividend due to the information content. Bhattacharya (1979) claimed that the existence of information asymmetries between managers and outside investors could play a signaling role regarding dividends. This view regarding the signaling effect is also consistent with Miller and Rock (1985). Investors preference for dividend varies with time. (Baker and Wurgler, 2004b), one possibility is that investor demand reflects time-varying risk preferences or sentiment. Specifically, in low-sentiment periods (e.g., recessions, bearish trend) investors may prefer safer dividend-paying stocks.
Methodology The steps used in the completion of this report are as follows: Formulation of the problem: The problem statement of this project study is To identify the most suitable dividend policy for Nepalese companies at present scenario. Problem solving approach: Primary as well as secondary sources of data was collected to address the problem. Research Design: Various data collected from primary and secondary sources are collected, tabulated, analyzed and presented. 4
Data Collection: Different primary as well as secondary sources of information were used in collecting the data. Primary Source Survey was conducted among 30 investors of Kathmandu Valley. Short interviews of the investors were conducted.
Secondary Source: Official website of four companies- Everest Bank Limited, Nepal Doorsanchar Company Ltd, Chilime Hydropower Company Ltd, and Butwal Power Company Annual Reports of the respective companies Related articles, research, newspapers, etc. Questionnaire Development: Questionnaire survey technique was used for the collection of the data. 17 questions were prepared and they were easy to understand. For the final draft of the questions, few investors were interviewed regarding the questions. The questions included different categories like Dividend Distribution (6 questions), Dividend policy (2 question), Signaling Effect (4 questions), Dividend Theories (Dividend Irrelevance Theory, Bird-in Hand theory) (5 questions). Sample Selection: 30 random investors inside Kathmandu valley were directly approached with the questionnaire. Short interviews were taken with the same investors. Data Analysis: Following steps were involved in data analysis: In the first phase data was extracted from the filled questionnaire as well as from annual reports of four companies. In the second phase, data were presented in the form of different graphs and diagrams with the help of Excel Sheet. In the final phase, based on the graphs and diagrams different conclusions were drawn about the dividend decisions.
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Limitations of the Study Some of the limitations of our study are as follows: Due to the time constraint only 30 of the investors were approached with the questionnaire and the report is prepared based on this survey. To analyze the most relevant theory of investor preferences in the context of Nepal, only perception of buyers are taken into consideration. Only few aspects of dividend policy have been taken into consideration, future forecasts and possibilities are beyond the scope of this study. Only four companies were taken for the analysis purpose. Had more companies been taken, the more accurate results could have been expected.
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RESULTS AND ANALYSIS OF INVESTORS RESULTS
Findings of Investors Survey Based on the survey conducted, analysis of the preferences of the investors was analyzed. Analysis such as motive behind cash dividend, influence of dividend on investment decision, investors preference on the stability of dividend, degree of awareness of residual dividend policy, and so on was done. The analysis is explicitly shown below:
Motive behind Cash Dividend
Fig 1: Motive behind Cash Dividend
Table 1: Motive behind Cash Dividend Most of the investor has preference towards cash dividend. Amongst the respondents, most believe that company provide cash dividend to make shareholders happy. 22% of the investors believed that the motive for cash dividend was to convey the companys prospects. This is the result of signaling effect. This shows that when the company pays cash dividend many of the investors have positive belief about the companys growth prospects. To increase share price To make shareholders happy To convey about company's prospects To make new shareholders Other reasons Motive for cash dividend Motive % of customers To increase share price 6 To make shareholders happy 42 To convey about company's prospects 22 To make new shareholders 26 Other reasons 4 Total 100 7
Influence of Dividend on Investment Decision The influence of dividend on investment decision can be understood from the following figure:
Fig 2: Dividend Influence on Investment Decision 84% of the respondents agreed to the notion that dividend decision has influence on investment decision of investors.
Mode of Income Distribution, Regularity and Stability
Fig 3: Mode of Income Distribution, Regularity and Stability of Dividend According to above shown results it can be deduced that investors prefer regular dividends. Other form of dividend such as stock dividends and low regular dividend plus extra is not highly welcomed. Stock repurchase is the not welcomed form of dividend. About 70% of the respondents believe stability of dividend to be important. Yes 84% No 16% Very Important 24% Important 46% Neutral 20% Not important 10% Degree of stability of dividend 59% 88% 88 % 8
The mode of dividend plays a significant role in determining the expectation of the shareholder. Thus, dividend policy has significant impact of the share price of the company. By providing stable and regular dividend, the risk and uncertainty associated with investment in the share is reduced. As the riskiness is reduced, the required rate of return of shareholders will also decrease. This eventually reduces the cost of equity and WACC of the firm. Reduction in WACC means that the discounting rate for companys earnings will be reduced. This will ultimately result in increase of market value of the share of the company.
Residual Dividend Policy In residual dividend policy, if a company has profitable investment opportunities, the company invests the required amount out of the earnings and the remaining amount of the earnings is distributed as dividend (Jeewan, R.Shiva, & Rajendra, 2010). Investors perception regarding residual dividend policy
Fig 4: Awareness of Residual Dividend Policy The above chart signifies that there are still significant portion of the population that are not aware of residual dividend policy. If people were m re aware of the residual dividend policy then investors would not have negative view towards dividend cuts or zero dividend or unstable dividends. As people are not aware of the policy, the above finding of people valuing stable and regular dividend is justifiable. In context of Nepal, since significant portion of people are still not aware of residual dividend policy, unstable dividend might not be welcomed by investors in Nepal. Yes 64% No 36% Degree of awareness of residual dividend policy 41% 59% 70% 30% 9
Signaling Effect Shareholders often view a dividend payment as a signal of the firms future success. A stable and continuous dividend is a positive signal, conveying the firms good financial health. Shareholders are likely to interpret a passed dividend payment due to a loss or to very low earnings as a negative signal (Lawrence, 2011). Investors perception regarding dividend payment or dividend cut in context of Nepal is presented below:
Fig 5: Signaling Effect The analysis of the chart done above, highlight the fact that dividend distribution has signaling effect. It can be seen that most investors agree to the fact that dividend declaration have significant impact on of companys prospect in the market. Due to this fact managers are not willing to cut dividend, as it portraits a negative image of the companys future in the market.
Preference towards Dividend or Capital Gain The figure given below entitled degree of importance shows the preference of dividend gain over capital gain. 53% of the people prefer dividend gain where as 47% of the people prefer capital gain. This shows that in Nepal, most of the investors prefer some constant source of income i.e. dividend gain.
33 47 10 7 3 Strongly agree Agree Neutral Diagree Strongly disagree Do you agree dividend cut has negative impact of company in market Percentage 35% 44% 70% 10
Fig 6: Dividend or Capital Gain Preference
Tax Effect In the dividend preference of the investors, tax has a significant influence according to our survey. Investors were asked whether tax effects would make them to prefer capital gains over dividend gain then 62% of the investors preferred capital gain rather than dividend gain. Currently, dividend gain tax and capital gain tax are brought down to the similar level. However preferring capital gain over dividend gain might be due to time value effect. Due to time value effects, a dollar of taxes paid in the future has a lower effective cost than a dollar paid today. So even if dividends and gains are taxed equally, capital gains are never taxed sooner than dividends (Eugene & Michael, Tax preference theory, 2012).
Analysis of Different Dividend Theories Our primary objective is to analyze the prevalence of dividend policies in Nepal. We try to figure out whether dividend theories help to solve the dividend puzzle. Our sample is primarily individual/retail investors. Among our respondents we will try to find their preference of either dividend gain or capital gain. The descriptive theories of dividend like the clientele theories and life cycle theories provide insight on the characteristics of the investors receiving dividend and firms paying them. Behavioral theories see market inefficiency (investor sentiment), investor Dividend gain 53% Capital gain 47% Degree of importance 11
biases, as the key drivers of dividend payments. Hence for the purpose of our study we have taken insight on the observation of descriptive as well as the behavioral theories. For our study we will look into dividend relevance and dividend irrelevance. For dividend relevance theories we will analyze motivation theories like bird-in-hand, self-control, and mental accounting theories.
Dividend Irrelevant Theory This theory suggests that dividend policy has no effect on the price of the companys stock and its cost of capital. Our survey showed that there is not much prevalence of the dividend irrelevance theory. 47% of the investors preferred capital gain. This shows that most of the Nepalese investors prefer dividend gain. Thus, dividend policy of a firm has some impact upon the price of the stock. However, this preference may be due to signaling effect which signals managements earnings expectations. Thus, the motive for the preference was analyzed to have better view of the theory applicable in Nepal. 53% of the investors in our survey preferred dividend gain where as only about 6% of the investors believed that firms motive behind providing dividend is to increase the value of the firm. This being, however dividend decision is not totally irrelevant decision. Through our survey it was found that dividend irrelevance theory is not highly regarded in Nepalese context. There seems to be huge prevalence of dividend preference.
Dividend Relevant Theory Our survey revealed that the investors had huge preference for dividend over capital gains. Thus, dividend relevance theory is much more prevalent in Nepalese context. While analyzing the bird in hand theory Nepalese retail investors were in huge preference of dividend. The survey highlighted that investors preferred stability of the dividend. Major retail investors preferred dividend gain to capital gain mainly due to following reasons: 12
Investors see current dividends as less risky than future dividends or capital gains (Lawrence, 2011) Many investors dont have enough knowledge about the market mechanism. Thus, these investors prefer secured stable income which is provided by dividends. Clientele effect/ Investors profile of Nepalese investors have increased preference of dividend. Hence, the most prevalent dividend theory in Nepal is the Dividend Relevance (Bird in hand Theory).Various behavioral theories can be referred to explain the Nepalese investors preference for Dividend Gain over Capital Gain.
Descriptive Theory of Dividend These theories basically describe the investors and companies feature and nature influencing the dividend policy. The major dividend theories are: Clientele Theory in Nepalese Investment Environment Different groups or clienteles of stockholders prefer different dividend payout policies (Eugene & Michael, 2012, p. 643). Our survey basically focused on retail investors and their dividend preferences. Various aspects of the investors influence their preference for particular dividend theory. Following facts about the investors were revealed through our survey: The bullish and bearish trend of the stock market affects the decision of stockholders. Stock market at present is in the bearish trend. Thus, the market is risky from the perspective of the investors. Thus, wanting to prefer dividend gain over capital gain. Nepalese investors prefer stable dividend as it has supplemented the income of many of the investors. Thus, they are much more inclined towards dividend gain over capital gain. Nepalese investors are risk averse by nature. So they would prefer dividend returns over capital gain. The respondents age profile ranged from 24 to 56. 53% preferred dividend gain while 47% preferred capital gain. Age clientele did not have much effect. 13
We can see that clientele effect has made an impact on investors preference for dividend returns over capital return. More over various facets of investors have come into play in clientele effect.
Signaling Theory The investors believe the dividend announcement to better signal for the prospect of the company. Reduced dividend trend of the company is attributed to negative future prospect of the company. Such signaling effect of the dividend has effect on the value and market price of the firm. Decrease in dividend has serious repercussion in the value of the firm in the market. In context of Nepal, investors have strong belief in the information content of the dividend decision. Thus the signaling theory shows the relevancy of dividend in influencing the value of the firm. 80% of the respondent believed that dividend cut provide negative information of the companys future earnings. Nepalese investors have a one minded view of dividend decision i.e. dividend increase signals better prospect of the company and dividend cut signals reduced future prospect of the company. The companies should efficiently make the dividend decision.
Dividend Theory and Dividend Puzzle There have been several theories of dividend propounded. All the theories add to certain degree of confusion. The pioneering dividend theory of Miller and Modigliani (Dividend Irrelevance Theory) states that dividend policy does not have significant value, as investors can create their own dividend policy (Eugene & Michael, 2012, p. 639). Miller and Modigliani theory believed that investors are indifferent regarding the choice between dividend and capital gain. This policy ignores brokerage cost and tax cost. Our survey revealed that dividend had a great influence investors investment decisions most of the investors preferred dividend gain. The dividend puzzle in context of Nepal can be solved by the Bird in hand Theory. There are many factors in influencing investors choice for the dividend such as the nature of the Nepalese investors being a risk averse, dividend incorporates certain 14
portion of the households income. As the Nepalese market is in bearish trend, this has also resulted in investors wanting sure returns. Thus we can say Dividend Relevant Theory (Bird in hand Theory) is the ultimate theory prevalent in our country. Dividend decision plays a significant role in determining the future prospect of the company in the market.
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DIVIDEND DISTRIBUTION TREND ANALYSIS OF FOUR NEPALESE COMPANIES
This is the other part of report endeavoring to provide a glimpse of dividend policy of Nepalese company representing sector like Banking and Insurance, Manufacturing, Hydropower, and Networking. At first, the individual analysis of dividend policy of each company based on EPS, DPS and Payout Ratio is done and is concluded with comparative analysis between them.
Analysis of Dividend Policy of Four Companies Chilime Hydropower Company Limited Chilime Hydropower Company Limited (Chilime) was incorporated in 1995 with an objective of hydroelectricity generation through optimal utilization of resources within the country. Nepal Electricity Authority (NEA) holds majority ownership with 51% shareholding. Chilime has actually begun working towards its 2020 vision already. Right after the generation of hydroelectricity began on 25August 2003, the company applied for further projects and has four projects in its pipeline now. From the table and the graph given below showing dividend growth rate we can find that dividend per Share of Chilime Hydropower was increasing at increasing rate till 2009/10. However, it was increasing at decreasing rate in 2010/11. Earnings Growth Rate significantly increased from 1.78% in 2007/08 to 8.24% in 2008/09. But this growth decreased to 5.72% in 2009/10 and then there was negative growth rate of 4.17% in 2010/11. However, each year the dividend payout ratio was increasing. To encourage investors and avoid the negative signaling due to dividend cut, manager of Chilime ensure the consistency and growth in dividend despite fluctuations in earning.
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Year 2006/7 2007/8 2008/9 2009/10 2010/11 Dividend per share 30.00 35.00 45.00 60.00 70.00 Earnings Per share 91.49 93.12 100.79 106.56 102.12 Dividend growth rate (%) [DG] 16.67 28.57 33.33 16.67 Earnings growth rate (%)[EG] 1.78 8.24 5.72 -4.17 Dividend Payout Ratio (%) [DPR] 32.79 37.59 44.65 56.31 68.55 Table 2: Comparison of DPR of various years of Chilime Hydropower [Source: Chilime Annual Report 2011/2012]
Fig 7: Line chart of DPS, EPS, DPR of Chilime Hydropower [DG] [EG] [DPR] -10.00 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 2006/7 2007/8 2008/9 2009/10 2010/11 P e r c e n t a g e
Year 17
However, when EPS decreased in 2010/11 and Chilime invested Rs. 192.42 million in the same year, the company then cut its DPS. Investment in new project was Rs. 84.20 million in 2008/09. There was significant increase in investment of 128.53% in 2009/10. Dividend Payout Ratio (DPR) is increasing each year from 2006/07 to 2010/11. It means that the retention ratio is decreasing each year. However, the company is investing more each year in new investments.
Butwal Power Company (BPC) Butwal Power Company (BPC) was established in 1966 by a visionary Norwegian engineer Mr. Odd Hoftun. Mr. Hoftun with the aim of educating the young of Nepal started Tinau hydropower plant, and to create the opportunities for small businesses by utilizing the hydropower potential of Nepals river. He managed to raise support from his home country, and brought tons of equipment from Norway to Butwal in 1964. BPC was established with the various concepts for developing self-competency in various area of the hydropower industry like engineering, construction, operation, maintenance and manufacturing of hydroelectric equipment. Year 2007/8 2008/9 2009/10 2010/11 2011/12 Dividend per share 30.0 30.0 30.0 25.0 25.0 Earnings Per Share 42.2
34.8 24.3 32.4 47.6 Dividend growth rate (%) 0.0 0.0 -16.7 0.0 Earnings growth rate (%) -17.61 -30.10 33.39 46.82 Dividend Payout Ratio (%) 71.12 86.33 123.51 77.16 52.55 Table 3: Comparison of DPR of various years of Butwal Power Company The above mentioned growths are shown in below line chart: 18
Fig 8: Line chart of DPS, EPS, DPR of Butwal Hydropower Company [Source: Annual Report of Butwal Power Company (2011/12)] Dividend per Share (DPS) of Butwal Power Company is quite stable. From 2007/08 to 2009/10 the growth rate of dividend is 0%. However, in 2009/10, the company slashed it DPS by Rs. 5. During 2009/10 the EPS was increasing at an increasing rate. However, in preceding years EPS was decreasing. During those years company was maintaining same dividend. However, when there was growth of EPS in 2009/10, the company might have analyzed the possibility of the decrease in the EPS in the coming years. So, to deal with the possible adverse situation and to bring the consistency in the dividend it might have slashed its dividend by Rs.5 so that it can maintain the same dividend in future too.
Nepal Doorsanchar Company Ltd Nepal Doorsanchar Company Ltd popularly known as Nepal Telecom is the largest telecommunication service provider in Nepal. The company was a monopoly until 2003, when the first private sector operator UTL started providing basic telephony services. Doorsanchar Company Ltd earnings per share and dividend per share over the years 2007/2008 to 2011/2012 is as follows:
DG EG DPR -40.0 -20.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 2007/8 2008/9 2009/10 2010/11 2011/12 P e r c e n t a g e
Year 19
Year 2007/8 2008/9 2009/10 2010/11 2011/12 Earnings Per Share 53.00 68.00 72.00 81.00 77.00 Earnings growth rate (%) [EG]
28.30 5.88 12.50 -4.94 Dividend per share 10.00 25.00 35.00 40.00 41.00 Dividend growth rate (%) [DG] 150.00 40.00 14.29 2.50 Dividend Payout Ratio (%) [DPR] 18.87 36.76 48.61 49.38 53.25 Table 4: Comparison of DPR of various years of Nepal Doorsanchar Company [Source: Annual Report of Nepal Telecom (2011/12)]
Fig 9: Line chart of DPS, EPS, DPR of Nepal Doorsanchar Company Both the DPS and EPS of Nepal Telecom are increasing each year. However, growth rate of both DPS and EPS are in decreasing trend. As the earning is increasing the company is providing more dividends. The Dividend Payout Ratio is increasing each year. Most investors look for a company that has a dividend ratio of between 40-60 percent. With this breakdown, shareholders earn a profit while still allowing the company to roll over the money to increase internal growth. DG EG DPR -20.00 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 2007/8 2008/9 2009/10 2010/11 2011/12 P e r c e n t a g e
Year 20
Companies that have a higher payout ratio are investing less money into the company for growth (Dividendpayoutratio.org, 2013). Thus, Nepal Doorsanchar is retaining less for its internal growth.
Everest Bank Ltd Everest bank was founded in 1994, the bank has been one of the leading banks of the country and has been catering its services to various segments of the society since then. It is now catering to more than 5.5 lacs customers today. (Welcome to Everest Bank) The information obtained regarding Everest Bank Limiteds earning per share and dividend per share over the years 2007/2008 to 2011/2012 is as follows:
Table 5: Comparison of DPR of various years of Everest Bank Limited [Source: Annual Report of Everest Bank Ltd (2011/12)]
Fig 10: Line chart of DPS, EPS, DPR of Everest Bank Ltd Everest bank provided constant dividend from 2008/09 to 2010/11 to its investors. However, in 2011/12, it slashed its dividend by 47.37%. Earnings growth rate of the bank in 2010/11 was negative but the bank was providing constant dividend as it was providing in the previous two years. In 2011/12 the earnings of the bank became positive and the bank reduced its dividend. Cutting the dividend when the earnings are low might have sent a negative signal towards the investors. So, the bank might have waited till the earnings became positive. Since, the Everest bank might have felt that it will not be able to maintain the same dividend in the future, it might have cut its dividend. But to lessen the negative signal, the company might have waited till the earnings became positive. On an average, firms that cut dividends have had poor earnings in the years directly preceding the cut but have actually improved earnings in subsequent years (Eugene & Michael, Financial Management, 2012). Dividend Payout Ratio (DPR) of the bank is fluctuating. It might be due to the fluctuating EPS of the company.
DG
EG DPR -60.00 -40.00 -20.00 0.00 20.00 40.00 60.00 80.00 2007/8 2008/9 2009/10 2010/11 2011/12 A x i s
T i t l e
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CONCLUSION AND RECOMMENDATIONS
Conclusion We conducted survey among the investors to analyze the most prevalent dividend theory in explaining the dividend puzzle of the country. We tried to analyze the relevancy of the dividend and dividend policy in the investment climate of Nepal. Dividend relevant theories like Bird in hand theory is most prevalent in the context of Nepal. Investors believed that the major motive of companies for the payment of dividend was to make investors happy and these investors prefer stable dividend. The findings also revealed that majority of the investors didnt know much about residual dividend policy. The survey revealed that dividend is highly relevant in context of Nepal and also if any company slashes its dividend then investors will have negative perception towards the company. Besides the survey conducted, our report also focused on the analysis of the dividend trend of four different companies from different industries. Dividend payout trend was analyzed of these companies separately and a comparative analysis of the dividend was made. According to our analysis what we found was that there was no consistency in the payout trend. The fluctuation that occurred can be attributed to the economy of the country, the nature of the industries involved and so on. Huge investment opportunity has led the fluctuating trend in the hydropower sector. Unlike hydropower sector, the competition is fierce in banking sector. Thus, banks normally do not want to cut its dividend, however, there is fluctuation in the payout in this sector too. Major findings of the survey are as follows: 1. Most of the investor has preference towards cash dividend. 2. Dividend decision has influence on investment decision of investors. 3. Investors prefer regular dividends. 4. Most of the investors are not aware of the residual dividend policy. 5. Dividend distribution has signaling effect. 23
6. Investors prefer of dividend gain over capital gain. 7. Dividend relevant theory is highly applicable in Nepal.
Recommendations Recommendation to Companies Some of the recommendations for companies are as follows: 1. Nepalese investors prefer stable dividend and dividend cut portray a negative signal towards the company. Thus, company should try to provide stable dividend, however if dividend cut becomes necessary then the company should pre-inform the investors about the reasons for dividend slash. 2. Company should carry out careful analysis before providing higher dividend. The company should provide such dividend amount that it can maintain in future 3. Many times company might be slashing its dividend looking its future growth prospects. The company should inform the investors about such opportunity to nullify or reduce the negative signaling effect.
Recommendation to Investors Some of the recommendations to the investors are as follows: 1. Investors should analyze the investment opportunities before investing in any company. Higher dividend payout sometimes also reflects lower investment prospects of the company, which is not good from the long term perspective. 2. Reduced earning might not always be the reason of the lower dividend. When the company sees growth prospect it can cut its dividend and dividend cut in this way is necessary for the growth of the company.
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BIBLIOGRAPHY
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