«In Pakistani Service Industry: Dividend Payout Ratio as Function of some Factors Waseem KHAN1 Naheed ASHRAF2 1,2 1 2 The Islamia University ...»
International Journal of Academic Research in Accounting, Finance and Management Sciences
Vol. 4, No.1, January 2014, pp. 390–396
E-ISSN: 2225-8329, P-ISSN: 2308-0337
© 2014 HRMARS
In Pakistani Service Industry: Dividend Payout Ratio as Function of some
1,2 1 2
The Islamia University Bahawalpur, E-mail: email@example.com, E-mail: firstname.lastname@example.org
The purpose of this paper is to find that dividend payout ratio is the function of Corporate Profitability, Cash Flow, Tax, Sales Growth and Debt to Equity ratio. For seeking out the dividend payout ratio relationship of with the Corporate Profitability, Cash Flow, Tax, Sales Growth and Debt to Equity ratio, data has been taken from financial statements of 26 firms listed on Karachi Stock Exchange (Pakistan). It has been find that dividend payout ratio is not the function of Corporate Profitability, Cash Flow, Tax, and Sales Growth except Debt to Equity ratio. Though in rest of the international markets dividend payout ratio is the function Corporate Profitability, Cash Flow, Tax and Sales Growth but in Pakistan its’ contradictory to this phenomenon. The data has been taken limited. For increasing the size of data results can be changed at some extent. And these results show that in Pakistan, there are other factors which influence the dividend payout ratio. It is most probably behavioral factor. This paper predicts the presence of other factor which can be influence dividend payout ratio. It invites further investigations and provides the bases for research.
Key words Dividend Payout Ratio (Dependent Variable), Corporate Profitability, Cash Flow, Tax, Sales Growth and Debt to Equity ratio (Independent Variables) DOI: 10.6007/IJARAFMS/v4-i1/696 URL: http://dx.doi.org/10.6007/IJARAFMS/v4-i1/696
1. Introduction Dividend payout ratio is a subject of argument for financial researcher and academicians. Many theoretical models have been presented to solve this phenomenon. These models present some determinants to that manager should consider while making decisions about dividend policy. Mangers should consider determinants in deciding amount and size of cash distribution for share holders. The determinants which may affect dividend payout ratio include corporate profitability, cash flow, tax, debt to equity ratio and sales growth. Dividend ratio also has the impact of investor’s behavior on it. Profit seeker likes to have high dividend payout ratio and wealth seeker goes with low dividend payout.
The influence by different determinants on dividend payout ratio presents their relation to it. On the strength of these relation managers may prioritize determinants.
Corporation Profitability Income of the corporation can be invested in some new project, operating projects, used to purchase securities, to pay back debt/liability, or to distribute to shareholders. This distribution may be cash dividends or company may buy back its shares. At the end, it shall be on decision makers’ will either they decide for cash distribution or buy back shares. Company’s decision makers decide dividend policy. This controversial situation comes to an end with ultimate affect on dividend payout ratio.
negative because of lower cash status. The companies of no dividend history are taken positively when declare dividends. The decision of to payout dividend or not to payout affect dividend ratio.
Tax It’s ever been presumed that investor expect and require higher return on investment. Taxation model of companies effect investor’s decision for having maximum dividend. Company portfolio composition is responsible for investor’s decision. Increase or decrease in tax liabilities has strong impact on dividend increase or decrease requirement. Increase in tax liability may lead to the preference for increase in dividend payment. In the light of leverage frame work of company, investor chooses either to go for dividend or capital gain. So, it shows the positive relation between taxation and dividend payout ratio.
Sales Growth Highly growing companies prefer to pay low dividend as remaining will be invested in more projects.
Growing companies need cash from sales for more operations. Sales growth has impact on dividend ratio.
This impact can be positive or negative. It depends on company investment structure. If the company is growing and seeking growth then relation between sales and dividend payout ratio will be negative.
Debt to Equity Ratio Leverage proportion used to finance the company operations indicates the risk affects for company’s dividend policy. Highly growing companies come up with high debt financing and high dividend payout ratio. This show positive relation of debt to equity ratio but in some situations it creates negative relation.
Negative relation can be established on the bases of debt risk and dividend payout ratio.
2. Literature Review Dividend Payout Ratio Dividend payout ratio is widely research area of finance but still a puzzle for absolute contribution of factors. Dividend payout ratio decision is due consideration for its legal and financial factors. Dividend as a part of earnings represent firm’s current financial condition, past trend and future anticipations. Dividend reflects how efficiently management is utilizing its financial resources and ability to earn profits. Company’s earning capacity ability can be seen in one snap shot through dividend payout ratio. Past behavior of dividend payout ratio can stand as symbol of investor’s interest and trust on corporation’s earnings.
Corporate Profitability Vivian, A. (2006) says that relation between corporation profitability and dividend payout ratio should be negative and it can be justified easily. Especially in the absence of external financing opportunity, when firm use optimal finance available to it. When firm want to increase its future earnings and retain earnings are the only source for further investments.
Arnott and Asness (2003) investigated relation of corporate earnings growth and dividend payout ratio. Dividends represent small portion of earnings. As the lower will be the dividend payout ratio higher will be the future profits because it will give high investment opportunity for future projects. Corporate profitability growth can be possible in the condition of cut off or offsetting transactions (e.g., dividends or shares buy backs). The growth of corporation’s earrings and dividends are directly consistent to whole market growth. Investor’s idea of shares buy back can increase earning faster than GDP brought different results that it just decrease number of share issuance instead of impacting profitability (Bernstein & Arnott, 2003). Dividend payouts and earnings are positively related. If the dividends will be high then profits will be high. High earrings draw high dividends (Parker, 2005).
Cash Flow Free cash flows of company have positive implication. These companies tend to pay large dividends.
Cash flows and dividend payout relation have positive relation. Increase in free cash flows brings positive impact on dividend payouts (Thanatawee, 2011).
391 International Journal of Academic Research in Accounting, Finance and Management Sciences Vol. 4 (1), pp. 390–396, © 2014 HRMARS
Manual calculation has been made of cash flows excluding taxes through formula:
The result of this formula used to find out dividend payout ratio. Which shown that there is significant relation between dividend payout ratio and cash flows. Beta value in regression analysis of cash flows and dividend payout was 1.89 (for large cap). Cash flows play important role in determining dividend payouts (Hellstrom & Inagambaev, 2012).
Cash level shows liquidity position of firm. Consider the situation if firm has no cash for investment financing or need for equity capital. All this will create picture of firm’s cash flows which will affect dividend payout ratio (John & Muthusamy, 2010).
Bradley et al., (1998) found the link between dividend payouts and cash flow volatility. The uncertain situation of cash flow can be a signal for market. Systematic risk attached with cash flows lower the share price. Firms with high cash volatility promise low dividends.
Tax Tax influence personal and managerial decisions as well. As the tax level increases, corporations’ increases stock repurchases and decreases the dividend payouts. Tax level and dividend payout varies with the percentage of individual investments (Lightner, 2008). Tax variation affects personal income and stock value. And tax avoidance ways are not risk free and cost free. So, efforts to concise personal and corporation tax rates must make favorable structure of size and capital gain tax (Chen & Kane, 2003).
It’s often predicted that tax has inverse relation with stock ownership. But here result showed that tax has positive relation with stock ownership. People prefer dividends on capital gain for the reason different tax treatment (Han et al., 1999). Farah and Selwyn (1967) found that a part of the Equilibrium frame is selected, the individual investor. In addition, if the amount of personal and corporate leverage companies such as dividends or capital distributions can acquisition.
Sales Growth Sales growth is critical to company growth and dividend payout. In Swedish market sale growth has negative relation with dividend payout. In Swedish market, negative relationship to the sale growth rate inversely proportionate the signaling theory which states that higher growth should contribute to higher dividend (Hellstrom & Inagambaeev, 2012). Higher growth firms need higher financing. It is firms’ need to set good reputation through high dividend payouts for access the high financing. But empirical investigation showed that sale growth is negatively related to the dividend payouts (John & Muthusamy, 2010). Sales growth in the payout ratio could be affected. Determine the amount of dividends that are not quite the company's been after investing and financing decisions (Amidu and Abor, 2006); Rather, taken together with the investment and dividend decisions. Funding decisions. Partington (1983) the use of intellectual Company’s dividend of goal orientation to pay motivation, and there are some decisions about dividends regardless of the investment policy.
Debt to Equity The debt benefits and efficiency ignored by mangers and it’s called ‘controlled hypotheses’. Free cash flow can be increased for dividend payouts or repurchasing of stock and thereby payout current cash which would otherwise be invested in low returning projects or wasted by firms. The leverage structure totally depends on firm’s decision and it brings positive influence on dividend payouts (Al-Taleb, 2012).
Leverage structure essentially contributes to the firm’s ability to payout dividends. It measures firm’s ability to manage capital. For Nigeria manufacturing firms, debt to equity structure is positively related to the dividend payout ratio (Oladipuo & Okafor, 2013).
With the literature point of view profitability, cash flows, tax, sales growth and debt to equity are contributing factors in determining dividend payout ratio. These factors have ultimate effect on dividend payout either positively or negatively but it’s sure there is effect of these factors on dividend payout ratio.
3. Reasoning to study Different studies defining and explaining Profitability, Tax, Cash Flow, Sales and Debt to Equity factors in relation to dividend payout ratio in context of international markets. But here in Pakistan these factors are not exactly contributing on the same terms as defined by other researchers according to other country markets.
1. There is any relation between Dividend payouts and cash flows, tax, profitability, debt to equity ratio, sales.
2. If yes, then its positive relation or negative relation between dividend payouts and cash flows, tax, profitability, debt to equity ratio, sales.
5. Methodology & Data This study is centered towards quantitative research as following previous research. This study measures the correlation and regression between dividend payout ratio and other variables (Cash Flow,
Profitability, Tax, Sales Growth and Debt to Equity). Dividend Payout Model is as follows:
Dividend PAYOUTi = b0 + b1* PROFi + b2*CASHi + b3*TAX +b4*GROW i + b5*D/Ei + µi,t (2) Where b0 denotes the intercept of the regression equation, and b1, b2, b3, b4 and b5 are the regression coefficients of Profitability, Cash Flow, Tax, Growth, and Debt to Equity.
Data was collected of 26 firms from service sector for the years 2011 and 2012. These all firms were listed of Karachi Stock Exchange of Pakistan. All the financial information used from their annual report.
This secondary data is submitted to regularity institutions by firms of service sector.
Table 2 shows the static description of all the variables. It measures the dividend payout ratio (on Yearly bases) is 12.71% and Profitability is 1.28%, which means firms are holding 1.28% profits after Tax and pay about 13% of its profit as a dividend. The Cash Flow mean is 6.79 because of operating activities. Tax is 2.28% as firms are needed to pay very small amount as tax. Sales Growth is 1.49% and Debt to Equity ratio is 3.09.
Table 2. Descriptive Statistics of all variable involved is study
In Correlation Test Context:
All the variables discussed in the paper, contribution of them in affect to dividend payout ratio as
Corporate Profitability correlation with Dividend Payout Ratio is -0.2% and its’ 99 times likely to occur. It means profitability has very weak correlation which is ignorable.
Cash Flow correlation with Dividend Payout Ratio is about -28% and its’ 17 times likely to occur. It means cash flow has not a strong correlation.
Tax correlation with Dividend Payout Ratio is near about -9% and its’ 67 times likely to occur. It means tax has very weak correlation.
Sales Growth correlation with Dividend Payout Ratio is about -36% and even it 7 times likely to occur.
It means sales growth has weak correlation and even it can occur not very often.