ANALYSIS OF CAPITAL STRUCTURE AND DIVIDEND POLICY

OFTEXTILE INDUSTRIES IN BANGLADESH(TERM PAPER ON CORPORATE FINANCE)

Submitted ByMd. Wahiduzzaman Khan ID#12034Nur Muhammad Nadir ID#14002A S M Rezaul Karim ID#14022Sayeed Mahmud ID#14040Shahidullah Kaisar ID#14020

EMBA PROGRAMDEPARTMENT OF FINANCE

UNIVERSITY OF DHAKA

1. INTRODUCTION

The capital structure and dividend policy are the crucial issues for any company when its growth and profitability are concerned. This article is intended to investigate the financial structure and dividend policy of some of the textile companies in Bangladesh with an emphasis on growth and access to capital markets. Financial performance of the firms, pecking order and agency theory perspectives are reviewed in order to formulate a sizeable levels of long-term, short-term and total debt, and liquidity. Up-to-date financial data were collected from DSE library. Regression results indicate significant relationships between financial structure and profitability, asset structure, size, age .

The importance of the industry has a strong influence to firm-level financial and real decisions. We find that in addition to standard industry fixed effects, financial structure also depends on a firm's position within its industry.

2. Methodology

We were assigned to perform the analysis of capital structure and dividend policy of textile industry as a part of the requirements of completion of the subject named Corporate Finance.

The condition of textile industry in this country is very bad. There is hardly any company that is profitable or has sustainable profitability. When we go through the financial statements of different companies we found that many companies had even negative gross profit. As our assignment includes the dividend policy also, we had to select companies that seem to be profitable at the first sight, and pay dividend. The disclosure of information is very poor or inadequate. In many cases we found that further explanation or elaboration was necessary to understand financial statement. In those cases we had to make assumption to calculate the different financial ratios and multiples.

We selected five companies “Apex Spinning and Knitting Mills, Bex Tex, H R Textile Mills, Alltex Industries Limited, Square Textiles”, and distributed one company to every group member.

3. Capital Structure Analysis

To perform the capital structure analysis we had to calculate some debt related ratios such as Debt to Equity, Debt to Total Asset, Times Interest Earned Ratios (TIER). We also calculated some ratios that are related to operating profit such as Operating Profit Mergin (OPM), Operating Profit on Assets (OPA). Then we tried tofind out the relationship of profitability and other performances of different companies with their capitalstructure. We tried also to find out the deviation of the empirical scenario from that of idle one and tried to find out the reason of that deviation.

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3.1 Alltex Industries Limited

Alltex Industries Limited was incorporated on 24 January 1985 as a private limited company under the Companies Act, 1913 now repealed and re-enacted as the Companies Act, 1994. The Company was converted into public limited company on 25 October 1994. The Company was listed in Dhaka Stock Exchange Ltd. (DSE) on 31.08.1996 and Chittagong Stock Exchange Ltd. On 07.08.1996

Ratios 2008 2007 2006 2005 Average

OPM 5% 3% 4% 4% 4%

OPA 6% 5% 4% 5% 5%

TIER 1.17 1.21 1.22 1.27 1.21

Debt Ratio 0.65 0.65 0.61 0.53 0.61

Debt to equity Ratio

0.62 0.65 0.43 0.55 0.5625

CFCR 0.50 0.21 0.15 0.13 0.24

Table: 1 (Capital Structure of Alltex))

Analysis of Debt and Operating Profit Related Ratios: Debt to Total Assets ratio (From Table: 1) for the company had been increasing from 2005 to 2007; however in 2008 it was equal to that of the 2007. The average for these three years is 0.61. The Debt to Equity (From Table: 1) ratio was lower in 2006 than that of 2005; however it was higher in 2007 than that of 2005, and in 2008 the Debt to Equity ratio is little lower than that of 2007. The Average debt to equity ratio is 0.5625.

Operating Profit Mergin (From Table: 1) increased from 4% in 2005 to in 5% in 2008, and the average figure was 4%. Operating Profit on Assets also increased from 5% in 2005 to 6% in 2008, and the average is 5%. It is clear (From Table: 1) that TIER ratio decreased from 2005 to 2008. OPM and OPA increased however TIER decreased as Debt Ratio and Debt to Equity Ratio increased.

Analysis of Cash flow Conversion Ratio (CFCR): From Table:1 we have seen the Cash Flow Conversion Cycle Ratio is less than one which implies more repayment of principle and interest than the operating cash flow it generates. However the ratio is increasing from 2005 to 2008.

Growth The sales of this company has a growth rate of =0.1165 or 11.65%.

However this is an average annual growth rate for last three years. The sales in 2005 were nearly equal to that of 2006. And sales in 2008 are nearly equal to that of the 2007. However the sales had a drastic elevation in 2007. We also found that OCF is greater than FCFF in every year except 2006. Considering this two thing we can conclude that the company is growing.

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3.2 Square Tex, Bex Tex & HR Textile.

Square Textile Limited, Bextex Limited and HR Textile Limited are the three pillars in textile sector in Bangladesh. The share of these three companies are jointly owned by government, publics, institutional shareholders and the foreign companies. The percentage of shareholding of these companies are shown below.

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SQUARE TEXTILE LIMITEDSponsor/Director 53.94Govt. 0Institute 4.49Foreign 10.33Public 31.24

Share Percentage: 

BEXTEX LIMITEDSponsor/Director 39.47Govt. 0Institute 0Foreign 0Public 60.53

Share Percentage of BEXTEX

Sponsor/Director

Govt.

Institute

Foreign

Public

HR TEXTILE LIMITEDSponsor/Director 50Govt. 0Institute 26Foreign 0Public 24

Share Percentage of HR Textile

Sponsor/Director

Govt.

Institute

Foreign

Public

Share Percentage of Square Textile

Sponsor/Director

Govt.

Institute

Foreign

Public

3.3 APEX Spinning and Knitting Mills ltd.

The Apex Spinning & Knitting Mills Limited is a public limited company registered under the Companies Act, 1913. The Company was incorporated in Bangladesh on 25.11.1990. Shares of the Company are listed in the Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd.

Nature of Business Activities:The Company owns and operates a 100% export oriented vertically integrated knitting, dyeing& finishing and garment factory.

With respect to the other companies that we have studied APEX spinning mainatains a comparatively smaller amount of leverage in its capital structure. Though operating profit margin is low with respect to the other companies but it maintains a satisfactory growth rate in its asset and net profit.

APEX maintains a constant dividend policy and sufficient amount of Dividend Payout ratio so the market price of its share has got the rising tendency in the observed time.

The Total Assets of this company has a growth rate of =0.1187 or 11.87%.

However this is an average annual growth rate for last five years.

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3.4 Comparison among the companies.

When we compared different ratios within the companies we found that different companies maintained different level of debt in their capital structure.

Where BEXTEX got the D/E ratio from 0.67 to 2.45 from 2003 to 2007 whereas the APEX got only 0.30 average at the same period.

Square Textile has a decreasing Debt Equity Ratio. i.e. they are trying to use less Debt in financing.

Both BEXTEX and HR Textile has a increasing Debt Equity ratio. But BEXTEX has the highest ratio and the increment rate is higher than others. That means, it has been aggressive in financing its growth with debt.

APEX Spinning has relatively lower and constant D/E ratio over the years and in 2007 it fell sufficient.

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.

.039

.033

.030

.032

.033

APEX

.045

.04

.04

.04

.03

AllTEXYear Square Tex

HR Tex BEXTEX

2007 0.163 0.03 .23

2006 0.167 0.03 .34

2005 0.174 0.03 .15

2004 0.098 0.029 .16

2003 0.090 0.037 .15

Operating profit margin

PROFITABILITY

COMPARISON AMONG THE COMPANIES

Square Textile has an increasing Profit margin. But the margin is lower than that of BEXTEX.

BEXTEX has a higher and increasing Profit margin. HR Textile has the same profit margin for last 3 years and it is the lowest margin also . AllTex and APEX have less but constant profit margin over the years.

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Square Textile had a higher market value per share in 2007. There is no gradual increment with time.

Though HR Textile has a lower Share value, it has a gradual increase and it seems steady. BEXTEX Ltd. has a lower market value than others. The market price of APEX Spinning has an increasing tendency over the years and

jumped to 547 in 2007. Square Textile has the highest market value per share.

3.5 D/E vs OPM for all of the companies

When we analyzed D/E and the OPM of all the companies from year 2003 to 2007 we found that the company which has higher leverage also has the higher OPM. As we can see in the five year average column. The reason behind this may be the fact that the company uses debt in its capital structure to make it profitable.

But in individual case the scenario is different. The company when uses more debt, its operating profit margin either remains constant or decreases.

Comp Year D/E OPM Avg D/E Avg OPMSQUARE 2007 0.674 0.163TEX 2006 0.701 0.167  2005 0.653 0.174 .7864 .1384  2004 0.877 0.098  2003 1.027 0.09BEX 2007 2.45 0.23TEX 2006 2.03 0.34

  2005 1.14 0.15 1.5 .21

  2004 1.25 0.16

  2003 0.67 0.15

HR 2007 0.81 0.03TEX 2006 0.79 0.03  2005 0.31 0.03 .45 .03  2004 0.24 0.029  2003 0.11 0.037

ALL 2007 0.65 0.03TEX 2006 0.43 0.04

  2005 0.55 0.04 .534 .04

  2004 0.54 0.04

  2003 0.5 0.045

APEX 2007 0.2 0.033SPINNING 2006 0.3 0.032  2005 0.3 0.03 .29 .033  2004 0.33 0.033  2003 0.32 0.039

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4.0 Dividend Policy

Dividend Policy refers to the explicit or implicit decision of the Board of Directors regarding the amount of residual earnings (past or present) that should be distributed to the shareholders of the corporation.

This decision is considered a financing decision because the profits of the corporation are an important source of financing available to the firm.

4.1 Types of Dividend Policies

Residual dividend policy Residual dividend policy is one in which a firm pays dividends from the amount remaining after

undertaking all desirable projects from internally generated cash flows. Managed dividend policy

Three of the more commonly used managed dividend policies are: - Stable dollar dividend policy, - Constant payout ratio policy, and - Low-Regular-and-Extra dividend policy.

Stable Dollar Dividend Policy A dividend policy based on the payment of a fixed-dollar dividend in each period. It is the most popular kind of dividend policy for dividend paying firms.

Constant-Payout-Ratio Policy Constant-Payout-Ratio dividend policy, is based on the payment of a certain percentage of

earnings in each dividend period. Such a policy is likely to result in wildly fluctuating dividends. As a result, only a small

percentage of dividend paying firms follow such a policy.

Low-Regular-and-Extra Policy A dividend policy based on paying a low regular dividend, supplemented by an additional

dividend when earnings are higher than normal. Extra dividend is an additional dividend optionally paid by the firm if earnings are higher than

normal in a given period.Other Forms of Distribution

Stock dividends, Stock splits, and Share repurchases.

4.2 Dividend other related criteria of different companies

The Dividend paid by the different Textile companies under consideration are of different types. In fact a company maintains its own strategy when paying dividend. As we discussed earlier the policy varies from industry to industry and again it also varies from company to company in the same industry . This is because the profitability and the intention to distribute that profit as dividend vary from company to the company. The analysis of the dividend policy of the companies under our observation will give a clear picture of variation.

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4.2.1 Table of HR Textile

4.2.2 Table of Square textile

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-4.08

0.66

2.83

-20.38

-11.53

FCF PS

32.57

18.49

42.13

-9.47

45.56

OCF PS

42.1559.52%8.40.005200

3

56.7073.10%6.840.005200

4

60.65100.67

%7.450.007.5200

5

80.8092.02%8.150.007.5200

6

110.4088.08%9.650.008.5200

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Closing price of

stock

Dividend Pay Out

RatioEPS

Stock DPS

Cash DPS

Year

3.49

4.14

-0.41

21.76

7.84

FCF PS

11.16

11.50

12.56

13.97

13.05

OCF PS

76.9846.48%6.670.103200

3

95.8643.23%7.170.103200

4

64.2737.29%8.380.1253200

5

74.8530.97%10.170.153200

6

127.4030.20%8.940.202.5200

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Closing price of

stock

Dividend Pay Out

RatioEPSStock

DPSCash DPS

Year

25013970762003

1.41%

25372954632004

1.89%25851774752005

20.71%31206862422006

8.91%11.62% 34832312272007

Arithmetic Average

GrowthTotal AssetYear

Growth estimation (Asset growth)

4.2.3 Table of Bextex

4.2.4 Table of ALLtex

Terms2008 2007 2006 2005 Average

EPS (Diluted) TK

1.26 2.24 2.16 3.50 2.29

NAVPS (Diluted) TK

231.70 231.22 203.99 228.34 223.815

CDPS (Diluted) TK

2.50   8.00 7.50 4.5

CDRPS(Diluted) TK

2.5%   8% 7.5% 4.5%

Market Price(DSC)TK

83.69 63.83 55.67 72 68.79

OCFPS (Diluted) TK

48.11 34.46 27.71 23.80 33.52

FCFFPS (Diluted)

31.41 -6.09 46.15 21.99 23.365

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8.05

13.90

8.52

9.30

7.60

FCF PS

21.62

21.17

16.76

13.94

8.62

OCF PS

17.508.88%1.690.050.102003

18.7011.76%2.550.250.052004

21.807.38%2.030.100.052005

18.80-8.20%-1.220.100.002006

20.850.00%-5.280.000.002007

Closing price of

stock

Dividend Pay Out

RatioEPS

Stock DPS

Cash DPSYear

4.2.5 Table of APEX Spinning

Terms 2007 2006 2005 2004 2003

EPS TK

56.93 58.28 57.01 56.18 44.95

Market Price547 218 255 305 199

NAVPS TK

476.49 417.56 377 338 297

CDPS TK 20.00 20.00 18.00 18.00 15.00

CDRPSTK

3.66% 9.17% 7.06% 5.90% 7.54%

P/E ratio 9.61 3.73 4.47 5.43 4.43

Div Payout Ratio

35.13% 34.31% 31.57% 32.04% 33.37%

4.3 Comparison of Cash DPS of different companies

From the above chart we can see that HR Tex has paid tk 5 in 2003 & 2004, Tk 7.50 in 2005 & 06 and Tk 8.00 in 2007 in a share having the face value of Tk 50. whereas BEXtex has paid almost nil dividend in these year on a share of similar face value.

APEX has paid tk 15 in 2003, Tk 18 in 2004 & 05 and Tk 20 in 06 &07 on a share of face value Tk 100.

So apparently we are observing that HR Tex and APEX are paying similar ratio of dividend on the face value of share.. But when we consider the dividend payout ratio we can observe that APEX is maintaining an average payout ratio of 33% whereas HR textile is paying at a ratio from 53% in 2002 to 101% in 2005. That is it is paying highest dividend with respect to its income. its income.

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15.00

18.00

18.00

20.00

20.00

APEX

-50.1032003

-50.0532004

7.507.50.0532005

8.007.50.0032006

-8.50.002.52007

ALL TexSquare

text

HR Text

BextexSquare

textYear

Alltex has paid dividend in 2005 & 2006 but in other year it did not pay dividend though its profitability remains constant.

5.0 Conclusion The study implied that capital structure of a firm is independent from other firm in the

same industry. But in case of a particular firm profitability is significantly related to capital structure.

Specifically, profitability was inversely related to the amount of liability in a company’s capital structure. Therefore, the more debt a firm incur, the worse its earnings is hurt.

Corporate dividend policy is a complex matter to decide. A number of conflicting theoretical models (all lacking strong empirical support) define

current attempts to explain corporate dividend behavior. One faction sees dividends as attractive and as a positive influence on stock price. A

second bloc believes that stock prices are negatively correlated with dividend payout levels. The third group of theories maintains that firm dividend policy is irrelevant in stock price valuation.

In this study we found that most of the textile company do not pay or pay a little dividend.

The dividend paying companies pay a constant amount of dividend per share for years together. But the dividend payout ratio is different from one another.

The companies which pay cash dividend has a positive outcome with respect to its share price. That is share price is appreciating in case of the companies which pays regular cash dividend.

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