Abstract

The aim of this study was to investigate the determinants of the dividend payout ratio. For the objectives of this study to be achieved, a case study of ECOBANK was used. Relevant literature was therefore reviewed and necessary theories examined.

The objectives were guided by a hypothesis stated in the null (Ho) and alternative (H1) form. The data for this study was secondary data collected from the annual reports of ECOBANK from the year 2007 to 2011.

Using quantitative analysis it was found out that selected company factors such as profitability, and growth have a positive relationship with dividend payout ratio. These factors affect ECOBANKS’ decision in the distribution of earnings-dividend payout.

Throughout the study, we realize that many academicians, researchers have carried out research on this topic, but yet there has not been an answer to what factors really affect the determinants of dividends payout ratio in banks.

Therefore, the hypothesis of the study was tested using the Pearson correlation coefficient and the results show that ECOBANK has a dividend payout policy that is dependent on its ability to generate income.

Thus, ECOBANK’s profitability is fairly significant to its dividend payout decision and ratio.

In this case, we reject our H0 and accept H1 that the payment of dividends significantly influences the growth of commercial banks.

This paper presents a recommendation that goes as follows; the results and the analysis have revealed some additional questions which need to be answered in future studies.

Some company-selected factors than the ones included in the research should have an impact on the dividend payout ratio.

It would therefore be interesting and proper to conduct a similar study with different company-selected factors as a recommendation presented by this paper.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

A famous quotation by fisher (1976) states that; “The harder we look at the dividend pictures, the more it seems like a puzzle with pieces that just don’t fit together”.

The dividend payout has been an issue of interest in financial literature Academicians and researchers have developed many theoretical models which describe the factors that managers should consider when making dividend policy decisions.

The dividend payout ratio has become one of the major issues in cooperate finance in recent times. Dividends are the distribution or call it the appropriation of profits to the shareholders of a company.

The amount to be paid as a dividend is decided upon by the board of directors and is payable usually quarterly, annually, semi-annually, depending on the policy of the firm concerned.

In the late 2000’s, financial crises originated in the United States. Due to the difficulties that where encountered, companies took different majors in order to solve the crisis and one of the actions was to adjust the dividend payable to shareholders.

Generally, managers have the tendency of keeping up a stable and growing dividend and managers are not eager to decrease the dividend since it is generally interpreted as a negative signal but during the crisis trends of stabled dividends were abandoned and some companies drastically reduced the dividend payout while others at the same time increased the dividends (J.P. Mergan 2011).

In a similar paper by Miller and Modigliani (1961), they argued that given perfect capital markets, without any market imperfections, the company value is independent of the dividend policy.

Most financial practitioners and many academics greeted this conclusion with surprise because the conventional wisdom at the time suggested that a properly managed dividend policy has an impact on share price and shareholder wealth.

The above theory is contrary to the view of Brealey et.al (2008 p.973). Who has written one of the most influential undergraduate textbooks in cooperate finance?

They state that the dividend payout controversy is one of the ten major unsolved Problems in cooperate finance, and further research within the area is crucial in other to increase the understanding of the subject.

Normally a firm faces the problem of allocating earnings whether to distribute among shareholders or return for reinvestment and promote the firm’s growth.

According to the “perking order theory”,(this theory postulates that the cost of financing increases with asymmetric information.

Financing comes from three sources, internal, debt, and equity) firms prefer to use internal sources of finance first later debt and finally equity finance obtained from stock issues.

The more profitable the firms are, the more internal finance they will have hence larger dividends. Consequently, some researchers consider dividends less important as compared to capital gains.

The issue of dividend payout ratio is important for several reasons:

Firstly, the firms can use dividends as an instrument for financial signaling to the outsider vis- a-vis the stability and growth prospects of the firm.

Secondly, dividend plays a significant role in the firm’s capital structure.

According to the “residual dividend” theory, a firm pays dividends only if it does not have an opportunity for profitable investment.

Taking from the above-mentioned school of teaching, it is obviously clear that there is no unified picture regarding the dividend payout ratio of an institution. I, therefore, think that it will just be necessary to conduct research in this area regarding a number of preselected company factors and the dividend payout ratio in Cameroon companies.

Even though several studies have been done in this area, there are still many pieces in the dividend puzzle that are missing and it remains one of the ten major problems faced in corporate finance.

1.2 Problem statement

In the real world, major conflicts have existed between the distribution and investment decisions of financial managers. They are always faced with the problem of paying a large dividend or returning a high profit.

This trade-off must be established, for instance, if a company pays a large dividend, it will therefore have low retention of profits within the firm; it, needs to rely heavily on a new common stock issue for equity financing.

And if a company pays a small dividend, it will, therefore; have a high retention of profit within the firm and will not need to rely heavily on a new common stock issue for equity financing. The profits returned for reinvestment will provide the needed equity financing.

The dividend is not a new phenomenon payout to shareholders. It has been a standard procedure for most companies for hundreds of years (Baker, 2009 pg.30).

However, some of the most successful companies in the last years such as Apple and Google have chosen not to pay dividends (Ciaccia, 2012). This indicates that it is possible to be successful without paying dividends. The question is why do firms pay dividends at all?

This question has been extensively debated and one of the most powerful arguments toward the impact of dividend was presented by Jensen (1986).

Various academics have argued that dividend has an impact on the company’s value. One of the first studies which claimed that dividends play a major role was presented by Lintner (1956).

The study basically concluded that dividends are determined by a target payout level which depends on the company’s long term earnings

Based on dividend irrelevancy theory which stated that under a perfect capital market without any taxes, transaction cost, and other market imperfections, the company’s value is independent of dividend policies, instead, the firm’s value is solely dependent on the earnings power of the company’s assets and its investments policy and not by how it’s profits are distributed to the shareholders if this will be the case no company would pay dividend since it does not pay any additional value for the shareholders and no further research regarding dividend will be necessary. This is contrary to the view of Brealey et al (2008 pg. 973).

Who has written one of the most recent undergraduate textbooks in corporate finance? This states that the dividend controversy is one of the ten major unsolved problems in corporate finance and further research within the area is crucial in other to increase the understanding of the subject.

In the real world, disregarding the assumptions made in dividend irrelevancy theory, various academics have argued that dividends have an impact on the company’s value.

Nevertheless, if dividend affects the value of the company, it is of importance that the company’s shareholders are aware of the factors that affect the dividend payout, various studies have been conducted in other to determine the companies factors that influence the dividend payout.

In practice, some financial managers consider free cash flow as a major determinant of the dividend payout.

This is due to the agency cost connected to free cash flow and shareholders prefer cash payment in the form of dividends rather than to keep the free cash flow within the company.

Managers should therefore pay excessive free cash flow as dividends in other to reduce the agency cost. But free cash flow is far from being the only factor that may affect the company’s dividend payout.

Besides famous studies presented by Miller and Rock (1985) argued that dividends provide a signal to investors that the company’s profitability will increase in the future.

As such, the company’s growth according to Miller and Rock is an important determinant of the dividend payout. These examples reveal two company factors that may have an impact on the dividend payout. They are of course not the only factors that influence the dividend payout.

A lot of research in various countries has also been conducted in other to describe the relationship between a number of factors and the company dividend payout to shareholders.

But even though many studies have been conducted, the result shows that there are some differences between countries regarding which factors that have impact on dividend payout. For instance, in the United State of America, an investigation was conducted by Rozell (1982).

In regards to the determinants of dividend payout, they arrived at a conclusion that there is strong negative relationship between the riskiness and the dividend payout.

The study is contrary to the study made by Al Shabibi and Ramesh (2011). In the United Kingdom, the studies reviewed a positive relationship between the dividend payout and the riskiness of the company.

In the two countries discussed above, the relationship between the companies selected and dividend payout have been some worth different but we do not know the determinant of the Cameroon Company’s dividend payout.

To my knowledge, few studies regarding determinants of dividend payout have been conducted in Cameroon and they are not up to date.

I, therefore, think that it will be interesting to investigate the issue as the harder we look at the dividend picture, the more it seems like a puzzle with pieces that do not just fit together.

This research will provide answers to this unresolved problem in the Cameroon financial area. To this effect, we can be led to ask the following questions:

1. What is the effect of capital on the dividend payout ratio?
2. What is the effect of profits on dividend payout ratio? and
3. What is the effect of taxes on dividend payout ratio?

1.3   The objectives

The objectives of the study are:

The main objective of this study is to investigate the determinants of the dividend payout ratio.

The specific objectives will include:

1. To examine the effect of capital on a dividend payout ratio
2. To assess the effect of profit on a dividend payout ratio
3. To determine the effect of taxes on a dividend payout ratio
4. To make necessary recommendation

Read Also: The Effects Of Dividend Policy On Commercial Banks Sustainability In Cameroon: Case Study Ecobank