A STUDY ON DETERMINANTS OF DIVIDEND POLICY IN SARAWAK BASED PUBLIC LISTED COMPANIES

Mohamad Haniz Bin Osman

KG Corporate Master in Business Administration 4028

2012D5 M697 2012

Pusat KJddma( l\'i;lkjulOat Ak~demik UNIVERSITI MALAYSIA S WAK

P.KHIDMAT MAKLUMAT AKADEMIK

111111111 rli'rn'lllllllill 1000246524

A STUDY ON DETERMINANTS OF DIVIDEND POLICY IN SARAWAK BASED PUBLIC LISTED COMPANIES

MOHAMAD HANIZ BIN OSMAN

A dissertation submitted in partial fulfillment of the requirements for the degree of Corporate Master in Business Administration

Faculty of Economics and Business UNIVERSITI MALAYSIA SARA W AK

2012

APPROVAL PAGE

I certify that I have supervised and read this study and that in my opinion it conforms to

acceptable standards of scholarly presentation and is fully adequate, in scope and quality, as a

research paper for the degree ofCorporate Master in Business and Administration.

ASSSOCIATE PROFESSOR DR. MOHAMMAD JAIS

Supervisor

This research paper was submitted to the Faculty of Economics and Business, UNlMAS and

is accepted as partial fulfillment of the requirements for the degree of Corporate Master in

Business and Administration.

ASSOCIATE PROFESSOR DR. ERNEST CYRILL DE RUN

Deputy Dean, Center for Graduate Studies

DECLARATION

Name Mohamad Haniz bin Osman

Matric Number 10031645

I hereby declare that this research is the result of my own investigation, except where

otherwise stated. Other sources are acknowledged by footnotes giving explicit references and

bibliography is appended.

Signature

Date

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ABSTRACT

(ThiS study attempts to contribute to a controversy on the issue ofdividend policy among the

financial community by examining the determinants of dividend policy for Sarawak based

companies listed in the Bursa Malaysia. A sample of 13 firms was selected for the period

2002 to 2010 with 108 observations is included in the analysiV The financial data of these

companies was analyzed by regressing the net income, free cash flow, total debt, total asset to

the dividend yield Based on the results, all selected independent variables had indicated a

significant relationship with dividend yield and considered to be the important determinants

in the study. A positive association with dividend yield had only been found in the net profit

which also consistence with the prediction in the developed hypotheses. Two variables which

are the free cash flow and total asset have shown a negative association with dividend yield

and inconsistent with the positive sign predicted in the hypotheses.

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Pusat KhjdmHt Maklumat Akademik VNIVERSITI MALAYSIA SARAWAK

TABLE OF CONTENTS

PAGE

APPROVAL

DEC LARA TION ii

ABSTRACT iii

TABLE OF CONTENTS iv

LIST OF DIAGRAM vii

LIST OF TABLES vii

LIST OF APPENDICES vii

ACKNOWLEDGEMENT viii

iv

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION

1.1 Background Of Study

1.2 Problem Statement

1.3 Research Question

1.4 Research Objectives

1.5 Significance Of Study

1.6 Limitation Of Study

1.7 Key Tenns

1.7.1 Dividend Yield

1.7.2 Net Profit

1.7.3 Free Cash Flow

1.7.4 Total Debt

1.7.5 Total Asset

1.7.6 Sales Growth

1.8 Bursa Malaysia

1.9 Chapter Organization

CHAPTER 2: LITERATURE REVIEW

2.1 Introduction

2.2 Detenninant Factors

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TABLE OF CONTENTS

CHAPTER 3: METHODOLOGY

3.1 Study Design

3.2 Study Scope

3.3 Sample Selection

3.4 ltesearchFramevvork

3.5 Hypotheses

3.6 Data Analysis

CHAPTER 4: FINDING (ANALYSIS AND EVALUATION)

4.1 Findings

4.1.1 Descriptive Statistic

4.1.2 Regression Analysis

4.1.3 Hypotheses Results

4.2 Discussions

CHAPTER 5: CONCLUSION AND RECOMMENDATION

5.1 Conclusion

5.2 Itecommendation

REFERENCES

APPENDICES

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LIST OF DIAGRAM

Diagram 1: Research framework

LIST OF TABLES

Table 1: List of Sarawak Based Public Listed Companies

Table 2: Standardized Data Example

Table 3: Variables and Hypotheses

Table 4: P-Value Evaluation

Table 5: Descriptive Statistic

Table 6: Regression Results

Table 7: Hypotheses Results

LIST OF

APPENDICES

Appendix 1: Selected and Arranged Data

Appendix 2: Standardized Data

Appendix 3: Descriptive Statistical Output

Appendix 4: Summary Output ofRegression Analysis

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ACKNOWLEDGEMENT

Assalamu'alaikum Warah Matullah.

I would like to express my deepest gratitude to my thesis supervisor, Associate Professor Dr.

Mohammad Jais of Faculty of Economics and Business, UNIMAS for the time and guidance

that contributed towards the completion of this research.

I would like to thank my subject lecturers and my course mates with the assistance, advice

and motivation given.

Last but not least, my deepest thanks to my lovely wife, children and parents especially my

beloved mother, Allahyarhamah Bonda Rakiah binti Abu Hassan who had always inspired

me in the pursuance of my study. I really appreciate their consideration, support and

encouragement that helped towards the success of this research.

Without all ofthem, this research is not possible. Thus, the deepest thanks and gratitude to all

of them for making this research success.

Wassalam

viii

CHAPTER 1

INTRODUCTION

1.1 Background Of Study

Dividend policy is one of important financial decisions in a corporate world as it actually has

a great impact on building good image of the firm as well as increases the investors'

confident level in the company's future prospects. An appropriate dividend distribution

policy will strengthen the company's position in the capital market and indirectly polishing

up its corporate image. In other words, firm's present and future performance can be

indicated by how well is the dividend payment and at what level is the company potential

risk. To eliminate uncertainty and poor evaluation made by investors, it is necessary for a

company to have an effective dividend policy. A decreasing dividend payout often results in

negative response by market and can lead to the fall of company's stock price. This situation

makes dividend policy become crucial when managers need to consider about investment

attractiveness and at the same time managing the continuity of business expansion. ( Kanwal

Ani! & Sujata Kapoor, 2008 )

Pouring too much money into dividend payment can decrease retained earnings and slowing

down company activities in buying assets to generate income. Cutting dividend payment can

also cause a reduction in stock price when investors tend to make conclusion that company

has problem with their earnings and having small potential to grow in the market. Therefore,

1

the percentages of dividend payment are always surrounded by conflicts and often be made

once the company is very positive about their earnings performance and their business

successful in the future.

Paying out dividends to the shareholder is also associated with negative aspects in the firms.

Cost of agency and the tax cost are the common problem faced by management. Firms can

also lose their opportunity to reinvest the earnings into new projects in order and to generate

more income as well as for the sake of company's growth. Moreover, dividend policy is very

hard to be framed due to legal constraints or changes by the government from time to time.

As a result, external financing become an option to finance their business operation and this

will increase the cost of debt. Paying higher dividend can become a burden to company

especially when management need to consider their short term and long term debt, liquidity

and the amount of asset to be acquired for the growth of company. Furthermore, management

has to think about market price of the stock and at the same time putting more effort in

sustaining the intrinsic value of the firm to ensure the survival of business in the future. This

is an uphill task for managers in the company since there is no absolute dividend policy can

be practised. (Kania and Bacon, 2005)

A useful model of dividend policy has actually not yet been developed in the real world of

financial. If an effective model of dividend model exists, it will ease the firms to replicate it

and avoid or reduce mistake in making dividend policy. But this is still a dream for financial

community and raises a long standing debate on the issue of dividend payment. Both the

firms and the investors still struggling to find the right model to value dividend. Research by

research also has been carried out in order to understand well the function of dividend policy

2

as well as the effort done by managers in the firms. Managers need to consider many

financial factors and non financial factors before making the final decision on dividend policy

decision in order to satisfy their shareholders and maintain company's expansion through

stability in firm stock price and investment.

Though managers may have the same burning question on the most effective dividend policy

in purpose to protect investment opportunity and satisfy their shareholders' expectation, they

might have a different approaches or selecting different determinants. This situation is

contributed by the different industry and type of business where the firms are operating into.

For the researchers, they need to tackle question such as why firm is paying dividend. Is

dividend payment really describes the intrinsic value of the firms? How far can dividend

payment influence the stock price? What important factors need to be analyzed before

declaring portion of dividend payment? These questions are always become an issue and

controversy among the financial community until now.

Managers nowadays are very concern when dividend payment is always being related to the

intrinsic value of firms and this issue is quite against the conclusion made by Miller and

Modigliani (1961) that there is no clear relationship between decision on dividend and the

firm value although in a perfect capital market condition. In other words, at that time there is

a belief that shareholders' wealth will remain unaffected by dividend policy by excluding the

role of tax in dividend policy. Therefore any suggestion that dividend policy has an impact on

share prices and shareholder wealth was insignificant for them. In other words, dividend

policy does not picturing the atmosphere of company's stock price at all in the market.

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But what had Miller and Modigliani (1961) concluded has been challenged over the time and

many studies after that had revealed that dividend payment is one of important signals to the

performance of finn. Battacharya (1979) and others concluded that finn dividend policy can

be very costly but at the same time capable to signal how good is a finn's prospects to the

stock market. Every finn want a consistent and stable dividend payment because this is one

the best approaches to indicate a good quallty of the firm in the eye of shareholders as well as

the stakeholders. Thus, dividend policy can be considered relevant when dealing with other

factors such as finn earnings, shareholder liquidity and deadweight costs such as paying

dividends and refinance cash flow.

Healy and Palepu (1998) revealed that private infonnation in one finn especially about the

future earning changes can be known through dividend changes. This is consistence with

Battacharya (1979) , however is not supported by Benartzi (1997) who concluded that there is

no concrete evidence to prove there is relationship between changes in dividends and private

information consist of future earning changes. On the other hand, Koch and Sun (2004)

emphasized that the dividend increase is actually contributed by the past earning changes but

not the future earning changes and thus argue conclusion made by Healy and Palepu (1998)

An emerging consensus that dividend policy cannot be explained at all had become a strong

motivation behind this study. The researcher want to find some important financial factors

that responsible in framing dividend policy in Sarawak based listed companies in Bursa

Malaysia. According to Amidu & Abor (2006) who examine the determinants of dividend

payouts in Ghana, found that the payout ratios are positively correlated to profitability, cash

flow and tax but negatively related to risk and growth. Over time, factors thai affecting

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Pusot Khid at Maklumat Akademik Ul\lVERSm MALAYSIA SARAWAK

dividend policy of company had increased substantially and open again a wide discussion

among the researchers and investors. This has encouraged the researcher to go deeper into the

issue and try to investigate the influence factors that might be considered by management of

Sarawak's listed firms in deciding the appropriate dividend policy.

What really influence dividend policy has become a controversial issue and egg on extensive

studies to find and explain the determinant factors. This situation has encouraged the

researcher to find more information about how determinant factors play their role in shaping

dividend policy of the firm and Sarawak based public listed companies has become area of

interest. In this study, the researcher is trying to investigate whether several factors selected

influence dividend policy of Sarawak based public listed companies in Bursa Malaysia. Due

to the consistency and availability of data, only 13 public listed companies have been selected

to be used as sample in this research. The selection of explanatory variables is based on

alternative theories related to dividend payout and results from the past studies. Therefore, six

factors had been selected as proxy variable as below:

1. Dividend Payout ( Dividend Yield)

2. Profitability ( Net Income)

3. Liquidity ( Free Cash Flow)

4. Debt (Total Debt)

5. Size of Firm (Total Assets)

6. SaleslRevenue ( Sales Growth)

What is obvious regarding the selected companies is they can be categorized into various

industries such as plantation, food, technology, retail, shipping and etc. In other words, the

listed companies are characteristics mixed. It would be interesting to explore and to find

whether there are similarities or differences in forming dividend policy done by companies

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which come from different background of industry. A study done by Kanwal Anil and Sujata

Kapoor (2008) which focusing only on Information Technology listed companies in India

revealed that only liquidity and beta are the noteworthy determinant. Because of IT sector is

spending more on manpower rather than capital assets like manufacturing company which

require higher costs, IT firms in India may allocate more money on paying dividend to the

shareholders. In other words, they pay higher dividend due to high liquidity. In the future,

extended research on certain industries in Sarawak can be implemented to reveal more new

pattern in dividend payment.

Following ( Table 1) are the Sarawak based public listed companies which have been selected

for the purpose of research.

Table 1 : List Of Sarawak Based Public Listed Company

SARAWAK BASED

PUBLIC LISTED COMPANIES

NO.

Bintulu Port Sendirian Berhad 1.

2. CCK Consolidated Holding Berhad

Glenealy Plantation Berhad 3.

4. Hock Seng Lee Berhad

Hubline Berhad 5.

Jaya Tiasa Holding Berhad 6.

Kim Hin Industry Berhad 7.

KKB Engineering Berhad 8.

9. Lingui Development Berhad

Sarawak Plantation Berhad 10.

11. Subur Tiasa Berhad

12. TaAnn Group

WTK Holding Berhad 13.

I

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1.2 Problem Statement

In a simple explanation, dividend policy is a process to allocate some portion of fund from

cash earnings and pay it to investors or shareholders. It is a struggle between how much to

reinvest for the company's growth and how much to payout to the investors. Both two

portions can actually affect things such as stock price, investors' level of confident and

company's opportunity in generating income. Moreover, it enhances the complexities and

ambiguity in dividend policy decision making to the financial community around the world.

There are indeed many factors that contribute to the framing ofdividend policy of a firm such

as stockholder wealth, stability of cash flow and also the future state of economy_ Baker and

Powell (2000) had listed the level of current and expected future earning to be the most

detenninant factor, followed by past dividends and stock price of a firm. Whatever the

conclusion in the past studies, dividend policy decision making still provokes controversy

among financial community until now especially for both the investor and the corporation.

There are many reasons that can be used by the managers in companies' decision to payor

not to pay dividends to the shareholders. Logically, increasing dividend distribution will

affect positively companies' reputation in the eye of investors but at the same time the

managers need to look thoroughly into their company's financial performance and the

economic environment. A stable dividend payout will sometimes attract more investors and

consequently maintain firm' market price of share. The situation can ensure a smooth activity

of ilDancing and investment in company and generate more profits in the future.

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AJthough dividend distribution seems to be a tool to increase the value of a firm in the eyes of

investors, it is still unclear what financial factors management uses to support their decision

behind declaring a dividend payment. For the researcher, this initiates a study to investigate

possible factors which influence dividend policy decision in Sarawak based public listed

companies. The dividend yield, being the dependent variable, will be examined for

correlation with the flowing factors selected from the literature: net profit, free cash flow,

total debt, total asset and sales growth.

Black (1976) stated that firms' dividend policy is still a puzzle as investment, capital

structure and dividend policies were not really related to each other. Contradictory results had

been obtained by researchers on the determinants of dividend payout, thus increased the

debate of what are the factors really responsible to shape the dividend policy decision. In

research done by Kanwal Anil and Sujata Kapoor ( 2008 ), liquidity and beta (risk) found to

be the noteworthy determinants of dividend policy in Indian Information Technology sector.

Howace Ho (2003) found that the size of firm was the determinant in Australia and liquidity

was the main factor in Japan.

In the view of DeAngelo and DeAngelo (2006), the need to distribute free cash flow of the

finns has become a pushing factor to achieve optimum payout policy. They support their

conclusion with a life-cycle theory which explains the tendency of firms to adjust dividend by

looking into evolution ofopportunity set the firms have. They added that firms will pay lesser

dividends in the early stage of operation whereby investment opportunities exceed the

internal capital of the firms. The reason behind is that the firms need more cash to be

reinvested and therefore increase their retained earning which affect the percentage of

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dividend payment. When the time that the internal capital is more than the investment

opportunities, the free cash flow will increase and by channelling it to pay dividend, firms

can avoid a waste of free cash flow.

All discussions regarding the conclusions made by previous research triggers the same

question on how the dividend payments are determined in Sarawak based public listed

companies. Baker and Powell (2000) had disclosed 20 most common factors that influence

dividend policy decision making from a study of 'Determinant of Corporate Dividend Policy:

A Survey ofNYSE Firms'. The following 10 factors are listed based on the most important

to the least important according to the study results:

1. Condition of current and expected future earnings of the firms.

2. The past dividends pattern.

3. Decision on stock price stability.

4. Dividend changes and the risks of signalling.

5. Amount of cash flow.

6. Profitable investment opportunities.

7. Liquidity constraints.

8. Capability to pay dividend in the long term.

9. The need of current shareholders.

10. Setting amount of capital structure.

The rest includes factors such as expected rate return on asset ofthe firms, debt, tax position,

economic condition and the ownership structure. By also analyzing the factors based on the

literature, the researcher has decided to select five relevant variables which can be used to

examine the determinant of dividend policy of Sarawak listed companies

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1.3 Research Question

What is the relationship between dividend payment decision and its' determinants in Sarawak

based public listed companies?

This research question is seeking for the answer on which selected determinants in this study

is strongly influence the dividend policy making in Sarawak based public listed companies.

1.4 Research Objectives

The main objective in this study is to explore and discover how the dividend policy made by

Sarawak based public listed companies can be different accordingly with their selected

detenninants. Although with the same variables, the study results can be inconsistent

according to place, country, economic condition and timing of period. The following are

research objectives ofthis study:

i. To identify the nature of relationship between selected determinants and dividend

payout decision made by Sarawak based public listed companies.

ii. To find which are the detenninants that influence dividend payout decision made by

Sarawak based public listed companies.

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I.S Significance of Study

The findings from this study can be guidance to the corporate managers to consider certain

important factors before making any decision on the dividend payment policy. The dividend

policy is very important to the growth of finn since its distribution will reflect the health of

the company as well as to encourage investors to pour in capita,1 and help companies to

expand their business activity to achieve higher profit. Pandey (2001) concluded that despite

fewer growth opportunities and higher surplus cash in plantation and consumer product

industries in KLSE, they still pay the highest dividend to the shareholders. This kind of

information will encourage a deeper understanding regarding motivation behind dividend

payment as well as to provide opportunity to investors in gaining positive return from their

investment in the chosen finns. Therefore, it would be interesting to investigate what are the

important detenninants that influencing the public listed companies of Sarawak in paying

dividend to their investors. The findings may not be applicable in other study design since the

scope of study will be only based on Sarawak based companies listed in Bursa Malaysia.

More or less, the study will contribute towards the literature of dividend policy decision

making.

1.6 Limitations Of Study

The availability of data from the financial data stream and Bursa Malaysia website has forced

the researcher to reduce the period of analysis to 9 years (2002 to 2010). Due to some

companies are lacking of certain data such as dividend yield, total debt and sales growth,

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finally only 13 companies can be selected as a sample. It would be better if 24 Sarawak based

listed companies can be included in the analysis in order to improve the validity and

reliability of results. Time constraint is also the reason behind for not looking into more

variables or specifying into certain industries where actually the companies are operating

within in this study. By knowing the industry, more understanding regarding the pattern of

dividend payment can be gained.

1.7 Key Terms

1.7.1 Dividend Yield

Dividend yield can be calculated by dividing the annual dividend per share

with price per share. It also defined as financial ratio where amount of dividend

being payout in each year according to its share price. Dividend yield can be stated as

the return on investment for the stock by ignoring the capital gains. Dividend yield is

calculated as follows:

= Annual Dividends Per Share Price Per Share

Based on Ross, Westerfield and Jordan (2008), dividend is a cash which been taken

out from current earning or accumulated retained earnings rather than other sources

ofcash. Dividend yield will also how much money or cash flow of company for each

dollar invested by shareholders. A stable dividend yield from stock investment

should be always preferred by rational investors.

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1. 7.2 Net Profit

Net profit is actually a company's total earnings. It is calculated by deducting the cost

of doing business, interest, depreciation and other expenses from revenues received

by a firm. Karam and Puja Goyal (2007) stated that net profit is the current earnings

ofcompany that will portray the ability of firm to pay dividend to shareholders and

related positively with dividends. Figure of net profit is included in company's

income statement and measured by certain period of time for example yearly. It can

also measure earning per share and become complex to handle depend on the size

of the firm. The larger the organization for instance the public listed companies, the

harder the accountant or the bookkeeper managing the financial data. Itemization

and allocation of revenue become more important in the large firm compare to small

and medium firm as well as managing the risk of financing can become bigger.

1.7.3 Free Cash Flow

A measure of financial performance calculated as operating cash flow minus capital

expenditures. Free cash flow (FCF) represents the cash that a company is able to

generate after laying out the money required to maintain or expand its asset base. Free

cash flow is important because it allows a company to pursue opportunities that

enhance shareholder value. It can be tough for company to improve their product, to

control their debt, paying dividend and to make acquisitions if they do not have

substantial of cash flow at the time they need it. Free cash flow is calculated as:

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--------

1.7.5 Total Asset

In financial accounting, assets are economic resources. An asset is any tangible and

intangible which can be owned and controlled by a corporation. In addition, capability

of asset is to produce value and any value that can be measured to have positive

economic value can be considered as an asset. Therefore, in a simple statement,

ownership of value is represented by asset and some asset is very liquid such as cash

but some are less liquid such as the property and equipment.

The balance sheet of a firm indicates the value of the assets in term of money owned

by the finn. It is money and other valuables belonging to an individual or business.

Asset can be divided into two categories which are the tangible asset and intangible

asset. Tangible assets consist of various subclasses, including current assets and

fixed assets. Current assets include inventories, trade and other receivables and cash.

Meanwhile, fixed assets include such items as property, plant and equipment.

Although intangible assets are nonphysical resources, yet it still has an economic

value to the corporation and become an important element in order to value a firm by

business people in the market place. Intangible assets include matter such as

trademarks, goodwill, copyrights, patents and financial assets such items as

accounts receivable, bonds and stocks.

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