An overview of Dividend Policy

Dividend is that portion of net profits which is distributed among the shareholders. The dividend
decision of the firm is vital for the finance manager since it determines the amount to be
distributed among shareholders and the amount of profit to be retained in the business.
Retained earnings are very important for the growth of the firm. Shareholders may also expect
the company to pay more dividends. So both the growth of company and higher dividend
distribution are in conflict. So the dividend decision has to be taken in the light of wealth
maximization objective. This requires a very good balance between dividends and retention of
earnings.
Dividend policy is concerned with financial policies regarding paying cash dividend in the
present or paying an increased dividend at a later stage. Whether to issue dividends and what
amount, is determined mainly on the basis of the company's available profit (surplus cash) and
influenced by the company's long-term earning power. When cash surplus exists and is not
needed by the firm, then management is expected to pay out some or all of those surplus
earnings in the form of cash dividends or to repurchase the company's stock through a share
buyback program.

Dividend theories
Dividend Irrelevance Theory:
Under these frictionless perfect capital market assumptions, dividend irrelevance follows from
the Modigliani-Miller theorem. Merton Miller and Franco Modigliani (MM) developed a theory
that shows that in perfect financial markets (certainty, no taxes, no transactions costs or other
market imperfections), the value of a firm is unaffected by the distribution of dividends. They
argue that value is driven only by the firm's ability to earn money and riskiness of its activity
can have an impact on the value of the company. The value of a firm is unaffected by how that
firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt,
nor does it matter what the firm's dividend policy is. Essentially, firms that pay more dividends
offer less stock price appreciation that would benefit stock owners who could choose to profit
from selling the stock. However, the total return from both dividends and capital gains to
stockholders should be the same. If dividends are too small, a stockholder can simply choose to
sell some portion of his stock. Therefore, if there are no tax advantages or disadvantages
involved with these two options, stockholders would ultimately be indifferent between returns
from dividends or returns from capital gains.

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Merton Miller and Franco Modigliani (MM) grounded their theory on a set of assumptions:
No time lag and transaction costs exist.
Securities can be split into any parts.
No taxes and flotation costs.
Financial leverage does not affect the cost of capital.
Both managers and investors have access to the same information.
Firm's cost of equity is not affected in any way by distribution of income between dividend

and retained earnings.

Dividend policy has no impact on firm's capital budget

Dividend Relevance theory (Bird-in-the Hand theory):

A theory developed by Myron J. Gordon & Linter that tells Stockholders prefer current dividend.
Gordon and Lintner suggested stockholders prefer current dividends that a positive relationship
exists between dividends and market value. Fundamental to this theory is that Bird-in-the Hand
argument suggests that investors are risk averse & attach less risk to current as opposite to
future dividends or capital gains. Because current dividends are less risky, investors will lower
their required return - thus boosting stock prices.
Cash Dividend reduces investor uncertainty causing investors to discount the firms earnings at
a lower rate and it places a higher value on the firms stock. If dividends are increased, investor
uncertainty will decrease, lowering the required return (Ks) and increasing the value of the
firms stock. If dividends are reduced or are not paid, investor uncertainty will increase, raising
the required return (Ks) and lowering the value of the firms stock.
Empirical studies fail to provide conclusive evidence in support of dividend relevance argument.
However, financial managers & stockholders believe that dividends are relevant. Approximately
90% of CFOs agree or strongly agree that they smooth dividends from year to year and try to
avoid reducing dividends. Dividend smoothing behavior was also recorded by other surveys.
According to the survey, managers believed that the market puts a premium on stability or
gradual growth in rate of dividends.
A financial manager may treat the dividend decision in the following two ways:
1) As a long term financing decision:
When dividend is treated as a source of finance, the firm will pay dividend only when it does
not have profitable investment opportunities. But the firm can also pay dividends and raise an
amount by the issue of shares.

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2) As a wealth maximization decision:

Payment of current dividend has a positive impact on the share price. So to maximize the price
per share the firm must pay more and more dividends.

Dividend policies
A dividend policy based on the paying a low regular dividend, supplemented by an additional
dividend when earnings are higher than normal in a given period. An additional dividend
optionally paid by the firm if earnings are higher than normal in a given period is called extra
dividend. By establishing a low regular dividend that is paid each period, the firm gives
investors the stable income necessary to build confidence in the firm. The extra dividend
permits them to share in the earnings from an especially good period.
Constant- Pay-out ratio:
The dividend payout ratio indicates the percentage of each dollar earned that is distributed to
the owners in the form of cash.
Dividend Payout Ratio = Cash Dividend Per Share / E.P.S.
With a constant-payout-ratio dividend policy, the firm established that a certain percentage of
earnings are paid to owners in each dividend period. The problem with this policy is that if the
firms earnings drop or if a loss occurs in a given period, the dividends may be low or even
nonexistent which could adversely affect the firms share price.
Regular Dividend Policy:
The regular dividend policy is based on the payments of a fixed amount dividend in each
period. This policy provides the owners with generally positive information, thereby minimizing
uncertainty. Often, firms that use this policy increase the regular dividend once a proven
increase in earnings has occurred. Under this policy, dividends are never decreased.
Low-Regular and Extra Dividend Policy:
Some firms establish a low-regular and extra dividend policy, paying a low regular dividend
supplemented by an additional dividend when earnings are higher than normal in a given
period. By calling the additional dividend an extra dividend, the firm avoids giving shareholders
false hopes. This policy is especially common among companies that experience cyclical shifts in
earnings.

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Key components of discussion

From the below table and figure we can easily understand Beximco Pharmaceuticals Limited is
following which Dividend for the last 5 years:
Net Income:
Year
2010
2011
2012
2013
2014

Net Income
(in million TK.)
1,052
1,199
1,319
1,405
1,528

Table 1: Net income in the last 5 years

Chart 1: Net income in the last 5 years

2,000
1,500
1,052

1,000

1,199

1,528

1,405

1,319

Net Income (in million

TK.)

500
0
2010

2011

2012

2013

2014

Growth rate of net income:

Year
2010
2011
2012
2013
2014

Net Income
(in million TK.)
1,052
1,199
1,319
1,405
1,528

Calculation
[(1,199-1,052)/
[(1,319-1,199)/
[(1,405-1,319)/
[(1,528-1,405)/

1,052]*100
1,199]*100
1,319]*100
1,405]*100

Growth Rate
(%)
13.97
10.01
6.52
8.75

Table 2: Net income and its growth rate in the last 5 years

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Chart 2: Growth rate of net income in the last 5 years

15

13.97

10

10.01

8.75

2011

6.52

2010

2012
2013

0
2010

2011

2012

2013

Interpretation:
Growth in net income is even more important than sales because net income tells the investor
how much money is left over after all of the operating costs are subtracted from sales. From
the above tables (Table-1,2, Chart-1,2), we can see that Beximco Pharmaceuticals Limited has
earned profit in the years 2010, 2011, 2012, 2013 and 2014. But in the year 2011 and 2012 it
has a negative growth rate of respectively (10.01) % and (6.52) % in profit. In 2011 and 2012,
the growth of Beximco Pharmaceuticals Limited was significantly affected because of political
unrest in Bangladesh.
Dividend declaration
After analyzing percentage dividend of the last 5 years, we have found out that Beximco
Pharmaceuticals Limited had declared only Stock dividend in 2010-12 and both Cash dividend &
Stock dividend 2013-14 to its shareholders. Details are as follows1. Cash Dividend:

Year

Dividend (%)

2010

2011

2012

2013

10

2014

10

Table 3: Cash Dividend declared in the last 5 years

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Chart 3: Cash Dividend declared in the last 5 years

10%

0%

0%

0%

2010

2011

2012

2013

10%

2014

Interpretation:
Beximco Pharmaceuticals Limited has declared 10% cash dividend in last two years on the face
value for their share holders and previous to that no cash dividend was paid. They give stock
dividend to their share holders on a consistent basis through which they spread good news in
the market that its a good prospect company.
2. Stock Dividend:
Considering the market consideration factor, Beximco Pharmaceuticals Limited is providing
mostly stock dividend as well as some cash dividend in order to satisfy both types of investors
considered under cliental effect- short term and long term investor. by looking at the dividend
trend it can also be said that they are more focused on stock as it helps the company to provide
dividend without transfer of cash and also a tool to increase number of common stock/ paid up
capital.

Year

Dividend (%)

2010

20

2011

21

2012

15

2013

2014

Table 4: Stock Dividend declared in the last 5 years

Chart 4: Stock Dividend declared in the last 5 years

20%

21%

Dividend (%)
15%

2010

2011

2012

5%

5%

2013

2014

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Interpretation:
From the above table we can say that Beximco Pharma declared at least 5 percent stock
dividend every year. Is had declared highest 21 percent stock dividend in the year 2011. From
the above table it is also clear that, this company has a position in between growing and
maturity stage, though it has more internal and external sources to raise fund for future
expansion but it mainly focus on internal sources. It also helps the company by provide
dividend without transfer of cash and also a tool to increase number of common stock/ paid up
capital.
Total Dividend:
Year

Cash Dividend (%)

Stock Dividend (%)

Total Dividend (%)

2010

20

20

2011

21

21

2012

15

15

2013

10

15

2014

10

15

Table 5: contribution of cash, stock dividend in total dividend

Chart 5: contribution of cash, stock dividend in total dividend

Cash Dividend (%)

Stock Dividend (%)

2014

10

15

2013

10

15

2012 0
2011 0
2010 0

15

Total Dividend (%)

15
21
20

21
20

Interpretation:
Beximco Pharmaceuticals Limited does not follow any specific dividend policy. We also see that
the percentage of stock dividend was not similar as well as they also declare cash dividend in
recent two years and the percentage of stock dividend was not same. Finally the percentage of
total dividend is fluctuated from 15% to 21%.

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Stockholders equity:
Beximco Pharmaceuticals Limited has the following stockholders equity status over the last 5
years-

2010

Equity amount
(In millions)
15,974

2011

17,128

2012

18,408

2013

19,776

2014

20,920

Year

Table 6: Stock holders equity in balance sheet

Chart 6: Stock holders equity in balance sheet

25,000
20,000
15,000
10,000
5,000
0

Equity
amount (In
millions)
2010 2011 2012 2013 2014

Interpretation:
The information mentioned in the above mentioned graph and chart shows an increasing trend
in stockholders equity starts from 2010 up to 2014.
Earnings per Share:
An Earnings per Share (EPS) is the amount of money earned by a company expressed in per
share. Following table provides the information of EPS of Beximco Pharmaceuticals Limited in
different years.
Year
EPS (in TK.)
2010
4.18
2011
3.93
2012
3.77
2013
3.82
2014
4.15
Table 7: EPS in the last 5 years

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Chart 7: EPS in the last 5 years

4.2
4
3.8
3.6
3.4

EPS (in TK.)

2010

2011

2012

2013

2014

Interpretation:
From the above table and chart, we can see that from 2010 to 2014 the Earning per share is
fluctuating each year, EPS was in decreasing mode in early two years (2011-12) which was not
good for both the company and for the shareholders. And it is in increasing slot in 2013-14.
Trend of Earnings per Share (EPS):
Year
2010
2011
2012
2013
2014

EPS (in TK.)

4.18
3.93
3.77
3.82
4.15

Calculation
[(3.93-4.18)/ 4.18]*100
[(3.77-3.93)/ 3.93]*100
[(3.82-3.77)/ 3.77]*100
[(4.15-3.82)/ 3.82]*100

Growth Rate (%)

-5.98
-4.07
1.33
8.64

Table 8: EPS growth in the last 5 years

Chart 8: EPS growth in the last 5 years

1.33

0
2010

8.64

2011

2012
-4.07

2013

2014

-5.98
Growth Rate (%)

Interpretation:
From the above table and chart, we can see a U shape trend exist in last five years. From
2010 to 2014 the Earning per share growth rate is fluctuating each year. EPS have negative
growth rate in early two years (2011-12) which was not good for both the company and for the
shareholders. And it is in increasing slot in 2013-14.
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Dividend Payout Ratio:

Dividend payout ratio = Cash Dividend per Share / Earnings per Share (EPS)
Dividend payout ratio says the percentage of EPS that is paid as dividend. It helps us to
determine whether it is following dividend relevance theory or dividend irrelevance theory.
Year

Cash dividend
per Share

Earnings
per Share

Calculation

Dividend payout
ratio (%)

2010
2011
2012
2013
2014

0
0
0
1
1

4.18
3.93
3.77
3.82
4.15

(0/4.18)*100
(0/3.93)*100
(0/3.77)*100
(1/3.82)*100
(1/4.15)*100

0
0
0
26.18
24.10

Table 9: Dividend Payout ratio of Beximco Pharmaceuticals Limited for last 5 years
Chart 9: Dividend Payout ratio for last 5 years

30
26.18

24.1

20
10
0

2010

2011

0
2012

2013

2014

Dividen
d

Interpretation:
From the above table and chart, we can see that the dividend payout ratio was nil in first three
years (2010-2013) and increased in last two years (2013-2014). Through this Beximco
Pharmaceuticals Limited is spreading good news in the market that its a good prospect
company.
Dividend Retention ratio:
Year

Dividend payout
ratio (%)

2010

Retention ratio
[1- Dividend payout ratio (%)]
100

2011

100

2012

100

2013

26.18

73.82

2014

24.10

75.90

Table 10: Retention ratio for last 5 years

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Chart 10: Retention ratio for last 5 years

100

100

100

100

75.9

73.82

50
0
2010

2011

2012

2013

2014

Retention ratio [1- Dividend payout ratio (%)]

Interpretation:
In 2010 to 2012 the retention ratio was very high as on that years less cash dividend paid to
their share holders and keeps more as retained earnings. In 2013 and 2014 retention ratio falls
as company decide to pay 10% cash dividend. By seeing the trend of retention ratio we can
say they were followed dividend irrelevance theory for their future growth.
Price earnings (P/E) ratio:
Price ratio is a key investor performance measure. P/E ratio is the ratio of a companys current
share price to its earnings per share. A high P/E ratio indicates strong shareholders confidence
towards the company and low Price earnings (P/E) ratio indicates lower confidence.
Year
2010
2011
2012
2013
2014

Price Earning (P/E)

ratio (times)
32.32
23.82
14.83
12.36
14.14

Table 11: P/E ratio for last5 years

2014
15%

Chart 11: P/E ratio for last 5 years

2010
33%

2013
13%
2012
15%

2011
24%

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Interpretation:
It is seen that year end P/E ratio was at least 12.36 times in the year 2013 and highest P/E
ratio was 32.32 times in the year 2010. P/E ratio have a downwards direction. This is not a
good sign for the future growth and prospect of the company, which will discourage the
investors for investing in the company. Moreover, fewer dividends are paid in recent a year
which is parallel trend to dividend.
Relation between Dividend and Market Price of Stock
From the table and chart given below, we can say that market price was high when rate of dividend was
high in 2010 & 2011. Then the decreasing rates of dividend results gradually decrease of market price.
Here we can comment according to dividend Relevance theory.

Year

Dividend (%)

Stock Price in DSE (TK)

2010

20

135.10

2011

21

93.60

2012

15

55.90

2013

15

47.20

2014

15

58.70

Table 12: Dividend in % and Stock Price of Beximco Pharmaceuticals Limited

Chart 12: Dividend in % and Stock Price

% Dividend

Market Price (TK.)

135.1
93.6
55.9

58.7

47.2

20

21

15

15

15

2010

2011

2012

2013

2014

Interpretation:
According to available data of Beximco Pharmaceuticals Limited from 2010 to 2014, it is clear that
Beximco Pharmaceuticals is following dividend relevance theory (Bird-in -The Hand Theory) which is
developed by Myron J. Gordon & Linter. Myron J. Gordon & Linter said that there is a direct link between
Dividend Policy of the firm and its market value and a company may declare higher dividend because of
the following reason:

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 Stockholders prefer current dividend

Direct link between dividend policy of the firm and its market value
Investors are risk averse & attach less risk to current as opposite to future dividends or capital gains.
Investors believe that a bird in the hand is worth two in the bush
Cash dividend reduce uncertainty causing earning at a lower rate
Financial manager & stockholders believe that dividends are relevant

Relation between NI and total Dividend:

Year
2010
2011
2012
2013
2014

Net Income
(in million TK.)
1,052
1,199
1,319
1,405
1,528

Dividend (%)
20
21
15
15
15

Table 13: NI and Dividend of relationship

Chart 13.1: NI and Dividend of relationship

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

Chart 13.2: NI and Dividend of relationship

25
20
15

Net Income (in

million TK.)

Dividend (%)

10
5
0

2010 2011 2012 2013 2014

2010 2011 2012 2013 2014

Interpretation:
From the above table and charts we can see that net income is continuously raising from 2010
to 2014 and percentage of dividend payment also increased in 2011 compare to 2010 as net
income increased. But in 2012 to 2013 dividend falls and remain constant at 15% though the
net income have in increasing trend. As net income increase every year, However dividend rate
become constant at the same point so, we can assume that company focus on future
investment rather paying dividend which ultimately enhance the shareholders wealth in long run

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Relation between NI and Cash Dividend:

Year

Net Income
(in million TK.)

Cash Dividend
(%)

2010
2011
2012
2013
2014

1,052
1,199
1,319
1,405
1,528

0
0
0
10
10

Table 14: Relationship of NI and cash Dividend

Chart 14.1: Relationship of NI and cash dividend

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

Chart 14.1: Relationship of NI and cash dividend

Cash Dividend (%)

Net Income (in

million TK.)

2010 2011 2012 2013 2014

2010

2011

2012

10

10

2013

2014

Interpretation:
The company does not provide any cash dividend in the first 3 year though they have
increasing net income. That indicates that they use the income more in investment and provide
stock dividend to reduce the shareholders dissatisfaction. As a result net income increased more
in subsequent years and then company decides to pay cash dividends as they already capture
the potential investment opportunities and now they have enough cash to distribute
By observing the relationship or trend of total and cash dividend with net income, we came in a
conclusion that the company focus on long term wealth maximization rather short term profit
maximization that attracts the risk taker investors to invest more in shares of the organization.
Net assets value (NAV) per share:
Net assets value per share measure value of the investment based on its assets less its
liabilities.
Net assets value (NAV) per share = Total Net Asset Value of Company/ Number of Share
Outstanding

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Net asset value

(NAV) per share
79
68
60
56
57

Year
2010
2011
2012
2013
2014

Market Price of share

135.10
93.60
55.90
47.20
58.70

Table 15: Relationship of NAV and market price of share

Chart 15: Relationship of NAV and market price of share

250
135.1

200

Market
price

93.6

150

55.9

100
79

68

60

50

58.7

47.2

57

56

Net asset
value
(NAV) per
share

0
2010

2011

2012

2013

2014

Interpretation:
The net asset value (NAV) per share shows a decreasing mode starts from the year 2011 and
continues till 2013 and slightly increased in 2014. NAV trend influence the market price of the
share which also has a decreasing mode starts from the year 2011 and continues till 2013 and
slightly increased in 2014. So dividend is not only factor that affect the share price.

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