Dividend policy of Bata shoe

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An appraisal of the Divident policy of Bata Shoe(Bangladesh) Ltd.

December 17, 2013

Professor Dr. Tanbir Ahmed ChowdhuryCourse Instructor Masters of Business AdministrationDepartment of Business AdministrationEast West University

Dear Sir

According to your direction, we have prepared this Report under the course of “Corporate

Finance (MBA FIN 507)”. It is also a requirement to complete the course. That is why we

provided full attention and potential to complete this report. We have tried to follow all the

advice and suggestions that you provided in the class lecture. We have tried our level best

to present the report according to the vital standards and requirements. We hope the

report will serve its purpose.

It would be kind of you if you could provide the necessary feedback and remarks.

Your cooperation in this regard would be highly appreciated.

Thank you.

UMME RUMANA PERVIN 2012-1-95-036MD. SHAIFUL ISLAM 2011-3-95-059MD. SAIFUL ALAM 2012-1-95-030MD. HABIL UDDIN 2012-1-95-031MD. RASHADUL HAQ 2011-2-95-084MD. ATIKUL ISLAM 2012-1-95-118

Letter of TransmittalLetter of Transmittal

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At first, we would like to thank almighty Allah for helping and showing us the right path to

complete the term paper just on time.

Besides, We thankful our course instructor Professor Dr. Tanvir Ahmed Chowdhury ,

who gave us the opportunity to prepare this report on “AN APPRAISAL OF THE DIVIDEND

POLICY OF BATA SHOE(BANGLADESH) LTD .” under the course of “Corporate Finance (MBA

FIN 507)”. We are very grateful to our instructor as he provided us the direction about how

the report have to complete and what topics and areas have to cover to make the term

paper perfect enough. Lecture sheets and class lecture that given by the instructor helped

us to discuss the subject matter and to evaluate the term paper. At last, we cannot forget

the labs and library personnel of EWU facilitate us to complete it.

As per the direction of the course instructor to prepare the report with group members

that belongs to each group. But after the completion of the report we have to say that there

are many persons involved in it. At last, we would thankful to our honorable course

instructor and all the other group members who are associated with this report.

Once again, our sincere thank you to all the above people.

AcknowledgmentAcknowledgment

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We are going to identify the theory which can be applicable for dividend policy to attract

the investors. To find out the value of the corporation & scatter the importance of its

uniqueness towards all the stakeholders, competitors and contemporary corporation.

However, BATA has already demonstrated its excellence through good products to

customers, but has not yet deceased his journey to titan its capital & Customers providing

fruitful dividend. Bata is trying to formulate an accomplished dividend policy that offers

the dividend after undertaking the investment for expanding the business and financial

decision.

Objective of the studyObjective of the study

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To prepare this report we have used the following method-

Primary Data Sources

These are those, which are collected for this specific report and which are afresh in nature, were

not used before and need to be processed.

Primary sources are ………

Information that are collected through the direct conversation.

And from Bata Shoe Co Ltd. Web sites.

Secondary Data Sources

The secondary sources of data include as under:

Annual Report Bata Shoe Co Limited.

Group Instruction Manual & Business Instruction Manual

Prior research Report

Different books and periodicals related to the same business sector

Newspapers

Methodology of the studyMethodology of the study

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Nothing is beyond limitations. Everywhere and in every task there must have some sort of

limitations. We also faced some problems at the time of preparing my internship report as

well.

The limitations are:

Shortage of time

Lack of availability of funds (financial budget constraints)

Company’s restrictions to disclose all information

In spite of above limitations, we have tried with all of our efforts to know and find out the response

pattern of the subject and consultation of relevant record and document. Data have reached a fairly

acceptable degree of accuracy.

Limitations of the studyLimitations of the study

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The Bata Shoe (Bangladesh) Ltd. was founded in 1894 by Czech businessman Tomas Bata in the

city of Zlin. Today the Bata is a sprawling geo-centric company encompassing operations in

more than 70 countries around the world and is managed by 3 Meaningful Business Units

(MBU) across five continents.

In Bangladesh, Bata started its operation in 1962. Bata Shoe (Bangladesh) Ltd. (hereinafter

referred to as "Bata"/"the company"/"the parent company") is a public company limited by

shares. It was incorporated in Bangladesh in 1972 under the Companies Act 1913. The address

of the registered office of the company is Tongi, Gazipur, Bangladesh. The company is one of

the operating companies of worldwide Bata Shoe Organization (BSO). The shares in the

company are listed in both Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange

(CSE). The company is mainly engaged in manufacturing and marketing of leather, rubber,

plastic, canvas footwear, hosiery and accessories items as well as finished leather. The company

is one of the largest tax–paying corporate bodies contributing Tk. 1.17 billion (year 2011) which

represents approximately 70% of tax paid by the entire footwear sector of Bangladesh. With a

production capacity of 110,000 pairs of shoes daily, the company also has a modern tannery

facility with an output of 5 million square feet of leather annually.

Bata introduce a number of designers’ collections for men, women and children. Internationally

renowned brands such as Bata Comfit, Marie Claire, Hush Puppies, Scholl, Nike,

Bubblegummers, Sandak, Weinbrenner and B’first are a few names that testify to the momentous

change towards branded shoe marketing in Bangladesh. Specialized shoe categories such as

athletic shoes have been targeted through development of the Power brand. Uncompromising

quality with striking designs have put Bata shoes in a key position to appeal to different

segments of consumers. Bata has 13 Wholesale depots covering Bangladesh. Under these depots

390 RWD (Registered Wholesale Dealers) and 553 DSP (Dealer Support Program) stores are

operating. Bata has a firm commitment to eco-friendly business and a state of the art Effluent

Treatment Plant (ETP) has been set up to provide a pollution free environment for both workers

and the locality. Partnerships with other voluntary and charitable organizations are another

prominent feature of Bata’s corporate social responsibility.

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Once a company makes a profit, they must decide on what to do with those profits. They can

continue to retain the profits within the company, or they can pay out the profits to the owners of

the firm in the form of dividends. Once the company decides on whether to pay dividends, they

may establish a somewhat permanent dividend policy, which may in turn impact on investors

and perceptions of the company in the financial markets. Dividends refer to that portion of a

firm’s earnings which are paid out to the shareholder. Dividend policy may be of two types.

Preferred Stock Dividend is fixed and focus on Common stockholders dividend varies. Dividend

policy refers to the policy chalked out by companies regarding the amount it would pay to their

shareholders as dividend. These policies shape the attitude of the investors and the financial

market in general towards the concerned company. What the company decided what will be their

dividend policy depends on the situation of the company now and in the future. It also depends

on the preferences of investors and potential investors. We are going to find out about the

dividend policy of Bata through this report.

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There are some arguments both for and against the dividend payment decision of a firm. Among

them some arguments support that the dividend decision is not important in determining the

firm’s value. But in the other hand, some arguments directly oppose this declaration. Some

theories are described flowingly in this regard.

(i) The Residual Theory

According to this theory ‘The dividend paid by a firm should be the amount left over after all

acceptable investment opportunities has been undertaken.” That means, this suggests that the

firm should not lose any opportunity of investment which would yield a return (IRR) in access of

cost (WMCC). It also implies that the dividend represents an earning residual rather than an

active decision variable that affects the firm’s value.

(ii) The Dividend Irrelevance Theory

This theory was given by Metorn H. Millar & Franco Modigliani (M&M) which suggests, ‘In a

perfect world, the value of a firm is unaffected by the distribution of dividends and is determined

solely by the earning power and risk of its assets and that the manner in which it splits its

earnings stream between dividends and internally retained funds does not affect this value.

(iii) Birds-in-the Hand theory

This theory was developed by Myron J. Gordon & Linter that tells Stockholders prefer current

dividend. It also tells that there is a direct link between Dividend Policy of the firm and its

market value. Fundamental to this proposition 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.

Among the theories above first two suggest that the dividend decision is important in determining the firm’s value where the last one goes against this decision.

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(i) Constant- Pay-out ratio:

The dividend policy ratio indicates the percentage of if each amount earned that is distributed to

the owners in the form of cash. It is calculated by Dividend payout ratio = Cash Dividend per

Share / EPS 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 firm’s earnings drop or if a loss occurs in a given

period, the dividends may be low or even nonexistent which could adversely affect the firm’s

share price.

(ii) 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.

(iii) 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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Capital Structure consists of authorized Capital, paid up Capital, share money deposit, statutory

reserve & retained earnings. Capital structure of Bata from 2008 to 2012 is shown in the

following table:

SL. No.

Capital Components 2008 2009 2010 2011 2012

1 Authorized Capital 200.00 200.00 200.00 200.00 200.00

2 Paid up Capital 118.30 124.45 128.56 137.20 137.00

3 Statutory reserve 126.55 130.40 136.80 143.20 171.72

4 Retained earnings 82.44 86.3 89.10 93.45 96.72

Table 1: - Capital Structure (Figure in million Taka)

Other financial Performance Indicators

SL.

No.

Indicators 2008 2009 2010 2011 2012

1 Total Assets 2483.40 2722.95 2920.40 3112.55 3980.02

2 Loans & Advances 330.12 393.43 398.10 402.25 566.73

3 Deposits 48464.64 32,919.76 19,252 18,985 17,398

4 Total Equity 972.05 1120.50 1260.85 1320.28 1854.00

5 Net Profit After Tax 385.50 390.12 398.26 427.43 671.92

Table 2: - Other financial Performance (Figure in million Taka)

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The following table will show the five year’s data of Bata Shoe (Bangladesh) Ltd. which

includes Net Income, Retained Earnings, and Dividend Payout Ratio, Percentage of Dividend,

EPS and Share price. Based on the analysis of these statistics the interferences have been

drowned in the following sections.

Year Net Income Retained Earnings

Dividend Payout Ratio

Percentage of Dividend

EPS Share Price

2008 449,415,702 123,574,273 66.97% 220.00 32.85 320.70

2009009 449,406,445 170,382,566 66.97% 220.00 32.85 528.30

2010 543,970,530 184,257,799 55.33% 250.00 39.76 648.00

2011 580,617,053 421,461,253 59.045% 250.00 42.34 598.50

2012 671,916,303 1,606,707,776 55.99% 275.00 49.12 598.4

Table: 5 year’s competitive data

(i) Net Income

Net Income (NI) indicates a company’s total earnings or profit. Net Income is even more

important than sales because it tells the investor how much money is left over after all of the

operating costs are subtracted from sales.Net income can be distributed among holders of

common stock as a dividend or held by the firm as an addition to retained earnings. This number

is found on a company's income statement and is an important measure of how profitable the

company is over a period of time.

The following table is showing the net income for Bata Shoe (Bangladesh) Ltd. from the year 2008 to 2012.

http://en.wikipedia.org/wiki/Retained_earnings

http://en.wikipedia.org/wiki/Dividend

http://www.money-zine.com/Definitions/Investing-Dictionary/Net-Income/

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Table: Net Income of 5 years

Interpretation

From the above table, we can see that the NI of Bata Shoe (Bangladesh) Ltd. increased in 2008.

But it fall slightly in 2009. During that time was significantly affected because of global

economic recession. Therefore, consumers concentrated more on essential consumable items

instead of footwear. Moreover, electricity shortage throughout the country has interrupted

production. This is why growth was negative. As the NI increased, the company got more

opportunity to declare dividend after satisfying their equity financing need.

(ii) Retained Earnings

Year Net Income (Tk)

2008 449,415,702

2009 449,406,445

2010 543,970,530

2011 580,617,053

2012 671,916,303

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Retained earnings are the portion of net income which is held by the company for reinvestment.

The company does so to increase the growth rate of the company. On the other hand the

company can declare dividend instead of retaining the net income.

Year Net Income Retained Earnings(Tk) % of Retention

2008 449,415,702123,574,273 72.50%

2009 449,406,445170,382,566 62.08%

2010 543,970,530184,257,799 66.12%

2011 580,617,053421,461,253 27.41%

2012 671,916,303967,259,128 30.534%

Table: 5 years Retained Earnings

Interpretation

From the chart above it can be seen that Bata Shoe (Bangladesh) Ltd. preferred to retain its

income previously. But in the recent year it did not retained that much portion of its income. It

indicates the company the company is trying to follow dividend relevance theory in recent years.

(iii) Dividend Payout Ratio

Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends.

The dividend payout ratio is a relatively simple calculation:

Dividend payout ratio = Cash Dividend per Share / EPS

Dividend Payout Ratio helps us to determine whether it is following dividend relevance theory or

dividend irrelevance theory.

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Year Cash Dividend Per Share

(Tk)

EPS Dividend Pay Out Ratio

(Cash Dividend Per Share/ EPS)

2008 22.00 32.85 66.97%

2009 22.00 32.85 66.97%

2010 25.00 39.76 55.33%

2011 25.00 42.34 59.045%

2012 27.50 49.12 56%

Table: Dividend Payout ratio for last 5 years

Interpretation

From the above table, we can see that the dividend payout ratio decreased each year. This was

due to the increase in Cash Dividend which was not as much as the increase in EPS. This

indicated that Bata Shoe was trying to retain its earning for future expansion needs. Increasing of

EPS indicates that investors are risk averse. They take the cash dividend and that’s why earning

per share increased gradually this preference of investors leads to the Gordon and Lintner’s

dividend relevance theory which indicates a direct relationship with cash dividend and earnings

per share.

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(iv) Percentage of Dividend

Dividend Rate is calculated by dividing cash dividend by face value of share .After analyzing %

Dividend of the last 5 years, we have found that Bata Shoe (Bangladesh) Ltd. has not declared

any Stock Dividend to its shareholders. A stock dividend is paid when a company needs to

preserve funds to finance rapid growth. Since, Bata is an established firm; it has numerous

sources for funding. This could send a positive signal to investors thinking that Bata has enough

financing power for future growth, which we can see by observing the increase in its share price

for the last 5 years. Here the face value is Tk.10.

YEAR Dividend (Tk) % Dividend Stock Price in DSE (Tk)

2008 22 220% 320.70

2009 22 220% 528.30

2010 25 250% 648.00

2011 25 250% 598.50

2012 27 275% 598.40

Table: Percentage of Dividend Payments

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Interpretation

The table shows that the rate at which Bata is offering Cash Dividend is quite attractive. This

activity can be attributed to the cause that Bata Shoe is trying to attract more investors to invest

in the company’s stock. They are trying to give a positive signal to the stock market through high

percentage of dividend payments.

Relation between Dividend Rate and Market Price of Stock:

The Chart given beside depicts that stock price of Bata was low when rate of dividend was

lower in 2008 and 2009. Then the increasing rates of dividend results gradually increase of

market price. Highest the market price growth rate occur from 2010 to 2012. Here we can

comment according to dividend irrelevance theory as it says dividend should be paid whatever is

left after meeting all available investment decision. In last two years firm follow dividend

irrelevance theory and was able to increase shareholders value.

Relationship between Profit and Total Dividend paid:

The graph beside shows that Bata declared gradually higher dividend from 2009 to 2012. On

that time it paid most of its profit as Dividend but in 2011 it paid comparatively lower dividend

than profit compare to last four years. In 2011, the organization preferred to growth of the

firm that increased their basic earning power. It attracted those shareholders who were interested

to maximize the basic earning power, stability of dividends & growth of the firm.

(v) Earnings per Share (EPS)

Earnings per Share (EPS) are the amount of money earned by a company expressed in per

share. Table: EPS and its growth in the last 5 years

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Following Chart provides the information of EPS of Bata Shoe (Bangladesh) Ltd. in different

years.

Interpretation

From the

above table

we can

see that

from 2008

to 2012,

EPS is

increasing which is good for both the firm and for the shareholders. But the rate of increasing is

Year EPS Growth (%)

2008 32.85 32.85 - 23.75 / 23.75 * 100 = 38%

2009 32.85 32.85 - 32.85 / 32.85 * 100 = 0%

2010 39.66 39.66 - 32.85 / 32.85 * 100 = 21%

2011 42.34 42.34 - 39.66 / 39.76 * 100 = 6.74%

2012 49.12 49.12 - 42.34 / 42.34 * 100 = 16%

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not very constant. It is fluctuating during this time period. EPS in 2008 and 2009 is same. EPS

has increased substantially and highest amount of increase in the year of 2010 because of high

amount of net income.

(vi) Share Price

A share price is the price of a single share of a number of saleable stocks of a company. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share.

YEAR Share

price

GROWTH (%)

2008 320.70 320.7 – 223.6 / 223.5 * 100 = 43.42%

2009 528.30 528.30 – 320.7/ 320.7* 100 = 64.73%

2010 648.00 648- 528.30 / 528.30 * 100 = 22.65%

2011 598.50 598.5 - 648.0 / 648.0 * 100 = (7.63)%

2012 598.40 598.40 - 598.50 / 598.50*100 = (1.67)%

Table: Share price of 5 years

The table above shows that the growth of share price was not very stable. From 2008 to 2011 the

share price increased. But in 2012 the share price decreased. Share price has increased

substantially and highest amount of increase in the year of 2010 because of high amount of net

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income. A high net income bears a positive sign to the shareholders and thus they bid their share

price up. This results price increasing.

The findings of the study are as follows….

The company paid cash dividend over last five years, and shows that dividend was not stable

over time.

During 2008 to 2011 Bata Shoe (Bangladesh) Ltd. paid on an average 60% of their net income as

dividend. In the following years firm used much of their earnings for reinvestment.

According to Dividend Relevance the stock price of Bata should fall. But the management

team could able to convince the stockholder that they cut their payout percentage for the

purpose of accelerating the growth and overcoming the running recession. Consequently their

stock price went up.

Customers’ achieve means the tendency of a firm to attract a set of investors who like its

dividend policy. I n c a se o f Ba t a Shoe (Bang l adesh ) L td . mos t o f t he

i nves to r s p r e f e r more d iv idends because the company has small number of wealthy

investors.

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In the year 2008 and 2009 the firm used the residual dividend model to set payout ratio at a level

that will permit the firm to meet its Financing requirements with RE.

It is found that though Bata shoe does not practice any particular dividend policy but the

relatively practice relates to Regular Dividend Policy because it is declared more or less fixed

dividend (ranging from 22% to 25%)

Bata shoe (Bangladesh) Ltd. should continue to follow dividend relevance theory for their

future growth and attract Share holder.

They should follow any particular dividend policy so that investors can assume their

expected return on the basis of their preference (Short term or Long term).

Share holder will be able to calculate the expected return more accurately that will affect the market price.

Bata shoe should maintain constant dividend that is the positive signal to increase share price.

Share holder will prefer high .dividend; So Bata should maintain high dividend policy.

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Bata Shoe (Bangladesh) Ltd. tried to provide highest possible dividend for its investors. It always

tried to provide dividend for its investor without considering a large amount investment. We can

see the Bata Shoe (Bangladesh) Ltd. is in the maturity stage of business life cycle. The investor

of Bata Bangladesh is not much interested in long term investment. People also have a trend to

earn high dividend from this company. In conclusion we can say that Bata Bangladesh follows

the Dividend Relevance Theory which indicates that the investors consider current dividends as

less risky than future dividend and future gain.

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Lecture notes of FIN-507 prepared by Dr. Md. Tanbir Ahmed Chowdhury

Annual Report of Bata Shoe (Bangladesh) Ltd. (2008-2012).

Principles of Managerial Finance by Lawrence J.Gitaman-. 10Th edition,

Essentials Of Managerial Finance by Scott Basely & Eugene F. Bringham

www.batabd.com

www.dsebd.org

Dividend policy of Bata shoe

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