EFFECT OF DIVIDEND POLICY ON FIRMS’ EARNING IN NIGERIA

EFFECT OF DIVIDEND POLICY ON FIRMS’ EARNING IN NIGERIA (A CASE STUDY OF UNITED BANK FOR AFRICA)

CHAPTER ONE

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       PURPOSE OF THE STUDY

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

1. Find the relationship between dividend policy and the determinant factors of dividend policy.
2. The effect of dividend policy on practicing firms.
3. To make recommendation based on the findings.

1.3       SCOPE 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.

1.4       STATEMENT OF THE PROBLEM

In order to look into the financial management objective of shareholder wealth maximization, organization pursue investment, financing and decision which will increase value to the owners of the business. This additional value depends on the dividend policies that is 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 investors 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.

1.5       SIGNIFICANCE OF THE STUDY

1. To determine the division of earnings between payment to shareholders and retained earnings.
2. The firm has to balance between the growth of the company and the distribution to the shareholders.
3. To strike a balance between the long-term financing decision and the wealth maximization.
4. To ascertain the market price of share.
5. Retained earnings helps the firm to concentrate on the growth, expansion and the modernization of the firm.
6. To know the financial flow, capital structure of the firm, corporate liquidity, stock prices, growth of the company and the investors.

1.6       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.

1. 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.
2. 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.
3. Stock Dividend: It is the payment of dividend in the form of issue of additional shares to residual owners of the firm.
4. Cash Dividend: It is the payment of dividend in cash.
5. Stock Split: It means the division of existing stock price by two and the multiplication of such stock by two.
6. Stock Re-Purchase: It is the acquisition of the company’s outstanding shares by the company itself for warehousing in the stock trading.
7. Firms: A firm is a business working for the actualization of goals. An individual can be a firm.
8. Company: A company has to do with group of firms engaging in business to realize primarily profit.
9. Earnings: It is the reward that goes to an investor (profit).
10. Budget: It is a propose plan quantified in monetary terms showing income and expenditure to be incurred in the future.
11. Finance: This has to do with the asset of a company. It could be in the form liquid or fixed (fixed or current).
12. Value: It is a firms’ worth is a business.
13. Exchange: It is the value one give up for wealth acquisition.

1.7       RESEARCH QUESTIONS

The research questions for this study are as follows:

1. Are there relationship between dividend and firms’ earning in Nigeria?
2. Has dividend distribution been adequately addressed in the United Bank for Africa Nigeria Limited?
3. Should dividend policies and firms’ earnings of UBA be redesigned?
4. Are they any relationship between dividend and earnings by firm and the management objective of shareholders’ wealth maximization?