Synopsis of Article

"Dividend Payment Practices in the Non-Financial Sector of Pakistan:

Empirical Evidence from the Karachi Stock Exchange"

Submitted By: Jivan Kuikel

Roll No: 2
Introduction
This article was written by Muhammad Azam Roomi and Naveed Iqbal Chaudhary
and Azeem M. It was published in World Academy of Science, Engineering and
Technology Journal, back in 2011. This study tends to investigate the dividend
payment practices of the non-financial sectors of the Karachi Stock Exchange.
Dividends are the compensation paid to shareholders for bearing risk on their
investments. Companies have several stakeholders that have certain self-interest
and motive, so as to be part of organization and be involved with it. However,
the question remains about the rate of dividend is that the rate of dividend that
should be paid, procedure of dividend payment. Pakistan has Karachi Stock
Exchange and this article revolves around the common dividend distribution
practices of companies registered in KSE. In this article the amount of dividend
paid by these companies is as low as Rs.0.25 per share. The most significant fact
is that highly capitalized sectors of Pakistan pay less dividends compared to less
capitalized sectors that are distributing more. New and growing company priors
to get turnover by paying 100% to 300% of stockholders return.
Another major problem stated by the article is that, retained earnings are cheap
internal source of financing retained to finance growth opportunities. The
profitability of organization determines dividend and retained earning of the firm.
However, the dividend policy may vary based on the growth opportunity and size
or scope of the industry too. In fact, dividend policy of firm is complex in nature.
It has been even concluded that market capitalization is positively linked with
dividend policy other things remaining the same.

Objectives
The objectives of this study are:
i. To portray the dividend payment practices in the non-financial sectors of
Karachi Stock Exchange
ii. To investigate the compliance between dividend policy and market
capitalization of the companies listed in Karachi Stock Exchange.
iii. To investigate how companies, utilize their earnings.
Methodology
The entire dividend payment status of non-financial sector was selected for the
study. Major five independent variables namely; profitability, market to book
value ratio, retained earnings, total asset growth and market capitalization were
used in this study along with one dependent variable, dividend yield ratio. The
variables were compared with each other to project the dividend policy of each
non-financial sector. The major procedure was determination of dependent
variable i.e. dividend yield. Descriptive statistics was used as a major test for this
study.
Findings
In this study, 11 non-financial sectors of Karachi Stock Exchange were studied.
1. Engineering Sector: Out of 13 companies, only 7 were regular dividend
payers. In this sector, majority of the funds were retained instead of being
given out as dividend.
2. Cement Sector: Out of 21 listed companies, % companies paid dividend
regularly. In this sector, companies preferred to invest in growth
opportunities via retained earnings when they had sufficient earnings.
3. Sugar and allied sector: In this sector, out of 37 companies, 11 were regular
dividend payers. Companies preferred to pay dividends at nominal rate,
but when they had earnings they preferred to finance for growth
opportunities.
4. Paper Board sector: Out of 10 listed companies, 4 companies were
regularly paying dividends in this sector. The frequency of dividend
payments was good at beginning years but it declined in later years. In this
sector, internal sources of financing was attempted to finance growth
opportunities.
5. Textile Sector: This sector lists 208 companies, but only 37 of them distribute
dividends. In this sector, most of the funds were retained instead of
distributing them as dividends.
6. Chemical and Pharmaceutical Sector: In this sector, 20 out of 32 companies
paid dividends. Here, the potential for earnings is attractive throughout the
period and company management distributed some portion of earnings to
shareholders as dividends.
 7. Transportation and Communication Sector: It includes 14 companies, out of
which 4 are dividend distributors. This sector showed a trend of balanced
dividends. The company established pace with dividend payment as well
as they also accumulated funds to finance for growth opportunities.
8. Fuel and Energy Sector: This is an important and very large sector of
Karachi Stock Exchange, which includes most of the blue-chip companies.
The companies maintained nominal pace of dividends but also invested for
growth opportunities.
9. Auto and Allied Sector: Out of 25 listed companies,11 paid dividends. In
this sector, dividend distribution was not prioritized. The company focused
mainly on investing for growth opportunities.
10. Cables and Electronic Goods Sector: The number of listed companies was
9 and 4 of which were dividend distributors. The dividend paying behavior
of this sector remained unpredictable during the entire period, while the
market capitalization was always positive.
11. Miscellaneous Sector: In this Sector, out of 87 companies, 37 were dividend
payers. From this study it is known that companies preferred to distribute
dividends, but only after achieving a certain level of growth.
Conclusion
Dividend policies usually respond positively to market capitalization. Generally,
dividends and market capitalization move in same direction. But in Karachi Stock
Exchange, dividend and market capitalization moved in opposite direction.
Market capitalization continually acts in contradiction to dividends. In most of the
sectors, dividends and market capitalization link negatively. All of the sectors
under the study are reluctant to pay dividends. Even the most profitable sectors
distribute very small portion of their profit as dividends and the dividends begin
to reduce with the increasing rate of growth options.