dividend policy of bank asia ltd

Dividend policy of Bank Asia Limited

Term paper on Dividend policy of Bank Asia Limited

Course: Financial Management (F -207)

Group No-15

Table of contents

Executive Summary ……………………………………. 4

Theoretical Development …………………………………. 5

Forms of payment

Different forms of dividend policy

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Factors affecting dividend policy

Terminologies…..…………………………………………… 7

Profile: Bank Asia ………………………………………….. 8

Dividend policy: Bank Asia………………………………… 9

Price & Dividend

EPS & Dividend

P/E ratio & Dividend

Conclusion…….…..…………………………………………12

Executive Summary

A dividend is a usually distributed in cash form to stock holders of a corporation approved by

the board of director. It may also include stock dividend or other forms of payment. A stock

dividend represents a distribution of additional shares to common stockholders. Dividends are

only cash payments regularly made by corporations to their stockholders.

The dividend policy such as the payment of dividend affects the market price of share. If there

is a debate in this issue, this theory is commonly accepted. In this report the relationship

between dividend and the market price of share is proved the Bank Asia Limited. But it is also

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revealed that dividend is not the only variable to affect share price. The result shows a

significant relationship between dividend and share price. Some other factors such as profit,

EPS, growth rate, retained earnings, money supply etc.

Bank Asia a public limited banking company incorporated on 28 September 1999. Bank Asia

gave cash dividend only in 2005 and bonus share from 2002 to 2004 and from 2006 to 2009.

Percentage of bonus share fluctuated apparently in each year for which it is obvious that this

bank gives fluctuated dividend.

Bank Asia provides no opportunity for stock split and also reverse split. After the

announcement regarding dividend is made on the declaration date, all these are recorded on

the record date and dividends are provided on the payment date.

Theoretical Development

Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend.

Forms of Payments:

Cash dividends (most common) are those paid out in the form of a check. Such

dividends are a form of investment income and are usually taxable to the recipient in

the year they are paid.

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Stock dividends are those paid out in form of additional stock shares of the issuing

corporation, or other corporation (such as its subsidiary corporation).

Other dividends can be used in structured finance. Financial assets with a known

market value can be distributed as dividends; warrants are sometimes distributed in this

way.

Different types of dividend policies:

1. .Stable Dividend Policy: A company that follows this type of dividend policy pays a certain fixed amount per share as dividend. In other words fluctuations in earnings will not affect the amount of dividend payment.

2. Fluctuating dividend policy

Under this policy, firm pays a constant percentage of net earnings as dividend to the shareholders. This means the percentage of earnings paid out as dividend each year remains fixed. Therefore, with the variation of earnings each year, the amount of dividend per share will fluctuate.

3. Small constant dividend per share plus extra dividend

As per this type of policy, a small constant dividend per share is paid each period plus during the years of prosperity, additional extra dividend is paid over and above the regular dividend. When a normal condition prevails, the firm cuts off the extra dividend and pays the regular dividend per share.

4. Residual dividend policy

In residual dividend policy, a firm pays dividends only after meeting its investment needs while maintaining its desired debt equity ratio. As such, before paying any dividends to the shareholders, the firm first finances its investment requirements and at the same time maintains its target debt equity ratio.

Factors Influencing Dividend Policy:

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1. Preference of the shareholders

The preference of the majority of the owners sometimes influences the dividend policy of a firm. If most of the shareholders desire regular income from their stock investment, in such a case firm tries to pay regular dividends to the shareholders. On the other hand, if the majority of the owners prefer capital gain from stock price appreciation instead of regular dividend income, the firm without paying any dividend retains the earnings for future investment.

2. Tax status of the shareholders

Firm’s dividend policy may be dictated by the income-tax status of the shareholders. If a firm has a large percentage of wealthy stockholders who belong to high income tax bracket, it may decide to pay out lower percentage of its earnings as dividend or no dividend at all, allowing the owners to avoid higher tax applicable to dividend income.

3. Financial need of the company

If a firm has plenty of profitable investment opportunities, it usually prefers a low payout ratio, as it can reinvest earnings at a higher rate. Such firms, known as growth companies, are constantly in need of funds. These types of firms generally retain their earnings, as retention is convenient and less costly than selling new shares. On the contrary, if a firm has no growth opportunity, its need for fund is usually low and it prefers to distribute most of its earning as dividends to the shareholders.

4. Access to the capital market

Another factor that can affect the dividend policy is the extent to which the firm has access to the capital markets. Reputed and large size firms can usually raise the needed fund from the capital market easily. As such, they can pay out high dividends.

5. Insolvency

When a firm becomes insolvent i.e. if its liabilities exceed the assets, or if it is unable to meet its obligations, in such a case it is prohibited from paying dividends. Similarly, a firm is not allowed to pay dividends if such a payment may lead to insolvency.

6. Contractual constraints/restrictions in loan agreement

Various restrictions are imposed on the firm through bond indenture/loan or preference share agreement. These conditions prohibit the firm from paying cash dividends unless earnings reach a certain level or limit the amount of dividends to be paid to a certain percentage or amount.

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7. Higher cost of raising external financing

It is generally costly for the firm to raise funds from the external sources as it involves various types of costs such as brokerage fee, registration fee, administrative expenses, etc. Therefore, a firm with greater need of financing would first try to meet its fund requirements from internal source i.e. retain earnings and after that would go for higher cost external financing sources. This will reduce the firm’s ability to pay dividend.

8. Legal considerations

As per legal rules a firm cannot pay dividends from its paid up capital. This rule has been enacted in order to protect the claims of the preference shareholders and creditors on the firm’s assets. Any dividend payment by reducing the firm’s capital is illegal. Also, a firm may not deliberately accumulate large retained earnings without paying as dividends either to defer the income tax payments by its shareholders or to provide them with opportunities of capital gains. In such situations, they may be forced to pay dividends.

9. Capital impairment rules

According to this rule dividends cannot be paid from paid-up capital, as reduction in capital would adversely affect the security of its lenders. The rationale of this rule lies in protecting the interest of the lenders who initially extended loan to the company on the basis of the equity base.

10.Liquidity position of the company

The liquidity position of the company is one of the major factors in dividend decision. As dividend represents cash outflow, the greater the cash position and overall liquidity of the company, the greater its ability to pay a dividend and vice versa. The liquidity position of the company is strongly influenced by the firm’s investment and financing decisions.

Terminologies Related Dividend:

EPS: Earnings per share are defined as the concept, which equals the net income divided by the number of outstanding shares of common stock. It can be calculated using following formula:

EPS=

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P/E ratio: Price earnings ratio shows how much investors are willing to pay per dollar of reported profits. It can be calculated using following formula:

P/E ratio=

Declaration Date: The Board of Directors declares a payment of dividends

Ex-Dividend Date: Date that determines whether a stockholder is entitled to a dividend

payment; anyone holding stock before this date is entitled to a dividend.

Record Date: Person who owns stock on this date received the dividend.

Price Behavior around the Ex-Dividend Date:In a perfect world, the stock price will fall by the amount of the dividend on the ex-dividend date. Taxes complicate things a bit. Empirically, the price drop is less than the dividend and occurs within the first few minutes of the ex-date.In Bangladesh we cannot observe the price behavior along with ex dividend.

BANK ASIA LIMITED

Bank Asia a public limited banking company incorporated on 28 September 1999. It started banking business on 27 November 1999 with equity participation from 22 promoters. The authorized and paid up capital of the bank is Tk 800 million and Tk 218 million respectively. The paid up capital is divided into 2,180,000 ordinary shares of Tk 100 each fully paid by the sponsors.Here is the corporate information about Bank Asia-

Listing Year: 2004 Market Category : A

Outstanding Capital in BDT* (mn) 1395.0

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Face Value 100.0

Total no. of Securities 13950000Share

Percentage:Sponsor/Director

52

Govt.0 Institute 17 Foreign 0 Public 31

Table 1: corporate info of Bank Asia Ltd

Dividend policy: Bank Asia Limited

Bank Asia retains its earnings instead of paying dividends most of the time due to various reasons such as complying with capital impairment rule, financial need of the company, access to the capital market etc.

Here, is the information of Bank Asia regarding its dividend, P/E ratio and Share price:

Table 2: performance analysis of Bank Asia Ltd

YEAR

EPS P/E SHARE DIVIDENDRATIO PRICE

(MKT)CASH BONUS

SHARETOTAL

2002 48.51 0 0 0 0 02003 35.98 11.56 415.929 0 8.6352 8.63522004 39.48 12.35 487.578 0 9.87 9.872005 34.36 8.11 278.66 3.436 6.872 10.3082006 42.63 10.04 428.005 0 10.6575 10.65752007 47.3 11.03 521.75 0 11.825 11.8252008 39.38 11.97 383.25 0 9.0574 9.05742009 61.88 9.65 426.75 0 24.752 24.752Total 349.52 74.71 2941.922 3.436 81.6691 85.1051Average 43.69 9.33875 367.7402 0.4295 10.208638 10.638138

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From the above table, we can see that Bank Asia gave cash dividend only in 2005 and bonus share from 2002 to 2004 and from 2006 to 2009. Percentage of bonus share fluctuated apparently in each year for which it is obvious that this bank gives fluctuated dividend. In addition-

Bank Asia prefers to provide bonus share to its shareholder. The main reason behind it is that it opportunity to expand its business and most of its shareholders prefer stock dividend.

The percentage of stock dividend has increased chronologically which indicates its opportunity of expanding its business activities.

It is also manifest from the above table that Bank Asia gives small constant dividend per share plus extra dividend in the form of bonus share.

Price and Dividend:

Share price reflects the value of any company. Hence, share price and dividend are related to each other strongly.

Here are the graphs regarding the growth of share price and dividend of Bank Asia for different time periods:

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Figure 1: share price and Dividend

From the above graphs, we can see that In case of Bank Asia, there is a positive relationship between share price and dividends. Starting from 2002, both the share price and dividend fluctuated simultaneously.

EPS and Dividend:

As we know, EPS is one of the important performance measures for any company. It is found by dividing the total earnings with number of total outstanding share.

Likewise most of the company, EPS and dividend are strongly related in case of Bank Asia.Here are the graphs regarding the growth of EPS and Dividend of Bank Asia:

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Figure 2: EPS and Dividend

From the above graphs, it is obvious that there is also a direct relationship between EPS and dividend in case of Bank Asia. Starting from 2002, both EPS and dividend fluctuated simultaneously.

P/E Ratio and Dividend:

P/E ratio reflects the ratio between price and total earnings. This ratio is also a good measure of judging company’s performance. It may be related directly to dividend or may not. However, this relationship is different for different types of companies.

Here are the graphs regarding the growth of P/E ratio and dividend of Bank Asia:

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Figure 3:P/E ratio and Dividend

From the above graphs, it is obvious that there is a slight direct relationship between P/E ratio and dividend of Bank Asia. Sometimes both of them fluctuated simaltaneously although not in the same proportions and sometimes one of them rose while the other remained constant . It is also obvious that dividend fluctuated more than P/E ratio.

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Conclusion:

Bank Asia has a strong dividend policy which is based on the decision regarding less importance on liquidity preference. For this reason, this bank most of the time has given dividend in the form of bonus share thereby retaining the bulk amount of its earnings.

More precisely, Bank Asia imposes importance on the preference of fluctuating dividend. There are a more direct relationship between the Price per share and dividend, EPS and dividend than P/E ratio and dividend. Both the price and EPS fluctuates simultaneously with dividends with the passage of time.

Bank Asia provides no opportunity for stock split and also reverse split. After the announcement regarding dividend is made on the declaration date, all these are recorded on the record date and dividends are provided on the payment date.

However, finally it can be said that Bank Asia retains most of its earnings instead of giving them as cash dividend.

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