IPASJ International Journal of Management (IIJM)

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ISSN 2321-645X

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Volume 3, Issue 2, February 2015

USING DIVIDEND PAYOUT RATIO AS A

DETERMINANT FOR PORTFOLIO
SELECTION OF BANK SHARES
[A CASE STUDIES OF THREE BANK IN
NIGERIA NAMELY ZENITH BANK PLC,
GUARANTY TRUST BANK PLC AND FIRST
BANK NIGERIA PLC.]
Emiola, Olawale. K. Steve1, Alayemi, S. A2 , Adeoye Akeem Olanrewaju3 and Igbinehi, E.M '4
1

Department of Mathematics and Statistics, School of Applied Science,The Federal Polytechnic, Offa. Kwara State,
Nigeria.
2
Department of Accountancy,School of Business and Management Studies,The Federal Polytechnic ,Offa .Kwara State,
.
3
Department of Mathematics and Statistics,School of Applied Science, The Federal Polytechnic,Offa. Kwara State,
Nigeria.
4

Department of Mathematics and Statistics,School of Applied Science, The Federal Polytechnic,Offa. Kwara State,
Nigeria.

ABSTRACT
The banking sector of the Nigeria Economy has been viewed as the most profitable place to invest its share capital. Most
investors in the nation have their major investment in these banks therefore this research, using Dividend Payout Ratio as a
Determinant for Portfolio Selection of Bank Share was aimed to determine portfolio selection of Zenith Bank PLC, Guaranty
Trust Bank PLC and First Bank Nigeria PLC. Data was obtained from the Annual Report, Vetiva Research and was
formulated as linear programming . The research employs LINDO software to analyse the data. We create the lagrangean
expression and we introduce lagrangean multiplier for each constraint. The increment that yields the minimum variance with
mixed investment opportunity is 54%. Hence the optimum solution to the model is b1 = 70%, b2 = 5.39% and b3 = 24.61%. It
was discovered that allocation of available fund by investors should be allocated to available investment open to investors in
order to minimize risk and maximize return. We thereby recommended that any interested investor can decided to invest 70%
of available fund on Zenith bank share, 5.39% on Guaranty Trust Bank share and 24.61% on First bank share.

Keywords: Economy, profitable, bank and capital

1. INTRODUCTION
Portfolio is a collection or an aggregation of investments tools such as stocks, shares, mutual funds, bonds, cash to
mention a few. This portfolio is solely a function of the investors income, budget at a convenient time frame. A
portfolio manager must be careful in allocating invertible funds to a list of investments open to investors in order to
minimize the total cost and maximize the returns. A portfolio mix is a set of investments that an investor can invest in.
[1] showed that the evaluation of portfolio performance should take place through a complete stock market cycle
because of difference in performance during the market cycle. [3] demonstrates that switching between relative strength
and relative value strategies can increase problem is a quadratic programming problem. The banking sector of the
Nigeria Economy has been viewed as the most profitable place to invest in its share capital. Most investors in the nation
have their major investment in these banks. There are 22 commercial banks in Nigeria are money deposit banks. Many
companies set a target range for their payout ratios, and define them as a percentage of sustainable earnings, or cash
flow[4]. The companies with the best long-term record of dividend payments have stable payout ratios over many years.
While many blue-chip companies increase their dividends year after year, since they have steady earnings growth as
well. The future is never predictable. Its important to remember that there are many more aspects to valuating a stock
or dividend payment [2]. However, investors should be aware of any tool that will assist in predicting future dividend
stability, and the payout ratio does just that. With bond yields at record lows, many investors are looking to dividend-

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A Publisher for Research Motivation........

Volume 3, Issue 2, February 2015

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Email: editoriijm@ipasj.org
ISSN 2321-645X

paying stocks as a means of generating investment income. When a company starts paying a dividend, the market
expects it to maintain the dividend going forward, and the stock price will be punished for any reduction in dividend. A
stock with a high dividend yield is not a bargain if it surprises investors with a dividend cut. Therefore, looking for a
dividend-paying stock, must evaluate the safety of the dividendthat is, the likelihood that the company will
maintain or increase the dividend. One way to do this is to know how much of the companys earnings are paid out as
dividends to shareholders. The payout ratio allows investors to see how much of a companys earnings is being used to
fulfill dividend payments. It measures the amount of net income that is paid out as dividends to common shareholders,
expressed as a percentage. The payout ratio calculation is as follows: Dividend payout ratio is the fraction of net income
a firm pays to its stockholders in dividends. The payout ratio should also be tracked over time to spot any changes in
trends. Many companies set a target payout ratio, which indicates managements confidence in earnings and stability.
Typically, the more predictable the earnings are, the higher the payout ratio the company can maintain. A stable payout
ratio can be a sign of stable earnings[9]. Overall, the payout ratio can tell us quite a few things about a company. We
can analyze the reliability of future dividend payments, the growth stage of a company and the financial management of
the firm. Investors who look to dividend payments to supplement their income need to be aware of warning signs that
show an unsafe dividend. Just because the dividend payment is increasing annually doesnt mean that it will continue
to increase. The future is never predictable. Its important to remember that there are many more aspects to valuating a
stock or dividend payment. However, investors should be aware of any tool that will assist in predicting future dividend
stability, and the payout ratio does just that. The part of the earnings not paid to investors is left for investment to
provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies
with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because
capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. As they
mature, they tend to return more of the earnings back to investors. Note that dividend payout ratio is calculated as
DPS/EPS. This research is devoted to study of portfolio management of the three identified most viable bank in
Nigeria namely Zenith Bank plc, Guarantee Trust Bank plc and First Bank Nigeria plc.. The trio is quoted in Nigeria
stock market.

2. REVIEW OF RELATED LITERATURE

The decision to invest excess cash in marketable securities involves not only the amount to invest but also the type of
security in which to invest. To some extent, the two decisions are interdependent. However, both should be based on a
evaluation of expected net cash flows and uncertainty associated with these cash flows. According to investing is the
redirection of resources from being consumed today to creating benefit in future. In essence investment is the use of
assets to earn income or profit. This brings about different types of financial instrument and investment that are
prevalent today. A financial investment is commitment of naira in the current period for a period of time in order to
derive future payments compensating the investor for the time the funds are committed, the expected rate of inflation,
and the uncertainty of the future payment[7].
Modern portfolio Theory is Harry Markowitzs theory of portfolio choice in an uncertain future. In his theory, the
difference between the risk of portfolio assets taken individually and the overall risk of the portfolio is quantified. This
proffers a solution to the problem of choice of portfolio for a risk averse investor: the optional portfolios from the
rational investors point of view are defined as those that have the lowest risk of a given return [5],[6]. In the selection
of portfolio risk is always a key concept. Hence portfolio selection may be one period portfolio selection or multi period
portfolio selection. Therefore in one period portfolio selection according to risk which is measured as variance of return
has the same importance as return. However, under the multi-period portfolio selection, the appearance of risk is only
in the utility function encoding the risk behavior of the investors [8].

3.METHOD OF DATA COLLECTION

To achieve the aims and objectives data were collected from research work of Annual Report, Vetiva Research. This
undoubtly a secondary data with possible error. Problem of researcher in Nigeria is getting reliable data to work with,
although data of this nature is not possible to collect primarily, we definitely depend on transcribing from available

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A Publisher for Research Motivation........

Volume 3, Issue 2, February 2015

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Email: editoriijm@ipasj.org
ISSN 2321-645X

Table 1: Shows the Dividend Payout Ratio on Zenith Bank, GTBank and First Bank share

Source: STOCKWATCH WEEKLY from PEACE OF MIND ARCHIVE

4.DATA ANALYSIS
An investor has fixed sum of money say K, to invest in share capital of three identified most viable bank in Nigeria
namely Zenith Bank plc, Guarantee Trust Bank plc and First Bank Nigeria plc. The portfolio problem is to determine
how much money the investor should allocate to each investment so that total expected return is greater than nor equal
to some lowest acceptable amount say T, and so that the total variance of future payment in minimized. Let s, s, s
designate the amount of money to be allocated to Zenith Bank plc, Guarantee Trust Bank plc and First Bank Nigeria
plc respectively and let st denote the return per Naira invested from investment ( = 1, 2, 3) during the S period of
time in the past (t =1, 2, 3,.. 5).
If the past history of dividend payout ratio of each bank is indicative of future performance, the expected future return
per Naira from investment 1, 2, 3 is
E = -------------------- (1)
And the expected return from three investments combined is
E = Es + Es + Es --------------------- (2)
The portfolio problem modeled as quadratic programming is
Minimize R = ATCA
Subject to: s + s + s = K
Es1s1 + Es2s2 + Es2s3 T
s 0, s 0, s 0, where C is the covariance
Matrix which is positive semi - definite
Matrix C = E is the mathematical expectation
Column Matrix A = This can be translated as follows
Minimize R = (ss s) (s, s, s)T
Subject to: s1 + s2 + s3 = K
Es1s1 + Es2s2 + Es2s3 T
S 0, S 0, S 0
Hence we have
Minimize R = S + S + S + SS ( +) + SS ( +) + SS ( +)
S.T.
s + s + s = K
Es1s1 + Es2s2 + Es3s3 T
s 0, s 0, s 0
We consider the Dividend Payout Ratio of the banks to advise an investor in the Banking sector.
WE CALCULATE VARIANCE-COVARIANCE MATRIX from GBSTAT
MATRIX C = Expected Dividend Payout Ratio for each bank are 49.74%, 55.41%, 67.75% respectively.
The budget constraint investment portfolio optimization problem has three candidate assets (s1, s2, s3) for our portfolio
o.
THE MODEL
We are to determine what fraction should be devoted (or of the share should be purchased) to each Bank share , so an
expected return of at least 40% (equivalently, a growth factor 1.40) is obtained while minimizing the variance in return
and not exceeding a budget constraint.We also impose a restriction that any given asset can constitute at most 70% of
the portfolio. The variance of the entire portfolio is;

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A Publisher for Research Motivation........

Volume 3, Issue 2, February 2015

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ISSN 2321-645X

R = 32.46s + 4.91s + 240.25s - 24.74ss -174.23ss + 68.68ss

Since variance is a measure of risk, we need to minimize. Hence
MinimizeR= 32.46s + 4.91s + 240.25s - 24.74ss - 174.23ss + 68.68ss
Subject to:
! We start with N1.00
s + s + s = 1
! We want to end with at least N1.40
1.497s + 1.554s + 1.678s 1.40
! No asset may constitute more than 70% of the portfolio
s< 0.70
s< 0.70
s3< 0.70
The research employs LINDO software. We create the lagrangean expression. The impute procedure for LINDO
requires the model be converted to true linear form by writing the first order conditions. To do this we introduce
lagrangean multiplier for each constraint. There are five (5) constraints, we shall use five (5) dual variables devoted
respectively as UNITY, RETURN, s1 FRAC, s2 FRAC and s3 FRAC.
The lagrangean expression corresponding to this model is now
MIN R (s1,s2,,s3) = 32.46s1 + 4.91s2 + 240.25s3 - 24.74s1s2 - 174.23s1s3 + 68.68s2s3 + (s1 + s2 + s3 - 1) UNITY
+ [1.40 - (1.497s1 + 1.554s2 + 1.678s3)] RETURN + (s1 - 0.70) s2 FRAC + (s1 - 0.70) s3 FRAC
+ (s2 - 0.70) s3 FRAC
Next we compute the first order conditions
= 64.92s1 - 24.74s2 -174.23 s3 + UNITY 1.497RETURN + s1 FRAC > 0
= 9.82 s1 - 24.74 s2 + 68.68 s3 + UNITY 1.554RETURN + s2 FRAC > 0
= 480.5 s1 -174.23 s2 + 68.68 s3 + UNITY 1.678RETURN + s3 FRAC > 0
Adding the real constraints
s1 + s2 + s3 = 1
1.497 s1 + 1.554 s2 + 1.678s > 1.40
s1< 0.70
s2< 0.70
s3 < 0.70
The final model is thus:
MINI S1 + S2 + S3 + UNITY + RETURN + S1FRAC + S2FRAC + S3FRAC
ST
! First order condition for S1:
64.92S1 - 24.74S2 - 174.23S3 + UNITY - 1.497RETURN + S1FRAC>0
! First order condition for S2:
-24.74S1 + 9.82S2 + 68.68S3 + UNITY - 1.554RETURN + S2FRAC>0
! First order condition for S3:
-174.23S1 + 68.68S2 + 480.5S3 + UNITY - 1.678RETURN + S3FRAC>0
! ------------- Start of "Real" constraints -----------------! Budget constraint, multiplier is UNITY:
S1 + S2 + S3 = 1
! Growth constraint, multiplier is RETURN:
1.497S1 + 1.554S2 + 1.678S3>1.400
! Max fraction of S1, multiplier is S1FRAC:
S1<0.70
! Max fraction of S2, multiplier is S2FRAC:
S2<0.70
! Max fraction of S3, multiplier is S3FRAC:
S3<0.70
END
QCP
THE SOLUTION OF THE MODEL FROM LINDO SOFTWARE
LP OPTIMUM FOUND AT STEP
6 FOR T = 1.400 TO 1.540
OBJECTIVE FUNCTION VALUE
1) 0.3000000

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Volume 3, Issue 2, February 2015

VARIABLE
VALUE
REDUCED COST
IS1
0.000000
1.000000
S2
0.053880
0.000000
S3
0.246120
0.000000
UNITY
0.000000
1.000000
RETURN
0.000000
1.000000
S1FRAC
0.000000
1.000000
S2FRAC
0.000000
1.000000
S3FRAC
0.000000
1.000000
S1
0.700000
0.000000
NO. ITERATIONS=
6
LP OPTIMUM FOUND AT STEP
4 FOR T = 1.550
OBJECTIVE FUNCTION VALUE
1)
5.557793
VARIABLE
VALUE
REDUCED COST
IS1
0.000000
1.000000
S2
0.010484
0.000000
S3
0.289516
0.000000
UNITY
0.000000
0.000000
RETURN
0.000000
2.497000
S1FRAC
5.257793
0.000000
S2FRAC
0.000000
1.000000
S3FRAC
0.000000
1.000000
S1
0.700000
0.000000
NO. ITERATIONS=
4

5.DISCUSSION
Table 2: The summary of the results yields the table below for purpose of comparison and decisions
T
1.400 1.540

S1
0.700000

S2
0.053880

S3
0.246120

Variance
0.3000000
***
1.550
0.700000
0.010484
0.289516
5.557793
The increment that yields the minimum variance with mixed investment opportunity is 54%. Hence the optimum
solution to model eight is b1 = 70%, b2 = 5.39% and b3 = 24.61%

6.CONCLUSION
The purpose of this research work is to show how portfolio selection of bank share of the three most viable banks in
Nigeria has been done using the past records of each bank percentage payout ratio for five years. It also shows how
allocation of available fund by investors should be allocated to available investment open to investors. The research has
answered the quest of how much an investor should allocate to each investment to minimize risk and maximize return.

7.RECOMMENDATION
Based on the available data on dividend payout ratio to shareholders by Zenith bank, GTBANK and First bank, any
interested investor can decided to invest 70% of available fund on Zenith bank share, 5.39% on GTBANK share and
24.61% on First bank share. This will cause a 54% rise in payout ratio on dividend received by the investor from the
banks on share of the shareholder in the nearest future. It is also recommended that share holders and the company
management should employ the help of portfolio manager with a good knowledge of operations research and keep a
good and proper data bank for research for good decision making.

REFERENCE
[1] Bamman W. S and Miller R. E (1995) Portfolio performance rankings in stock market cycles. Financial Analysis
journal V51 (2) 79 87
[2] Bauman, W. S. and R. E. Miller, (1994), Can Managed Portfolio Performance be Predicted?, The Journal of
Portfolio Management Vol. 20-4, 31-40.

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A Publisher for Research Motivation........

Volume 3, Issue 2, February 2015

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Email: editoriijm@ipasj.org
ISSN 2321-645X

[3] Emiola O. K. S (2014) Application of Quadratic Programming in Portfolio Management Of Share Capital
Investments in Nigeria. A PhD Thesis of Atlantic International University. U S A
[4] Etukudo I. A, Effanga E. O, Onwukwe C. E and Umoren M. U (2009) Application of portfolio selection model for
optimal allocation of investible funds in a portfolio Mix Scientia African Faculty of science. University of
PortharcourtVol 8. No 1.96-102
[5] Markowitz, H. M. (1952). Portfolio selection. The Journal of Finance. 7; 77-91
[6] Markowitz, H. M. (1959). Portfolio selection: Efficient diversification of investments. Wiley&sons New York
[7] Reilly, F. K. & Brown, K. C. (2003). Investment analysis and portfolio management. Manson, Ohio (u.a):
Thomson South-Western.
[8] Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of
Finance, 19; 425- 442.
[9] Sullivan, A. & Sheffrin, S.M.(2003). Economics: Principle in action. Upper Saddle River, New Jersey 07458:
Pearson Prentice Hall.

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