ABSTRACT
This study investigated the impact of dividend policy on share price valuation in Nigerian banks.
This was done by utilizing data on Union Bank of Nigeria Plc, operating in the Nigerian
economy. The data used for this study were market price, dividend yield and retention ratio.
Market price was the dependent variable while dividend yield and retention ratio were included
in the independent variables. In order to accomplish the set out objectives of this study, two
research hypotheses (Ho1 – Ho2) were formulated which were tested via a number of analytical
techniques. These were the ADF Unit Root Test and the ordinary least squares test. These tests
were carried out with the aid of e-views software package. Based on the results obtained, the null
forms of both hypotheses were rejected while the alternate forms were accepted. The results
revealed that dividend yield had a significantly positive effect on share price while retention ratio
was found to have a significantly negative effect on it. The study recommended that since
dividend pay-out has a direct relationship with the firm share price; the financial manager should
keep mortifying dividend policy until the share price is optimized.
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TABLE OF CONTENTS
Page
Title Page………………………………………………………………………………………i
Declaration…………………………………………………………………………………….ii
Certification …………………………………………………………………………………..iii
Dedication……………………………………………………………………………………..iv
Acknowledgements……………………………………………………………………………..v
Abstract ……………………………………………………………………………………….vi
Table of Contents……………………………………………………………………………..vii
CHAPTER ONE: INTRODUCTION
1.1 Introduction…………………………………………………………………………….1
1.2 Background to the study……………………………………………………………….2
1.3 Statement of the problem……………………………………………………………….5
1.4 Objectives of the study…………………………………………………………………..6
1.5 Research questions……………………………………………………………………..6
1.6 Statement of the hypotheses……………………………………………………………7
1.7 Significance of the study………………………………………………………………7
1.8 Scope of the study……………………………………………………………………..8
1.9 Definitions of terms …………………………………………………………………..8
CHAPTER TWO: LITERATURE REVIEW
2.0 Introduction……………………………………………………………………………10
2.1 Conceptual frame work…………………………………………………………………10
2.2 Theoretical frame work…….……………………………………………………………14
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2.3 Literature on subject matter……………………………………………………………..18
CHAPTER THREE: METHODOLOGY
3.0 Introduction…………………………………………………………………………….33
3.1 Area of study………………………………………………………………………….33
3.2 Research design and sources of data…………………………………………………..33
3.3 Study population and sample size……………………………………………………..34
3.4 Instrumentation……………………………………………………………………….34
3.5 Procedure for data collection and data analysis………………………………………35
3.6 Limitations of the study………………………………………………………………36
CHAPTER FOUR: DATA ANALYSIS FINDINGS AND DISCUSSION
4.0 Introduction………………………….………………………………………………37
4.1 Data presentation…………………………………………………………………….37
4.2 Analysis of data………………………………………………………………………39
4.3 Test of Hypothesis……………………………………………………………………47
4.4 Discussion of the findings……………………………………………………………52
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.0 Summary of findings…………………………………………………………………54
5.1 Conclusion..………………………………………………………………………….54
5.2 Recommendations.…………………………………………………………………..55
References…………………………………………………………………………….57
Appendix…………………………………………………………………………….60
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LIST OF TABLES
Table 4.2.1: Designation of the respondents………………………………………………39
Table 4.2.2: Gender of the respondents……………………………………………………39
Table 4.2.3: Age of the respondents………………………………………………………40
Table 4.2.4: Marital status of the respondents…………………………………………….40
Table 4.2.5: Educational qualification of the respondents………………………………..41
Table 4.2.6: Years of experience of the respondents……………………………………..41
Table 4.2.7: Are there any problems as a result of inefficient Dividend policy………….42
Table 4.2.8: Are there any problems as a result of poor financial analysis………………….42
Table 4.2.9: Can poor management policy affect the investor’s
interest in the share acquisition of the company………………………………….43
Table 4.2.10: Can regression analysis be used to estimate the
causes of relationship between dividend payout ratios……………………..43
Table 4.2.11: Does dividend policy of companies seem to
influence change of share price……………………………………………..44
Table 4.2.12: Does dividend yield and share price positively relates……………………..44
Table 4.2.13: Dividend payout is by far the single important
factor affecting stock prices………………………………………………..45
Table 4.2.14: It was concluded that optimal dividend policy does exist…………………45
Table 4.2.15: The rate of return result entails that both payout
ratio and dividend yield matters……………………………………………46
Table 4.2.16: Dividend yield is expressed as the dividend per
share as a percentage of the share price……………………………………46
x
Table 4.3.1: Testing of the 1st Hypothesis………………………………………………48
Table 4.3.2: Testing of the 2nd Hypothesis………………………………………………50
Table 4.3.3: Testing of the 3rd Hypothesis………………………………………………52
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CHAPTER ONE
INTRODUCTION
Dividends are per-share payments designated by company’s board of directors to be distributed
among shareholders. For preferred shares, it is generally a fixed amount. For common shares, the
dividend varies with the fortunes of the company and the amount of cash on hand. It may be
omitted if the business is poor or the directors withhold earnings to invest in plant and equipment
Garver (2012). Since most closely held companies do not pay dividends, when using dividend
capitalization valuators must first determine dividend paying capacity of a business. Dividend
paying capacity based on average net income and on average cash flow is used Husseman
(2012). Dividend policy is a major financing decision that involves with the payment to
shareholders in return of their investments. Every firm operating in a given industry follows
some sort of dividend payment pattern or dividend policy and obviously it is a financial indicator
of the firm. Thus, demand of the firm’s share should to some extent, dependent on the firm’s
dividend policy. Gitman (2014) Dividend policy is one of the most widely researched topics in
the field of finance but the question is whether dividend policy affects stock prices still remain
debatable among managers, policy makers and researchers for many years. Rose (2015) pointed
out that dividend policy is important for investors, managers, lenders and for other stakeholders.
It is important for investors because investors consider dividends not only the source of income
but also a way to assess the firms from investment points of view. It is the way of assessing
whether the company could generate cash or not. Many investors like to watch the dividend
yield, which is calculated as the annual dividend income per share divided by the current share
price. According to Kiosel(2014) the dividend yield measures the amount of income received in
proportion to the share price. If a company has a low dividend yield compared to other
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companies in its sector, it can mean two things: (1) the share price is high because the market
reckons the company has impressive prospects and isn’t overly worried about the company’s
dividend payments, or (2) the company is in trouble and cannot afford to pay reasonable
dividends. At the same time, however, a high dividend yield can signal a sick company with a
depressed share price. Jones (2015) Dividend yield is of little importance for growth companies
because, retained earnings will be reinvested in expansion opportunities, giving shareholders
profits in the form of capital gains. Selecting a suitable dividend policy is an important decision
for the bank because flexibility to invest in future projects depends on the amount of dividends
that they pay to their shareholders. If company pay more dividends then fewer funds available
for investment in future projects. Lenders are also interested in the amount of dividend that a
company declares, as more amounts is paid as dividend means less amount would be available to
the company to pay off their obligation. So, the study will investigate the relationship between
dividend policy and its impact on market performance of the share in the stock exchange. In this
study, the researcher will examine with some real life sample (Union Bank in Nigeria Stock
Exchange) that whether the dividend policy has any effect on the firm’s share price determinants
as with compare to many in members other than the dividend payment pattern, researchers just
focus on the specific factor; the dividend policy.
1.2 BACKGROUND TO THE STUDY
The finance profession has long struggled to develop a simple satisfactory model of dividend
determination without much success. Modigliani and Miller (1961) show that in perfect capital
market with no information asymmetry and predetermined investment decision, the value of the
firm’s is independent of the financing decisions. Hence, a firm’s financing decision including
dividends, have no effect neither on the value of the firm nor the distribution of wealth between
3
classes of security holders. However, in imperfect settings, dividend can influence shareholders
wealth by providing information to investors or through wealth redistribution among claimants.
With information asymmetry, Bhattacharya (1979) demonstrates that dividends provide
information about the firm’s future cash flow and thus the dividend decision can change a firm
value. Fama and Babiak (1968) and Jensen and Meckling (1976) demonstrated another potential
real impact of financial decision transfer of wealth between classes of claimants can occur in the
absence of imperfect priority rules.
All corporate organizations, banks inclusive, have three major decisions to make if they must
work in the interest of achieving their fundamental objective of maximizing their shareholders
wealth. These decisions are on the kind of investments to undertake (investment decision) how to
finance these investments (financing decision) and what to do with the profits realized (dividend
decision) i.e. What amount of profit to be paid out as dividend to shareholders and what amount
to be retained for further investment purposes. Investment decisions determine the total value
and types of assets an organization utilizes. Financing decisions determine the capital structure of
the firm and forms the source on which investment decisions are made. The third decision,
dividend decision, which forms the focus of this study, has to do with the determination of the
dividend payout policy adopted by the firm in deciphering the amount of cash that is given to
shareholders. This decision is dependent on whether the potential investors and shareholders
alike have a preference for capital gains as opposed to income.
The financial market in Nigeria is liberalized. The economy of Nigeria is characterized by
different kinds of firms. So firms differ on sizes, registered or unregistered, ownership structure,
listed or unlisted etc. So, dividend decision therefore differs from firm to firm Adesola (2014).
Kalay(1982.) agreed that an optimal dividend decision is taken on some important criteria-
4
shareholders’ return, growth of a firm and the value of a firm. Besides, there are some important
factors that influence the dividend decision of a corporate firm. The factors are related to firm’s
investment opportunities and financial needs, shareholders’ expectations, constraints on paying
dividends, legal restrictions, liquidity, financial condition and borrowing capacity, access to the
capital market, restrictions in loan agreements and inflation. The dividend decision involves an
analysis of dividend payout and retention, and the relevant factors that influence the proportion
of dividend to earning per share (EPS) and retained earnings to EPS Ali (2012). The dividend
decision of a company suggests a change in dividend payout ratio and retention ration. The
dividend policy has implications for the shareholder’s earnings and growth of a firm Adelegan
(2010). The firm always expects an optimal dividend policy that strikes between shareholders’
return and growth of a firm so as to maximize the price of the stock in the stock market.
The choice of dividend policy to be adopted by a company is a decision based on mature
experience and a careful weighing of many intertwining factors by the financial manager for
instance there are varieties of consideration and influence and dividend. Pay-out policy like,
what amount of the your profit is to be retained for financing profitable projects in a near future,
the interest of the shareholders which demands a high rate of dividend, legal requirements, a
desire to maintain dividend stability etc. it is when a balanced argument on the above factor is
resolved that the financial manager chooses to adopt stable pay-out policy, residual dividend
policy, or stock split as may be favourable to both the shareholders and the firm. Dividends given
to the shareholders differ with different firms and hence their effect of stock returns. This study
will seek to investigate the effects of dividend policy and pay-out on Nigerian commercial banks
listed at the NSE a study of Union Bank.
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1.3 STATEMENT OF THE PROBLEM
The effect of dividend policy on share price is still a controversial topic for many years (Miller
and Modigliani 2013). Dividend refers to a portion of a firm’s current or retained earnings
distributed to its shareholders. Whether it has impact on the market share price of a firm is still
questionable. None of researchers and financial analysts can actually determine the best dividend
policy. Some researchers believe that dividend payment will increase the firm value. However,
some believe that dividend payment will decrease the firm value instead. Furthermore, some
researchers also emphasize that dividend payment has no impact on the firm value. For instance,
Miller and Modigliani (2013) states that dividend payment and share price are irrelevant under
perfect capital market where there is no tax, transaction cost and asymmetric information. Mulwa
(2006) established that at least in the year of dividend payment a relationship exists between the
amount of dividends pay-out and the value of shares.
Gordon (1963) and by Lintner (1962), argued that dividends are relevant in determining of the
value of the firm. Walter (1963) came up with a model which holds that dividend policy is
relevant in determining the value of a firm. Muigai (2012) examined the effects of dividend
declaration on share prices of commercial banks listed in the NSE and concluded that there was
no pattern observed during the event window. Watts (1978) found that a company’s current and
past dividends did have a little effect on the company’s future prospects. As a result, managers
are difficult to determine which dividend policy is best fit to the company. Dividend policy is an
integral part of financial management decision of a firm. There is adequate empirical evidence
pointing to a strong relationship between dividend policy and stock market prices. However,
managers are in a dilemma as to whether to pay large, small or zero percentage of their earnings
as dividends or to retain them for future investments. This situation is occasioned by the different
6
shareholder interests which management has to satisfy. For instance, some shareholders prefer to
be paid dividends every year for investing in other profitable businesses while other shareholders
would like to invest in the future and thus, prefer that the dividends be retained by the company
for re-investment.
However, this shows that there exists a research gap which still needs to be addressed as to
whether there is significant or otherwise effect on dividends pay-out and the value of shares of
various listed commercial banks in Nigeria.
1.4 OBJECTIVE OF THE STUDY
The main objective of this research work is to examine the overall effect of dividend policies on
the valuation of shares price in the banking industry in Nigeria using Union Bank of Nigeria Plc
as a case study.
The specifics objectives of this study includes the following
i. To assess the relationship between the shares market price and the dividend policy of the
banks in Nigeria
ii. To analyze the factors affecting the market price of the banks’ shares.
iii. To measure the impact of the banks’ earnings on dividend policy and shares market price.
1.5 RESEARCH QUESTIONS
For the purpose of this study, the following research questions will be examined
i. What is the effect of dividend policies on the shares price in the banking industry in
Nigeria
ii. What are the factors affecting the valuation of shares price in the banking industry in
Nigeria
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iii. What is the impact of earnings by banks on their dividend policies and share price in
Nigeria?
1.6 STATEMENT OF HYPOTHESES
From the objectives of this study, the following statements of hypotheses are formulated
H01: There is no significant effect of dividend policy on share prices in banking industry in
Nigeria
H02: There are no significant factor that affects the valuation of shares and share price in banking
industry in Nigeria
H03: Aggregate earnings by banks have no effect on the dividend policy and share price in
Nigeria
1.7 SIGNIFICANCE OF THE STUDY
Over the years, financial managers and investor analyst have been facing the difficulties of
linking dividend policy directly to share prices in various industries in which banking industry is
not an exception. Despite the clarity in the link between dividend policy and share prices, there
are still controversies so to whether dividend policies of individual firm will have effect on the
prices of their shares.
The findings from this research work will be of great value to commercial banks in Nigeria as it
will provide an insight as to whether dividend policy will have effect of their share price. This
will assist the banks managers in performing and carrying out accurate and reliable financial
decision policies and decision
This study will also be of significant important to financial analysts and financial consultant in
the area of providing financial advice to existing and potential investors. It will also help in
providing accurate and reliable financial information to the policy makers in the country.
8
The study will also be invaluable to potential investors, stock brokers, business entities and
society and large. This study will be of great important to students at various level of learning
especially those that intend to carry out further research on this subject. It will assist students to
understand the present circumstances and controversies surrounding the link between dividend
policies of and share price in the banking industry in Nigeria
Also this study will be of great importance to further researchers, scholars and academicians will
find the literature arising from the research work to be of great value as it will be added to the
existing literature.
1.8 SCOPE OF THE STUDY
For the study, the researcher will look at “share price valuation” from a specific angle of the
dividend policy. In other words the study shall not consider any other matter related to the shares
valuations in the capital market. And analysis of some specific data in relation to the topic shall
also be made. The study shall make use of Union Bank of Nig. Plc. as a case study.
1.9 DEFINITION OF TERMS
Dividend: – This is part of total profit made in a year by the company that has been set aside
for distribution to the stockholders.
Dividend Policy: – This is accepted gained company has chosen for declaration and payment
of dividend taking into account factors like retained earnings, the firm’s capital structure
requirement and legal constraints.
Share: – This is the smallest unit of capital that entitles the holder to a voting right, and share
of dividend.
Share price: – This is the money value of a share in the capital market. It can be priced at
par, discount or within a premium.
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Shareholders: – These are investors who have brought the shares of a company. The holders
of ordinary shares in an individual company are known as owners of that company.
Financial Manager: – The term refers to anybody who is responsible for any significant
corporate investment decision, or inflow – outflow analysis.
Retained Earnings: – This is part of the declared net profit in a year by an organization that
has been kept back in the business, re-invested to be used in financing favored projects by the
company.
Market Price per Share: – This is current price value of a share as determined by effect of
demand and supply and this is strictly monitored by the Nigerian stock exchange.
Dividend per Share: – This ratio of dividend declared to number of ordinary share
outstanding that is for every Naira invested, that which is received inform of returns.
Earnings per share: – The ratio of net income to the number of ordinary share. In other
words how much is a share contributing towards the income to be company.
Cost of Capital: – This means the rate of return on investment at which the price of the
firm’s common stock will retain unchanged.
Script Dividend: – This is dividend in noted of the particular company. The note usually is
interest.
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