Effect Of Dividend Policy On Firms Earning

This study is on effect of dividend policy on firms earning in Nigeria. The total population for the study is 200 staff of UBA, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

Introduction

1.1 Background to the Study

Dividend according to Nwude (2003) "is the share of the company"s legally available profits divided among the shareholders and received by the shareholders in cash (where cash is paid out) or stock (where stock is paid) or both in other forms of paper claims to wealth". Dividend is the reward for investing in the company.

Dividend plays an important role in determining the value of share in the capital market by investors. Payment of dividends satisfies the residual shareholders" desires for some return on their investment and increases their confidence in the future of the company in which they invested their money. In addition, every investor by policy is paid dividend at the end of every financial year, net earnings remaining after paying of creditors, tax authorities, expenses, preferred stockholders are paid out as dividends "or shared between retained earnings and cash dividends" or stock dividends. This enhances the firms share value in "capital market as the demand for the stock of such good dividend paying company will increase thereby pushing the share price upwards. This is called demand push share price increase. On the other hand, retained profits can also be reinvested in the company for meeting the expansion needs, profit targets and growth records.

Therefore, an effective dividend policy is extremely important for company in its desire to maximize the wealth of its stockholders.

Dividend policy, according to Pandey (2003) "is the guiding principle for determining the portion of a company"s net profit after taxes to be paid out to the residual shareholders as dividend during a particular financial year. The purpose of a dividend policy should be to maximize shareholders" wealth, which is dependent on both current dividend and capital gains".

What happens to the value of the firm as dividend is increased, holding everything else (capital budget and borrowing) constant. Thus, it is a trade-off between a retained earnings on one hand, and distributing cash or securities on the other as follows:

Maintenance of Stable Monetary Amount; the guiding policy is that firms will maintain and pay out to residual shareholders a stable amount in naira value as dividend in spite of the company"s performance during any year. Once that fixed amount is paid out from the earnings available to residual owners, any excess is retained in the business for other investment opportunities. Note: If the fixed amount is greater than the earnings available to residual owners, the deficit could be met from the revenue reserve. The implication is that if a company"s earnings per share is N5 during a year and has the policy of paying N5 divided per share every year, nothing will be left for investment purpose even though there is an investment opportunity existing or showcase. It encourages investors to pay high price for the company stock.

Maintenance of Stable Payout Ratio; This is a policy in which the firm decides to pay out a fixed percentage of its net profit as dividends to residual owners. The implication is that it often leads to fluctuation in her dividend policy.

Payment of Extra Dividends Over And Above the Fixed Ratio or Fixed Amount; this policy is an addendum to the maintenance of stable monetary amount and maintenance of stable payment ratio. If the firms make excess of the net profit, the balance can be used to improve or increase the dividend amount payable under fixed rate or used to invest or as a plough-back to the business.

Residual Dividend Policy; The decision here is that is to pay out whatever is left over after taken care of the capital requirements of the firms to residual owners as dividend. Therefore, effect of dividend policy on firms earnings in Nigeria will be elaborated upon in subsequent of the project work.

1.2 Statement of the Problem

In order to look into the financial management objective of shareholder wealth maximization, organization pursues investment, financing and decision which will increase value to the owners of the business. This additional value depends on the dividend policies that are reflected on the market value of the firms" stock. For long-term owner value to be maximized, a dividend policy which is consistent must be pursued. Hence, commitment towards achieving a dominant position in industry as well as retraining investor"s confidence has been an on-going struggle from management of forms. Therefore, striking a balance in linkage between dividend policy and firms" earning is one instrument in achieving the goal of financial management.

1.3 Objective of the Study

Effects of dividend policy on firms" earning in Nigeria can be achieved by the selection and adoption of various dividend policies in Nigeria that will lead to improvement in shares and market value of the firms:

Find the relationship between dividend policy and the determinant factors of dividend policy.

The effect of dividend policy on practicing firms.

To make recommendation based on the findings.

1.4 Research Hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H0: there is no relationship between dividend policy and the determinant factors of dividend policy
H1: there is relationship between dividend policy and the determinant factors of dividend policy

H02: there is no effect of dividend policy on practicing firms
H2: there is effect of dividend policy on practicing firms

1.5 Significance of the Study

To determine the division of earnings between payment to shareholders and retained earnings.

The firm has to balance between the growth of the company and the distribution to the shareholders.

To strike a balance between the long-term financing decision and the wealth maximization.

To ascertain the market price of share.

Retained earnings help the firm to concentrate on the growth, expansion and the modernization of the firm.

To know the financial flow, capital structure of the firm, corporate liquidity, stock prices, growth of the company and the investors.

1.6 Scope and Limitation of the Study

This project work is centered on the effect of dividend policy on firms" earning in Nigeria. The various determinant of dividend policy, forms of dividend, the dividend debate, objectives, mathematics of dividend policy, dividend payment procedure, cash dividend, stock dividend, stock repurchase, stock split etc. will be treated in detail in the subsequent chapters of this project work. The project work tend to touch every organization in Nigeria that adhere strictly to dividend policy but due to financial and time constraints, it narrow the scope of study to United Nigeria Bank for Africa Plc (UBA) and other interview will be carried out in some other manufacturing organization. The researcher encounters some constrain which limited the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.7 Definition of Terms

This involves a brief description of the various terms associated with dividend policy on firms" earning in Nigeria. The following includes terms that will be employed in the subsequent chapter of this project.

Dividend:

This is the distribution of value to shareholders. It is the reward for investing in an organization or for putting ones" asset into an investment.

Policy:

This has to do with the guiding rules and regulation, principles and mandate upon which management implore to ensure effectiveness in organization control. It has to do with the strict compliance in operation.

Stock Dividend:

It is the payment of dividend in the form of issue of additional shares to residual owners of the firm.

Cash Dividend:

It is the payment of dividend in cash.

Stock Split:

It means the division of existing stock price by two and the multiplication of such stock by two.

Stock Re-Purchase:

It is the acquisition of the company"s outstanding shares by the company itself for warehousing in the stock trading.

Firms:

A firm is a business working for the actualization of goals. An individual can be a firm.

Company:

A company has to do with group of firms engaging in business to realize primarily profit.

Earnings:

It is the reward that goes to an investor (profit).

Budget:

It is a propose plan quantified in monetary terms showing income and expenditure to be incurred in the future.

Finance:

This has to do with the asset of a company. It could be in the form liquid or fixed (fixed or current).

Value:

It is a firms" worth is a business.

Exchange:

It is the value one give up for wealth acquisition.

1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.

Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.

Chapter three deals on the research design and methodology adopted in the study.

Chapter four concentrate on the data collection and analysis and presentation of finding.

Chapter five gives summary, conclusion, and recommendations made of the study

Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain effect of dividend policy on firms earning in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of dividend policy on firms earning in Nigeria

5.2 Summary

This study was on the effect of dividend policy on firms earning in Nigeria. Three objectives were raised which included: Find the relationship between dividend policy and the determinant factors of dividend policy, the effect of dividend policy on practicing firms, to make recommendation based on the findings. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of UBA, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

5.3 Conclusion

A great deal of theoretical and empirical research on dividend policy effects has been done over the last several decades. Theoretically, cash dividend from earnings means giving reward to the shareholders, that is, something they already own in the company; but this will be offset by the decline in stock value. In an ideal world therefore dividend payments would have no impact on the shareholders" value. In the real world, however a change in the dividend policy is often followed by a change in the market value of stocks. The economic argument for investor"s preference for dividend income was offered by Graham and Dodd (1934); Walter (1963) and Gordon (1959 and 1962). Another researcher made efforts to further understand the dividend and earnings controversy on stock prices reveals that on the average investors, subject to their personal tax rates, 71 would prefer to have less cash dividend if it is taxable: size of optimal dividend inversely related to personal income tax rates (Pye, 1972). The theoretical literature on dividend and earnings effect effects has been well developed.

5.4 Recommendation

This study recommends managers should act in the best interest of investor as to reduce the agency problem, thus complete information about the dividend polices of the firm should be provided. It is argued that dividend announcements convey information to investors regarding the firm"s value prospects (Ezra, 1963). Thus, stock prices tend to increase when an increase in dividend is announced but tend to decrease when a decrease or omission is announced.

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