Dividend Policy and Firm’s Performance:Study on Malaysia Listed Company

2008-2009

CHAPTER 1: INTRODUCTION

Dividend policy has become one of the major areas of research amongst the

finance scholars since 1950s. It is obvious from the research results of these

scholars that dividend decision is the most elusive and controversial in financial

decision making, hence remained unsolved with puzzles (Black, 1976). The

dividend decision of a firm involves retaining a proportion of net earnings for

investment needs in the future while distributing the rest as dividend to

shareholders. A good dividend policy not only attracts investors and facilitates

fund raising from the stock market; it also caters for the future investment needs

of the firm. The association between dividend decision, earnings and future

investment needs therefore makes dividend announcement a source of

information to the investors in accessing the future prospects of a firm. In other

words, dividend “signals” information to investors.

In Malaysia, dividend payment matters. Several studies have shown that an

announcement of dividend increase (decrease) was followed by an increase

(decrease) in share prices (Norhayati, 2005, and Nur-Adriana et al., 2002). With

the proliferation of unit trusts in Malaysia, investors were made more aware of

returns in the form of dividends. Furthermore these funds represent an important

investing arm that invests in shares that give good returns in the form of capital

gains and dividend payments. Nevertheless, the impact of a firm’s dividend policy

on its value is an unresolved issue. Modigliani and Miller (1961) have shown that

investors may be indifferent about the amount of dividend as it has no influence

on the value of a firm. The lack of information on dividend policy of public listed

companies in Malaysia provides the motivation of this study.

In Malaysia, there is no standard policy or procedure governing dividend

payments. As such, companies are free to decide when and how much to pay out

in dividends for a specific financial business year as long as they comply with

Companies Act, 1965. Section 365 of the Act states that “No dividend shall be

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2008-2009

payable to the shareholders of any company except out of profits or pursuant to

Section 60.” In other words, the Act requires that dividends of a company can

only be distributed from the profits of the company except pursuant to Section 60

of the Act. Since there is a dearth in the academic literature that describes the

dividend policy for Malaysian companies, this paper is set to fill the gap by

examining the dividend policy for public listed companies in Malaysia. Thus, the

objectives of this study are:

To analyze the dividend policy as well as performance of firms listed on

the Bursa Malaysia by looking at the dividend yield and dividend payout

ratio.

To identify the relationship between dividend policy and firms’

performance.

This study is divided into five chapters. Chapter two below, is review of relevant

literature. Chapter three, details our data and methodology. The following chapter,

Chapter 4, presents the results and analysis. The final chapter, Chapter five is

conclusions.

CHAPTER 2: LITERATURE REVIEW

How firms determine their dividend policy has been a puzzle to financial

economists for many years. Many theories and models have been put forth to

examine the numerous facets of dividend study. The seminal article by Miller and

Modigliani (1961) is probably the watershed in the theoretical modeling of

dividends, which first proposed dividend irrelevance. On the other hand, theories

which support dividend relevance include tax preference, signaling, and agency

explanations. Other researchers have developed and empirically tested various

models to explain dividend behavior. Some conducted surveys of corporate

managers to learn the most important determinants of corporate dividend activity.

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The first empirical study of dividend policy was performed by Black (1976) in his

study concluded with this question: What should the corporation do about

dividend policy? We don’t know. Researchers have proposed many different

theories about the factors that influence a firm’s dividend policy. A number of

factors have been identified in previous empirical studies to influence the

dividend policy decisions of the firm. To, enumerate few profitability, risk, cash

flows, agency cost, growth, taxes, price earnings ratio etc. Profits have long been

regarded as the primary indicator of the firm’s capacity to pay dividends.

Then, Lintner (1956) through his interview with managers of 28 selected

companies, he discovered that managers tend to value stable dividend policies,

dividends are increased gradually and rarely cut and that most companies have

reasonably definitive target payout ratios. Over the years, the company will adjust

the dividends at a particularly speed of adjustment, so that the actual payout ratio

moves closer to the target payout ratio. According to Pruitt and Gitman (1991)

find that risk (year to year variability of earnings) also determine the firm’s

dividend policy. A firm that has relatively stable earnings is often able to predict

approximately what its future earning will be. Such a firm is more likely to pay a

higher percentage of its earnings than firm with fluctuating earnings.

Dividend policy of a firm can be measured using 2 methods: (1) dividend yield

and dividend payout ratio (Damodaran, 2001; Investopedia online). Changes in

these 2 measures provide some information in relation to risks and future growth

in earnings of the company. Previous research studies showed that shares with

high dividend yields will result in excess returns, after adjusting for the market

performance and risk (Damodaran, 2001). Dividend payout ratio is used in

estimating future dividends and expected growth in earnings. When dividend

payout ratio increases, the amount of free cash flow decreases and fewer

investments can be made from the available cash flow, therefore the firm is

expected to have lower growth in earnings. In other words, high retention ratio (1-

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2008-2009

dividend payout ratio) will result in higher growth in earnings (Damodaran,

2001).

In Malaysia, there is not much academic literature that describes the dividend

policy for Malaysian companies, except for a survey conducted by Minority

Shareholder Watchdog Group and University of Technology MARA (MSWG,

2006). They examine top 100 companies as per market capitalization on 31

December 2005. The survey examines the companies’ behavior on dividend

distribution over a three-year period of 2002-2004. The survey found that most of

the companies paid dividends in the three-year period. By examining the

characteristic of the dividend payers and non-dividend payers, the survey

proposed that profitability and liquidity are two essential ingredients for a healthy,

dividend-paying public listed company. Companies with these two healthy

components send out signals that they are able to sustain their dividend payment

in the future.

CHAPTER 3: DATA AND RESEARCH METHODOLOGY

This study focuses on the dividend policies as well as performance of firms listed

under three sectors in Bursa Malaysia. The annual reports of the three sectors

namely consumer product, plantation and trading or services for the year 2008 to

2009 were chosen for this study. The three sectors are randomly selected from

companies listed on the Main Board of Bursa Malaysia.

In order to analyze the dividend policies as well as performance of a firm or

organization; the financial ratio analysis can be done. Financial statement will

only reflect the profit and the financial position of the firm. There are two types of

ratio, which are dividend payout ratio and dividend yield. This financial ratio

analysis involves the methods of calculating and interpreting to evaluate the firm

performance.

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DPR is calculated as = Dividend per Share (DPS) Earnings per Share (EPS)

DY is calculated as = Dividend per Share (DPS) Market Price per Share (MPS)

There are two methods of ratio analysis that can be used in order to measure the

performance of the firm or institution. The first method is comparative or cross

sectional analysis. This method is used by comparing the financial ratio of a

particular firm with those of other similar firm in the same industry or with an

industry average.

Another method used in ratio analysis is time series analysis. This method will be

applied to this research. Time series analysis means that we had to computing the

financial ratio of a particular firm for a period of time and then compare the ratio

overtimes. Time series analysis can help the firm to find out their strength and

weaknesses by compare the firm performance over the year. The analysis is done

in order to assess the firm’s performance in terms of their dividend policy.

Linear regressions analysis is used in this study when independent variables

correlated with one another and with the dependent variable. The estimated

regression model can be used to analyze the expected relationship between

dependent variable and independent variables.

CHAPTER 4: RESULT AND ANALYSIS

This chapter discusses the finding on the analysis of the collected data based on

the company listed under three sectors on the Main Board of Bursa Malaysia. The

data collected are from company’s audited annual reports from the year 2008 to

2009. There are two types of ratio, which are dividend payout ratio and dividend

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yield. This financial ratio analysis involves the methods of calculating and

interpreting to evaluate the firm performance.

The first objective is to analyze the dividend policy as well as performance of

firms listed on the Bursa Malaysia by looking at the dividend yield and dividend

payout ratio. The table below will be data on the dividend payout ratio (DPR) and

dividend yield (DY) for each company over two years beginning from year 2008

to 2009.

Year 2008

Sector Dividend Payout Ratio Dividend Yield

Consumer product

1. Nestle (M) Bhd

2. Fraser & Neave Holdings Bhd

3. Apollo Holdings Bhd

4. Mamee-Double Decker (M) Bhd

5. Spritzer Bhd

average

119.99%

85.68%

69.85%

60%

25%

72.104%

5.8%

4.5%

7.8%

7.1%

2.2%

5.48%

Plantation

1. IOI Corpration Bhd

2. Genting (M) Berhad

3. IJM Plantations Bhd

4. Sarawak Plantations

5. Hap Seng Plantations Holdings

Bhd

average

41.9%

20.26%

50.42%

59.46%

61.16%

46.64%

2.2%

1.89%

4.1%

5.0%

6.0%

3.838%

Trading/services

1. KFC Holdings (M) Bhd

2. Telekom Malaysia Bhd

3. Parkson Holdings Bhd

4. Aeon Co. (M) Bhd

5. Sime Darby Bhd

29.7%

98.8%

35.29%

20.06%

82.17%

2.5%

6.4%

4.2%

1.8%

4.13%

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average 53.204% 3.806%

Table 1: the result of DPR and DY via sectors for year 2008

In the calculation shown in table 1, the results of current study found that in terms

of dividend payout ratio (DPR), the consumer product sector has the highest result

with average 72.104%, followed by trading/services sector until the lowest DPR

result is the plantation sector with average 46.64%. In term of dividend yield

(DY), the consumer product sector has the highest result with average 5.48%,

followed by plantation sector until the lowest DY result is the trading/services

sector with average 3.806%.

Year 2009

Sector Dividend Payout Ratio Dividend Yield

Consumer product

1. Nestle (M) Bhd

2. Fraser & Neave Holdings Bhd

3. Apollo Holdings Bhd

4. Mamee-Double Decker (M) Bhd

5. Spritzer Bhd

average

97.99%

80.15%

69.75%

55.1%

32.26%

67.05%

5.1%

4.8%

8.4%

7.3%

2.9%

5.7%

Plantation

1. IOI Corpration

2. Genting (M) Berhad

3. IJM Plantations Bhd

4. Sarawak Plantations

5. Hap Seng Plantations Holdings

Bhd

average

29.84%

28.92%

51.04%

53.57%

71.94%

47.062%

1.9%

1.14%

3.3%

3.4%

7.5%

3.448%

Trading/services

1. KFC Holdings (M) Bhd

2. Telekom Malaysia Bhd

3. Parkson Holdings Bhd

29.67%

150.90%

18.45%

2.8%

6.5%

1.4%

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4. Aeon Co. (M) Bhd

5. Sime Darby Bhd

average

20.00%

53.51%

54.506%

2.1%

2.73%

3.106%

Table 2: the result of DPR and DY via sectors for year 2009

In the calculation shown in table 2, the results of current study found that in terms

of dividend payout ratio (DPR), the consumer product sector has the highest result

with average 67.05%, followed by trading/services sector until the lowest DPR

result is the plantation sector with average 47.062%. In term of dividend yield

(DY), the consumer product sector has the highest result with average 5.7%,

followed by plantation sector until the lowest DY result is the trading/services

sector with average 3.106%.

Overall, the study on dividend policy as well as performance of firm shows that

the Telekom Malaysia Bhd has the highest performance in term of Dividend

Payout Ratio (DPR). It shows that the firm has well in growing their line of

business with get high revenue and profit as well as pay high dividend payment to

their shareholders. Then, in term of Dividend Yield (DY), the Apollo Holding

Bhd shows that the firm gets highest result comparing the other firms. It shows

that the firm pays out in high dividends each year relative to its share price or

return on investment for a stock.

The second objective is to identify whether there is a significant relationship

between Dependent Variable (DPR) with Independent Variable (DY). This

section presents the interpretation of Linear Regression, Coefficient of

Determination (R2), Regression Coefficient and Analysis of Variance (F-Stat). In

calculate and analyzed the data, Statistical Package for Social Science (SPSS)

Version 13 and Microsoft Excel 2007 was used. All the data were represent with

tables and figures.

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The table below shows the regression analysis result for observations from the

year 2008 to 2009 by using SPSS.

Model R R²

1 0.869 0.756

Table 3: The result of Coefficient of determination, R²From the table 3, it shows that the R² value is 0.756. It means that 75.6% of the

variation or changes in Dividend Payout Ratio (DPR) can be explained by the

independent variable such as Dividend Yield (DY). The other 24.4% of changes

in Dividend Payout Ratio (DPR) is explained by other factors or independent

variables which are not included in the model. This relationship can be considered

as a strong correlation because it is more than 50%.

Variable Coefficient

DY 8.412

Table 4: The regression coefficient result

From the table above, it shows that when Dividend Yield (DY) increased by 1%

the Dividend Payout Ratio increased by RM8.412 million. Thus, there is a

positive relationship between the Dividend Payout Ratio (DPR) and Dividend

Yield (DY).

Variable T - Statistics T - Distribution Relationship

DY 3.517 2.132 insignificant

Table 5: The T – Statistics result

The table 5 shows the result of t – statistics which is the degree of freedom is, 6 –

1 – 1 = 7, refer the t – distribution table is 2.132. Therefore, at a 95% confidence

interval and at a significance level of 0.05, the calculated t – value or t – statistics

is greater than the t – distribution table (3.517 > 2.365). The Dividend Yield (DY)

is said to be significant. From the hypothesis, H1 will be accepted and H0 will be

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rejected. So, there is a significant relationship between the Dividend Payout Ratio

(DPR) and Dividend Yield (DY). So the model appears to be useful and more

accurate for predicting Dividend Payout Ratio (DPR) as well as performance of

firm.

CHAPTER 5: CONCLUSION

This chapter presents the conclusions based on the findings and analysis obtained

from the previous chapters. This study was conducted to analyze the dividend

policy as well as performance of firms listed under three sectors on the Main

Board of Bursa Malaysia. The study covered the period from 2008 to 2009

annually. There are three sectors which are consumer product, plantation and

trading or services sector.

There are two objectives that need to be answered in this study. The first objective

is to analyze the dividend policy by looking at the dividend yield and dividend

payout ratio paid by the three sectors from year from 2008 to 2009 annually.

From the analysis, the study on DPR and DY of three sectors shows that the

consumer product gets the highest result compare with plantation and trading or

services sector. It shows that the consumer product sector has well performance

even though our economy gets effect from the global and domestic economic

situation.

In this study on dividend policy as well as performance of firm shows that the

Telekom Malaysia Bhd has the highest performance in term of Dividend Payout

Ratio (DPR). It shows that the firm had try to give the best dividend to their

shareholders by implementing certain dividend policy Then, in term of Dividend

Yield (DY), the Apollo Holding Bhd shows that the firm gets highest result

comparing the other firms. It shows that the firm pays out in high return on

investment for a stock to ensure shareholder’s confidence can be maintained at the

highest level.

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The second objective is to identify the relationship between the independent

variables (DY) with the dependent variable (DPR). After analyzing the data

thoroughly, various results have been produced for all the three sectors. The

current study found that, the overall Dividend Yield (DY) has significant

positively relationship with Dividend Payout Ratio (DPR). Besides that, the result

was significant for all three sectors in the present study because the independent

variable used can be generalized since each company used different items

treatment in their annual report.

Finally, from the conclusions it can be concluded that the dividend policy is a

very important elements that help company to sustain in the long run. Companies

are recommended to be aware of current domestic and global economic condition

so that they can find alternative to maintain good dividend rate to the shareholders

even the company’s profit is fall. This is important because the dividend rate is a

picture of the company’s health. If companies fail to distribute promised dividend

rate, the shareholders and public will lose their confidence to the company’s

ability.

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References

Aeon Co. (Malaysia) Berhad annual reports (2008-2009)

Apollo Holdings Berhad annual reports (2008-2009)

Black, F., 1976. The dividend puzzle. Journal of Portfolio Management 2, 5-8.

Damodaran, Aswath (2001), Corporate Finance: Theory and Practice, United States: John Wiley & Sons Inc.

Fraser & Neave Holdings Berhad annual reports (2008-2009)

Genting (Malaysia) Berhad annual reports (2008-2009)

Hap Seng Plantations Holdings Berhad annual reports (2008-2009)

IJM Plantations Berhad annual reports (2008-2009)

IOI Corpration Berhad annual reports (2008-2009)

KFC Holdings (Malaysia) Berhad annual reports (2008-2009)

Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46, 97-113.

Mamee-Double Decker (Malaysia) Berhad annual reports (2008-2009)

Miller, M. and Modigliani, F. (1961). Dividend policy, growth and the valuation of shares. Journal of Business, 34, 411-433.

Nestle (Malaysia) Berhad annual reports (2008-2009)

Norhayati, M. (2005). Information signalling and dividend policies in Malaysia.Unpublished Ph.D. Thesis, Universiti Putra Malaysia.

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Nur-Adiana, H. A., Rosemaliza, A. R. and Yusnidah, I. (2002). The effect of dividend announcements on stock returns for companies listed on the main board of the Kuala Lumpur Stock Exchange. Proceedings, MFA 4th Annual Symposium.

Parkson Holdings Berhad annual reports (2008-2009)Pruitt, S. W. and Gitman, L. J. (1991). The interactions between the investment, financing, and dividend decisions of major US firms. Financial Review, 26(3), 409-430.

Sarawak Plantations Berhad annual reports (2008-2009)

Sime Darby Berhad annual reports (2008-2009)

Spritzer Berhad annual reports (2008-2009)

Telekom Malaysia Berhad annual reports (2008-2009)

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