Evaluation Of Corporative Performance Variables That Determine Dividend Payout Polices

In this research titled corporate performance variables that determines dividend payout policies of companies in Nigerian. The researcher examined the relationship between earnings per share and dividend per share of Nigerian companies. Evaluated the relationship between firm size and dividend payout ratio of Nigerian companies. Examined the relationship between return on asset and dividend per share of Nigerian companies. Data for the study was sourced through the annual report of the selected brewery companies (Nigeria Brewery Plc, Guinness Nig. Plc and Champions Brewery plc ) and journal articles related to the subjects matter. Eview was used in the data analysis. The result revealed that the maximum values of these series are 0.700000, 1.740000, 1.90E +09 and 0.990000 for dividend per share (DPS), Earnings per share (EPS), firm size and return on assets (ROS) respectively. The minimum values are 0.200000, 0.060000, 1.92E +08 and 0.150000 dividend per share (DPS) Earnings per share, firms size and return on assets respectively. Dividend per share and return assets have kurtosis coefficient of 3.880333 and 1.722689 respectively which are seriously out of range of normality. Dividend per share, earning per share firm size and return of assets (ROA) have reported significant probability Values 0.266546 and 0.812933 respectively while earnings per share and firm size have p-value of 0.66173 and 0.763668 respectively, for Jarque-Bera statistics. The researcher also observed that there is insignificant relationship between earnings per share dividend per share of Nigerian Brewery firms. It was also observed that there is no insignificant relationship between firm size and dividend payout ratio of Nigerian companies.

The study equally observed that return on asset has insignificant effect on dividend per share of Nigerian companies. Based on the findings the researcher recommends that organizations should ensure that they have a good and robust dividend policy in place. This will enhance their profitability and attract investments to the organizations. Directors of corporate organizations should be made to update the records of shareholders including their next-of-kin to avoid a deliberate diversion or undue retention of unclaimed dividend warrants. Due procedures for the recognition and utilization of profit arising from investment of unclaimed dividend should be effected and properly accounted for. A more stringent level condition should be established to compel directors to only invest in profitable ventures, report the utilization of retention earnings through notes to the accounts.

Introduction

1.1 Background of the Study

So many factors affect the performance of corporate organizations and one of those factors is dividend policy. Dividend policy serves as a mechanism for control of a managerial opportunism. Empirical studies show that firms in developing Countries (e.g. Nigeria) smooth on their income and therefore, their dividends. The pattern of corporate dividend policies not only varies over time but also across countries, especially between developed, developing and emerging Capital markets. If the value of a company is the function of its dividend payments, dividend policy will affect directly the firm"s cost of capital.

Dividend is the return that accrues to shareholders as a result of the money invested in acquiring the stock of a given company (Eriki and Okafor 2002). While dividend policy on the other hand is concerned with division of net profit after taxes between payments to shareholders (ordinary shareholders) and retention for reinvestment on behalf of the shareholders (Kempner 1980) a difficult decision for both public and private limited companies is to determine the appropriate level of dividend to be paid to shareholders, and to decide whether or not to offer non-cash alternatives such as scrip dividends.

According to Davidson (1990) the existence of some share price reactions on dividend announcement prompts an analysis of the evidence for both shareholder clienteles and possible interaction of firms" dividend policies with key activities such as internal investments. An aspect of the theory of dividend policy is part of a continuum of control allocations between managers and investors, and hence cross-sectional variations in dividend policy are driven by an underlying factor. The allocation of controls between the manager and investors is important not because of agency or private information problems, but because of its potentially divergent beliefs that can lead to a disagreement about the value of project available to the firm. This underlying factor is "Corporate Performance"."Corporate performance is at the heart of the managerial function of an organization" (Samuel 1989). Analysis of corporate performance is mainly concerned with the development of a modeling methodology to help in the diagnosis of past performance and thus provide a framework for evaluating the effect of changes in operating parameters as a guide for future planning. The performance of an Organization is measured by the choice of the management form of wealth to be held. If the performance of an organization is good there will be little or no disagreement between the management and the shareholders.

In evaluating Corporate Performance, the emphasis is on assessing the current behavior of the organization in respect to its efficiency and effectiveness. To measure overall corporate performance goals are set for each of these perspectives and specific measure for achieving such goals are determined. Each of these perspectives is critical and must be considered simultaneously, to achieve overall efficiency and effectiveness, and to succeed in the long-run. If any area is either over-emphasized or underemphasized, performance evaluation will become "unbalanced". In this way, the aim of the concept is to establish a set of measures both financial and non-financial, through which, a company can control its activities and balance various measures to effectively track performance.

Modigliani and Miller (1961) observed that "The theoretical principles underlying the dividend policy and its impact on firms can be described either in terms of dividend irrelevance or dividend relevance theory". Therefore, dividend policy is irrelevant for the cost of capital and the value of the firms in a world without taxes or transaction cost. This shows that when investors can create any income pattern by selling and buying shares, the expected return required to induce them to hold firm"s shares will be invariant to the way the firm packages its dividend payments and new issues of shares. It is to be observed that a firm"s assets, investments opportunities, expected future net cash flows and cost of capital are not affected by the choices of dividend policy.

Agrawal and Jayaraman (2004) observed that Dividend payments and leverage policy are substitute mechanism for controlling the agency cost of free cash flow hence, improves performance. If a firm"s policy is to pay dividend each year end to shareholders, the level of activity in the organization will increase to obtain more income and have excess retained earnings to meet the standard set.

Brockington (1987) observed that "Dividend policy has the effect of destabilizing dividend as only a prolonged increase or decrease in profits will affect the average sufficiency to have any appreciable effect on the size of the distribution". Since it is a conservative dividend policy-in the long run, only one half of all profits will be distributed and there will be substantial buildup of retained earnings. This will certainly reinforce further, the consistency of dividends, which could for a while, be maintained even in the face of actual losses. It may also relieve the company of having recourse to external sources of finance. The retention under this policy bears no relationship to the availability of profitable investment opportunities. The risk is that projects yielding less than the true cost of capital will be undertaken in order to absorb funds which would otherwise lie idle. Samuels and Wilkes (2005) stated that the shareholders are entitled to a revenue stream of dividends. The value of the share corresponds to the present value of this stream of dividend payments.

1.2 Statement of the problems

The importance of dividend payments as one of the determinants of a firm"s economic performance has for long been recognized by developing economies (Oyejide, 1976). In Nigeria, early studies on dividend policy attempted to highlight the dividend policy pursued by Nigerian firms during the period of indigenization. Uzoaga and Alozienwa (1974); Inanga (1975) and Soyode (1976). These studies fall short of utilizing the conventional dividend models in their investigation. Subsequent studies such as Oyejide (1976), Izedonmi and Eriki, (1996) and Adelegan, (2000 and 2001) have tested the application of Lintner"s model and the modified Lintner-Britain model as adopted by Charitou and Vafeas (1998), in an attempt to explain the dividend policy of Nigerian firms at different periods. Most of these studies however, recognized the dynamic nature of the Nigerian economy and the need for further research in order to validate the conclusion that emanated from the studies.

The Financial Sector as a catalyst to economic development has not witnessed substantial research studies on its dividend policy. This study develops an empirical basis that will reveal the growth pattern and the determinants of dividend policy in Nigerian Deposit Money Banks (DMBs). This is expected to provide useful explanation on the dividend policy of Deposit Money Banks (DMBs) in Nigeria based on the explanatory variables identified from prior studies and legal considerations. The study also examines the effect of and relationship between dividend growth patterns and the Deposit Money Bank"s stock valuation.

Legally, dividend decisions in Nigeria are at the discretion of the directors, there are of course constraints that limit the directors. Some of the constraints are imposed by legal rules while others are imposed by financial factors. The level of influence of these constraints and factors are been evaluated to provide a guide to Board of directors in exercising their discretion in respect of making sound dividend decision.

1.3 Objectives of the Study

The aim of this researcher work is to examine corporate performance variables that determines dividend payout policies of companies in Nigerian. The specific objectives of this research work includes the following;

To examine the relationship between earnings per share and dividend per share of Nigerian companies.

To evaluate the relationship between firm size and dividend payout ratio of Nigerian companies.

To examine the relationship between return on asset and dividend per share of Nigerian companies.

1.4 Research Hypotheses

The following hypothetical statements will be validated in the course of this study

H01: There is no relationship between earnings per share and dividend per share of Nigerian companies.

H02: There is no relationship between return on asset and dividend per share of Nigerian companies.

H03: There is no relationship between firm size and dividend per share of Nigerian companies.

1.5 Significance of the Study

The under listed stakeholders will benefit from this study.

Investors should value the result of this study when making decisions on stock investment and portfolio management. As it will enhance investors" objectives concerning dividend and performance.

This enables management to understand what must be done in order to act in the best interest of shareholders in choosing dividend policies that will benefit and maximize their wealth. Likewise, financial managers can use the results of this study to develop a dividend policy that will determine the proportion of profits to retain in business and the proportion to distribute as dividends to shareholders in an attempt to maximize shareholders" wealth.

Shareholders have different investment objectives and the study helps them understand whether to expect immediate or long-term returns from their investment portfolios if they invested in any of the companies under study. The Stock brokers and Stock agents whose investment advisory services are of due importance to the investors will benefit from the study.

This study will help the companies that may want to adapt their dividend policy to the recommendations generated based on the relationship that exists between dividend policy and firm performance. The companies can use the findings as a platform to base their dividend policies in meeting both corporate and shareholder interests.

Scholars, students and researchers will benefit from this work because in terms of academic contribution, this study adds more updated empirical evidence to existing financial literature in Nigeria on (dividend policy and firm performance).

1.6 Scope of the Study

This study evaluates corporative performance variable that determines dividends payout policies of Nigeria Breweries. Hence, the study is narrowed to earnings per share, return on asset and dividend per share of Nigerian companies, as well as firm size and dividend per share of Nigerian companies. The study covers the period of six years which is from 2009-2014.

1.7 Limitations of the Study

This study is limited to data which are company specific and therefore can be obtained only from annual reports and financial statements. The study is restricted to companies quoted in Nigerian stock exchange (NSE) that meet the requirements for the research work. The results of the study cannot be generalized to other companies that are not studied or those that are listed in other security markets in the world. Data representing the period of six(6) years were used for the study.

Conclusion and Recommendations

5.1 Conclusion

The paper empirically investigated the corporate performance variables that determines dividend payout policies of companies in Nigeria nusing a linear regression model. This is as a result of the unresolved and divergent position of several studies on the impact of firm"s dividend policy on corporate performance. The study also conducted a sectoral analysis of the impact of dividend policy on share price to see if these impacts are sectoral specific.

Literature reviewed revealed that there is a school of thought that advocates that the higher the dividend payout ratio, the more attractive the share is to shareholders. Hence, investors place higher values on the shares of such firms. However, this is not always true as some investors view firms that retained higher proportions of their profits as firms with strategic investment opportunities. In this vein, another school of thought emanated in the literature suggesting that those firms who have viable investment opportunities should retain their profits and invest in such opportunities.

The result of the empirical study carried out revealed that dividends per share has a positive effect on earning per share, firm size, and return on assets. Similarly, the result of the sectoral analysis carried out also revealed that there is a positive relationship between ESP, FS, ROA, and dividends per share.

5.2 Recommendation

Based on the findings of this stud, the researcher recommends that market forces be allowed to determine dividends, that policy formulators should not, for personal interest overrule the decision of the management; that an optimal dividend policy that maintains an appropriate balance between dividend earnings and retained earnings should be undertaken to promote financial health of the firm; that the firms should pay as at when due the dividend accrued to the shareholders in order to reward their patronage; that corporate bodies should pay attention to dividend payout in order to maintain and sustain their shareholders and attract prospective investors. Nigerian firms should also consider all the factors that affect dividend policy when formulating one, in order to have an optimal policy that satisfies their share holders and other stakeholders.

• Accounting Project Topics and Materials