TITLE PAGE

AN APPRAISAL ON THE EFFECT OF DIVIDEND POLICY ON

MANUFACTURING FIRMS’ SHARE VALUE. (A CASE STUDY OF
SELECTED COMPANIES IN NIGERIA)

BY

ONUIGBO CHIDIEBERE .A

PG/ MBA/10/54944

BEING A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF

THE REQUIREMENT FOR THE AWARD OF MASTERS OF BUSINESS
ADMINISTRATION ( MBA) IN ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY
FACULTY OF BUSINESS ADMINISTRATION
UNIVERSITY OF NIGERIA, ENUGU CAMPUS
ENUGU STATE.

SUPERVISOR: MR. EMENGINI S.E

JUNE , 2012

i
 APPROVAL PAGE

This project was carried out by ONUIGBO CHIDIEBERE.A., a postgraduate

student with the registration number PG/MBA/10/54944.in the department of

accountancy and have been approved and accepted in the Department of

Accountancy, Faculty of Business Administration, University of Nigeria, Enugu

Campus.

___________________ _________________

MR EMENGINI. S .E. DATE

PROJECT SUPERVISOR

____________________ ____________________

MR. UGWOKE R.O DATE

HEAD OF DEPARTMENT

ii
 CERTIFICATION

I ONUIGBO CHIDIEBERE A., a postgraduate student in the Department of

Accountancy with registration number PG/ MBA/10/54944 has satisfactorily
completed the requirement for course and research work for the award of Master of
Business Administration (MBA) degree in Accountancy.

To the best of my knowledge, the work embodied in this project is original and has
not been submitted in part or in full for any other degree of this or any other
university.

__________________ ________________
ONUIGBO CHIDIEBERE A. DATE
PG/MBA/10/54944
RESEARCHER

iii
 DEDICATION

This project is dedicated to the Lord God Almighty, the fountain of wisdom and

knowledge, the giver of life who by HIS special grace, protection and mercy saw me

through and for making my dream come true.

iv
 ACKNOWLEDGEMENT

A research of this magnitude could not have been made possible without the unreserved
support of other people whose effort led to the climax of this work.

I express my immense gratitude to my able supervisor MR. EMENGINI S.E. whose

meticulous corrections and objective supervision of this work greatly contributed to the
achievement of the purpose of this work to be a valuable document

Equally I will not forget to acknowledge the support by the head of department in the person
of UGWOKE R.O., lecturers and non- academic staff especially Department of
Accountancy.

My unalloyed gratitude goes to my parent SIR $ LADY J.C. ONUIGBO for their unreserved
love, courage and determination , they have made my life so wonderful and also for their
financial support remains the “back-bone” of my academic pursuits, my lovely brother
Chukwuemeka.

Secondly, to my Aunt Nkechi, Aunt Susana, Collins for their Cheers, Jest and
Encouragement. My appreciation also goes to the management of Nigeria Stock Exchange at
Onitsha for their co-operation in making available information necessary to complete this
work. Special thanks to Agu .O.Agu, Uche Eneda and Paul who helped me at many critical
stages of my research. To my friends Chizoba, Onyinye, Moses, Kalu, Ebere and Ifesinachi
for their advice, inspiration and motivation and also for my other friends whose name have
not been mentioned, I appreciate all their efforts.

Above all to God Almighty, the most faithful God whose grace and love made all things
possible and for giving me the strength and wisdom throughout my masters programme at
university of Nigeria despite all odds. I say thank u

ONUIGBO CHIDIEBERE A.
PG/ MBA/10/54944.

v
 ABSTRACT

The purpose of this research work is to highlight an appraisal on the effect of

dividend policy on manufacturing firms’ share value. Dividend Policy is one of the
three major policy areas of financial management since Nigeria Stock Companies
came into existence. it determine the distribution of earning between payments to
stockholders and investment or reinvestment in the firm. It could be seen as to
constitute the cash flow that accures to the stockholders. The major objective of the
study is to determine the effect of dividend policy on manufacturing firms’ share
value. Other objective is to ascertain the relationship between dividend per share and
earning per share of manufacturing firm, to ascertain the companies dividend policy
that satisfies the objectives of maximizing owners wealth. The study had a population
of forty (40) quoted manufacturing firms. Out of which a sample size of fifteen (15)
were selected using Yaro Yamani formula. The ex –post facto research design was
adopted in the study. Three (3) hypotheses was tested using correlation co-efficient. It
was found out that there is no effect of dividend policy on manufacturing firms’ share
value, There is no significant relationship between earning per share and dividend
per share, Dividend policy satisfy the objective of maximizing owner wealth. Thus, it
is recommended that financial managers should have information on the factors in the
economy that affects the behavior of investors in their purchase of stock before any
public reissue. Nigeria Stock Exchange should maintain its reliance on the force of
demand and supply alongside its daily biding system because it tends to give the firms
a fair assessment before the public in an unstable business environment.

vi
 TABLE OF CONTENTS

Title page i

Approval page ii

Certification iii

Dedication iv

Acknowledgment v

Abstract vi

Table of Contents vii

CHAPTER ONE – INTRODUCTION

1.1 Background of the Study 4

1.2 Statement of the Problem 5

1.3 Objectives of the Study 6

1.4 Research Question 6

1.5 Hypothesis of the Study 7

1.6 Significance of the Study 8

1.7 Scope of the Study 9

1.8 Limitation of the study 9

1.9 Operational Definition of Terms 10

vii
 References 11

CHAPTER TWO-LITERATURE REVIEW

2.0 Introduction

12

2.1 Overview of Dividend and Earning per share 12

2.1.1 Types of dividend 16

2.2 Overview of Dividend Policy 19

2.2.1 Types of Dividend Policy 21

2.3 Dividend Policy and The Provision of Companies and Allied

Matters Acts 1990 as Amended 27

2.4 Evolution of Stock Pricing 27

2.5 Valuation Characteristics 28

2.6 Stock Valuation Models /Method 29

2.7 The Dividend Theories 33

2.7.1 Factor that influences a firm’s dividend decision 35

2.8 Relevance of Dividend Policy 38

viii
2.8.1 Irrelevance of Dividend Policy 44

2.9 The Residual Theory of Dividend Policy 50

2.10 Securities Valuation Technique 51

2.11 Dividend Policy Payment Procedure 55

2.12 Dividend Payment Timeline 57

2.13 Measures Dividend Policy 59

2.14 Factors Influencing Dividend Policy 60

2.15 Factor influencing share price behavior in Nigeria stock

Market 64

2.16 Effects of Dividend Policy on Required Rate of Return 65

Reference 68

CHAPTER THREE - RESEARCH METHODOLOGY

3.0 Introduction 70

3.1 Research Design 70

3.2 Sources of Data 71

3.3 Method of Data Collection 71

3.4 Population of the Study 72

3.5 Sample of the Study 72

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3.6 Techniques of Data Analysis 74

3.7 Model of Specification 75

Reference 76

CHAPTER FOUR – PRESENTATION OF DATA ANALYSIS AND

INTERPRETATION
4.0 Introduction 77
4.1 Data Presentation / Analysis 78
4.2 Hypotheses Testing / Interpretation of Test 92
CHAPTER FIVE –SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATION

5.0 Introduction 103

5.1 Summary of Findings 106

5.2 Conclusion 107

5.3 Recommendation 108

5.4 Suggestion Areas for Further Research 109

Bibliography 110

Appendix 111

x
 CHAPTER ONE
INTRODUCTION

1.0 BACKGROUND OF THE STUDY

Dividend Policy is one of the three major policy areas of financial management
since Nigeria stock companies came into existence. Dividend is commonly defined as
the distribution of earnings (past or present) in real assets among the shareholders of
the firm in proportion to their ownership. Dividend policy connotes to the payout
policy which managers’ purse in deciding the size and pattern of cash distribution to
shareholders overtime. Bhattacharya (1999:P.241).Management primary goal is
shareholders wealth maximization which translates into maximizing the value of the
company as measured by the price of the company’s common stock. This goal can be
achieved by giving the shareholder a “fair” payment on their investments. However,
the impact of firm’s dividend policy on shareholders wealth is still unresolved.

According to Bolt an (2000, p.249) Dividend policy is the guiding principle in

determining what proportion of earning should be paid out as dividend. Three decades
ago, Black fisher (1996) in his study on dividend wrote, “The harder we look at the
dividend picture the more. It seems like a puzzle with pieces that just don’t fit
together”. Why shareholders like dividends and why they reward managers who pay
regular increasing dividends is still unanswered. According to Frankfurter, George
and Wood bob (2003) Dividend policy has been kept as the top ten puzzles in finance.
The most pertinent question to be answered here is that how much cash should firms
give back to their shareholders? Which factors determine or influence the type of
dividend payout ratio? Does the payment of dividend affect the market price of the
shares of these companies? Should corporation pay their shareholders through

xi
dividends or by repurchasing their shares, which is the least costly form of payout
from tax perspective? Firms must take these important decisions period after period
(some must be repeated and some need to be revaluated each period on regular basis)

Firms adopt dividend policies that suit the stage of life cycle they are in. For
instance, high growth firms with larger cash flows and fewer projects tend to pay
more of their earnings out as dividends. The dividend policies of firms may follow
several interesting patterns adding further to the complexity of such decisions. First,
Dividends tend to lag behind earnings, that is, increases in earnings are followed by
increases in dividend and decreases in earning sometimes by dividend cuts. Second,
Dividend are “sticky” because firms are typically reluctant to change dividends, in
particular, firms avoid cutting dividends even when earning drops. Thirdly, Dividends
tends to follow a much smoother path than do earnings. Finally, there are distinct
differences in dividend policy over the life cycle of a firm, resulting from change in
growth rates, cash flows and project investment in hand. Especially the companies
that are vulnerable to macroeconomic vicissitudes such as those in cyclical industries
are less likely to be tempted to set a relatively low maintainable regular dividend so as
to avoid the dreaded consequences of a reduced dividend in a particularly bad year.

Shareholders wealth is represented in the market price of the company’s

common stock and a drop in share prices occur because dividends have a signaling
effect. According to the signaling effect, managers have private and superior
information. Such a calculation, on the part of the management of the firm may lead
to stable dividend payout ratio. Accordingly, dividend policy can be used as a
mechanism to reduce agency cost. The payment of dividends reduces the discretionary
funds available to manager to seek financing in capital markets. This monitoring by
the external capital markets may encourage the managers to be more disciplined and
act in owners’ best interest.

xii
 Companies generally prefer a stable dividend payout ratio because the
shareholders expect it and reveal a preference for it. Shareholders may want a stable
rate of dividend payment for a variety of reasons. Risk adverse shareholders would be
willing to invest only in those companies which pay current returns on shares. The
class of investors which includes pensioners and other small savers are partly or fully
dependent on dividend to meet their day to day needs. Such investors would therefore
prefer companies which pay a regular dividend every year. This clustering of
stockholders in companies with dividend policies that match their preferences is
called CLINETELE EFFECT.

1.1 STATEMENT OF THE PROBLEM

The problem of this research work is to examine the effect of dividend policy
on manufacturing firm’s share value. A major impediment to understanding dividend
policy is the availability of multiple plausible explanations for observed behavior.
Booth Laurence and Cleary Sean (2003) clarified the theoretical setting of this
problem by showing that absent informational asymmetries, transaction costs or tax
considerations, the payout behavior of firms should not affect share valuation by
investor s. it follows from these assumptions that the dividend policy instead appears
to have strongly predictable components with firms gradually adjusting dividends to
target levels that reflect current earnings.

What Fisher Black (1976) christened the “dividend puzzle”- the problem of
reconciling observed dividend behavior with economic incentive facing the relevant
decision makers- is typically cost as a result of the relationship between external
shareholder and internal corporate managers. Dividends represent gross flows from
corporations to their shareholders, so to the extent that owners dictate dividend policy,
they can use dividend level and can also use dividends to send credible profitability

xiii
signals to the capital market. Both of these uses of dividends address needs that stem
from imperfect monitoring and information flow between owners and managers.
Since control problems and capital market signaling carry similar empirical
implication for dividend payment, it can be difficult to distinguish between them.

The most pertinent question to be answered here is that how much cash should
firms give back to their shareholders? Should directors pay their shareholders through
dividends or by repurchasing their shares, which is the least costly form of payout
from tax perspective? Firms must have these important decision periods (some must
be repeated and some need to be revaluated each period on regular basis).

1.2 OBJECTIVE OF THE STUDY

The study is focused on the achievement of the following objectives –

1. To determine the effects of dividend policy on manufacturing firm share value

2. To determine the factors that influence corporate decisions on dividend policies
on manufacturing firms.
3. To ascertain the relationship between dividend per share and earnings per share
of manufacturing firms in Nigeria.
4. To examine the payment of dividend on the market price of a firm’s share.
5. To find out the association between various ownership group and dividend
payout policies of Nigeria manufacturing.
6. To ascertain the company’s dividend policy that satisfies the objective of
maximizing owner’s wealth.

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1.3 RESEARCH QUESTIONS

In order to explore the research problem, the focus of this project is on research
questions which reflect on the objectives of the study are fielded:

1. What are the effects of dividend policy on manufacturing firms share value?
2. Are there factors that influence corporate decisions on dividend policies on
manufacturing firms in Nigeria?
3. What are the relationship between dividend per share and earnings per share of
manufacturing firms in Nigeria?
4. What is the impact of payment of dividend on the market price of a firm’s
share?
5. To what extent does the association between various ownership group and
dividend payout policies of Nigeria manufacturing?
6. To what extent do the company’s dividend policy satisfies the objective of
maximizing owner’s wealth.

1.4 RESEARCH HYPOTHESE

In analyzing an appraisal on the effect of dividend policy on manufacturing

firms’ share value. Some tentative statements were formed to help answer the research
questions. Hence the following hypotheses that have to be tested were put forward for
this study.

HYPOTHESIS ONE

Ho: There is no effect of dividend policy on manufacturing firm’s share value.

H1: There is an effect of dividend policy on manufacturing firm’s share value.

xv
HYPOTHESIS TWO

Ho: There is no significant relationship between dividend per share and earnings
per share of manufacturing firms in Nigeria?

H1: There is a significant relationship between dividend per share and earnings per
share of manufacturing firms in Nigeria?

HYPOTHESIS THREE

Ho: Dividend policy does not satisfy the objective of maximizing owner’s wealth.

H1: Dividend policy satisfy the objective of maximizing owner’s wealth.

1.5 SIGNIFICANACE OF STUDY

Outcome of this research seeks to examine and identify the relative known
determinants of dividend policy in Nigeria. The research work also has made an
endeavor to bring the influence of ownership groups of a company on dividend payout
behavior of a firm. This research tries to unfold the relationship between dividend per
share and earning per share.

Given the diversity in corporate objectives and environments, through the

research an attempt has been made to suggest how dividend policy can be set at micro
level. Finance managers would be able to examine how the various market frictions
such as asymmetric information, transaction cost and agency costs affect their firms a
well as their current claim holders to arrive at reasonable dividend policies.

Furthermore for the dividend policy makers of manufacturing and service

industry, the study may prove to be useful for re-sketching their dividend policy

xvi
keeping in view and analysis, results and discussion presented. Through the research,
one can have better understanding of the factors that should systematically affect
firms’ payout decisions. It also gives insight into what kind of ownership structure is
beneficial for the shareholders.

1.6 SCOPE OF THE STUDY

This study will focus mainly on selected companies in Nigeria stock exchange
which covers the period of six years. i.e. 2005 -2010.The period is chosen because
six years study is assumed to give a true reflection of the performance of firms under
study and availability of data was considered.

1.7 LIMITATION OF THE STUDY

As part of the research experience by researchers all over the globe, certain
limitations hindered the effective and smooth collection of data for the work. In the
cause of carrying out the research, the researcher experience some difficulties which
manifested in the following ways-

Time constraint: Due to the limited time available for the study, the researcher could
not place the source of information for the study

Attitude of respondents: Some respondent are indifferent to the study because they
feel they have nothing to benefit from the study financially or otherwise.

Finance: Due to lack of financial resources of their researcher, could not visits some
place to gather more information about the work.

Scope of the research: The study was constrained to the manufacturing firms;
therefore from the conclusion drawn from this study may have potential; problem on
generalization.

xvii
1.8 OPERATIONAL DEFINITION OF TERMS

This section develops the definition of core terms for this research because precise
definitions of core terms are the foundation of any research project.

DIVIDEND: Dividend is a periodical payment of a share of profit to shareholders in a

business company.

POLICY: Policy is a plan of action, statement of aims and ideas especially one made
by the management of a public corporate. It is a written statement of the terms of a
contract or agreement.

DIVIDEND POLICY: The policy of a company uses to decide how much it will pay
out to shareholders in dividend.

DIVIDEND PAYOUT RATIO: The percentage of earnings paid to shareholders in

dividend.

EARNING PER SHARE (EPS): The reward of an investor for making his
investment and it is the best measure of performance of firm.
DIVIDEND PER SHARE (DPS): Dividend per share is a ratio that measures the
amount of dividend payable to shareholders on per share basis as a reward for their
investment in the firm.

SHARE: Shares means any of the equal parts into which the capital of a business
company is dividend giving the holders a right to a portion of the profit.

SHAREHOLDER FUND: Shareholder fund is a sum of all strategies decisions that

affects the firm’s ability to effectively increase the amount of free cash flow overtime.
MANUFACTURING FIRM: Manufacturing firm is an industry that produces /
manufactures goods in a large quantity.

xviii
 REFERENCE
Bhattacharya S. (1999) Imperfect Information, Dividend Policy and The Bird – in- the
hand fallacy. Journal of Economics.
Black fisher (1996) The Dividend Puzzle. The Journal Portfolio Management,
Volume 18 No2 page 634-639.
Boothlaurence, Cleary Sean (2003) Dividend Policy and Capital Market. Journal of
Financial Management. Page 101 -121
Dividend Online Etymology Dictionary Douglas Harper 2001 retrieved 2006.
Frankfurter M. George and Wood bob G. (2003) Dividend policy Theory and
Practice, Academic press.
Jensen M.C. and Meckling W.H (1997) The Theory of the firm Managerial behavior
Agency Cost and Ownership Structure. Journal of Financial Economic (October)
Linter J. (1994) Distribution of Incomes of Corporation among Dividend Retained
Earnings Taxes, American Economics Review 46(1) page 97 – 113
Kalay A. (1992) The Ex –dividend day behavior of stock prices. Journal of Finance
page 1052 -1070

xix
 CHAPTER TWO
LITERATURE REVIEW
2.0 The aim of this chapter is to review of previous work done by different author as
related to the study and also review the literature on the effect of dividend policy
that are relevant to the research problems in manufacturing firms. The background
theories used to develop the theoretical framework are discussed as follows-

2.1 OVERVIEW OF DIVIDEND AND EARNING PER SHARE

Dividend can be defined by different authors.

According to Harper (2001), the word “Dividend” comes from the Latin word
“dividendum” meaning “the thing which is to be divided among all. Sheffrin (2003)
define dividends as payment made by a corporation to its shareholding members or as
the portion of corporate profit paid out to stockholders.

Pandy (2005) define the term as payments made to stockholders from a firm’s
earnings whether these earnings are generated in the current period or in previous
periods. Essentially, payments made to equity shareholders for shares held by them
are called dividend.
Davies and Pain (2002) defined dividend as the amount payable to shareholders from
profit or distributable reserves. It represents distribution of earning that cannot be
profitably reinvested by the firm. Companies that are listed in the stock exchange are
usually obligated to payout dividend on quarterly or semiannual bias.

Pandy (1979) defined dividend as that portion of a company’s net earnings which the
directors recommend to be distributed to shareholders in proportion to their
shareholdings in the company.
Thus, if there are no profits made dividend are not declared but when profits are
made, the company whether to issue dividends and what amount is calculated mainly

xx
on the basis of the company’s in profit and its earnings for the year. Thus, if there are
no Net Present Value (NPV) positive opportunities i.e. projects where returns exceeds
the hurdle rate, then management often return such excess cash to investors. In this
case, dividend may be seen as the free cash flows which comprises of cash remaining
after all business expenses have been met. It is usually expressed as a percentage of
nominal value of the company’s ordinary share capital or as a fixed amount per share.
Whether to issue dividends and what amount is calculated mainly on the basis of the
company’s inappropriate profit and its earnings for the year. Thus, if there are no Net
Present Value (NPV) positive opportunities i.e. projects where returns exceeds the
hurdle rate, then management often return such excess cash to investors. In this case,
dividend may be seen as the free cash flows which comprises of cash remaining after
all business expenses have been met (Damodaran, 2002). The dividend decision in
corporate finance is a decision made by the directors of a company. It relates to the
amount and timing of any cash payments made to the company’s stock holders.
Dividends are usually paid out of the current year’s profit and sometimes out of the
general reserves. They are normally paid out in cash and this form of dividend
payment is known as CASH DIVIDEND. Another dividend available to a company
for the distribution of earning is by STOCK DIVIDEND (bonus Issue) which is
supplementary to cash dividend. When cash dividend is paid to shareholders, it has an
adverse effect on the liquidity position and the reserves of the firms as it tends to
reduce both of them. Dividend is the trade off between retaining earning and paying
out cash or issuing new shares to shareholders. Some firms may have low dividend
payout because management optimistic about the firm’s future and therefore wishes to
retain their earning for expansion.
Davies and Pain (2002) defined Dividend as the amount pay to shareholders
from profit or distributable reserve. It represents distribution of earnings that cannot
be profitably reinvested by the firm. Companies that are listed in the stock exchange
are usually obligated to pay out dividend on quarterly or semi annual bias.
xxi
 MEANING OF EARNING PER SHARE
According to Patra (2005) Earnings per share (EPS) can be described as the
reward of an investor for making his investment and it is the best measure of
performance of firm . The above definition of EPS and its importance was further
buttress by Hyderabad (1997) when he said that the bottom line of income statements
are an indicators of performance of think tank or top level of the company, therefore,
ordinary investors lacking in-depth knowledge and inside information mainly based
their decisions on EPS to make their investment decision, so it should be the objective
of financial management to maximize the EPS from the point of view of both the
investor and investee, thus to him, the objectives of financial management of
maximization of value measured in terms of market price of equity share of a
corporate entity is misplaced.
Pandey (2005) says given the objective of the firm to maximize the value of
equity share of the firm, management should select a desired combination of financing
mix or financial structure that will achieve the goal as stated by Patra (2005).
Theoretically, optimum financial structure implies that combinations of debt and
equity should be at the level where overall cost of capital is low and the value of the
firm is high. Therefore, the prevailing view is that the value maximization criterion as
a criterion of optimal financial structure is measured in terms of market price of equity
share, that is, the value of the firm is maximized when the market price of equity share
is maximized, so according to this view, maximization of the market price of equity
share leading to the maximization of value of the firm is a criterion of optimum
financial structure. Contrary to the above view according to Patra (2005) is that, the
market price of equity share should basically depends on the firm’s earnings per share
as the EPS valuation depends to a great extent, on many external factors such as
government monetary and economic policies, political stability, state of the economy
speculative trends etc, thus, it may be contended that market price of share has no
direct bearing on the optimum financial structure. He also agreed that since the
xxii
financial structure decision is an internal decision of the firm, an increase in market
prices of share should not be a criterion of optimum financial structure. Compsey and
Brigham (1985) totally agree with the above argument and say, Earning per share may
be a better substitute as a criterion of value maximization in respect of optimum
financial structure and as such maximizing EPS should be the main aim of a firm in
order to realize the objective of maintaining an appropriate financial structure.

2.1.1 TYPES OF DIVIDEND

Emekekwuo (1997:307) classified types of dividend into three main groups
namely: Cash dividend, Stock dividend and Stock split

2.1.1 CASH DIVIDEND

When a firm declares dividend, it is usual to distribute cash to its shareholder,
To make this possible, the firm would have taken adequate measure to ensure
the availability of cash. Some firms take the precautions of holding their
reserves in cash and marketable securities. When they declare dividends, they
dispose of those securities to enable them have enough cash to meet their
obligations to the shareholders. When a firm declares its intention to pay out-
dividend the effects of this declaration registers in the market where the market
price of their stock arises by approximately the amount of dividend that is
proposed. Investors will be in a haste to purchase such stocks to see if they can
enjoy the good fortune of the firm by participating in the dividend. After
dividends have been paid the liabilities side of the balance sheet will drop as
well as the asset side by the extent of the declared. When this happens the value
of the firms will drop and the market price of its stock will also drop.

xxiii
2.1.2 STOCK DIVIDEND
This is a situation where stocks are given out instead of paying cash dividend
to shareholders are in such a case given a percentage of their stock. Stock
holding as additional stock thus shareholders retain the same percentage of
stock holding, they had before the declaration of stock dividend. There will of
course be no change in total capitalization of the firm as the assets and
liabilities’ remain uncharged but there is going to be drop in the earning per
share. There is going to drop in the market price of the stock while there is
going to be corresponding rise in the volume of equity shareholdings. The
reserve or retained earnings going to drop. Since the firm have received nor
parted with any funds the both value as its debt will not be affected.
2.1.3 STOCK SPLITS
This is basically the same as stock dividend expects that a shareholder is
given a large number of shares for the old shareholder. There could be a stock
split of 3 for one, I which mean that for every one stock previously held, the
shareholder is given additional two stocks. This involves a reduction of per
value of the stock in proportional terms. As in stock dividend the shareholder
retains the same percentage of stock outstanding after as before stock split. As
with stock dividend, the total capitalization of the firm remains constant
because the assets and liabilities remain unchanged. The total market value of
the firm of the same but there is a drop in earnings per share to the extent of
proportion of the stock split. The individual stock holder still retains the same
total market value for his stock holding.
Firms generally adopt dividend polices that suit the stage of life cycle they are
in. For instance, high growth firms with larger cash flows and fewer projects tend to
pay more of their earnings out as dividend policies of firms may follows several
interesting patterns adding further to the complexity of such decisions.

xxiv
 First dividend tends to lag behind earnings, that is increasing in earning are
followed by increases dividend and decrease in earning. Sometimes by dividend cut.
Secondly, dividends are “sticky” because firm are typically reluctant to change
dividends; in particular firm avoid cutting dividends even when earning drops.
Thirdly, dividends tend to follow much smoother path than do earning.
Finally, there are district differences in dividend policy over the life cycle of a
firm resulting from changes in growth rates, cash flows and project investment in
hand, especially the companies that are vulnerable to macroeconomic vicissitudes,
such as those in cyclical industries, are less likely to be tempted to set a relatively low
maintainable regular dividend so as to avoid the consequences of a reduced dividend
in a particularly bad year.

2.2 OVERVIEW OF DIVIDEND POLICY

According to Van Horne (1971) Dividend policy entails the distribution of
earnings between payments to shareholders and investment or reinvestment in the
firm. Dividend policy could also be seen as to constitute the cash flow that accrues to
the stockholders.

Dividend policy is primarily concerned with the decisions regarding dividend

payout and retention. It is a decision that considers the amount of profits to be retained
by the company and that to be distributed to the shareholders of the company.
Dividend policy is a deliberate policy to maintain or increase dividend at a certain
level with the ultimate aim of sustaining the price of the ordinary shares on the stock
exchange. This is because capital markets are not perfect although shareholder are
indifferent between dividend and retained earnings due to market imperfections and
uncertainty, but they give a higher value to the current year dividend than the future
dividend and capital gain. Thus the payment of dividend has strong influence on the
market price of the shares. With this approach, dividend are desirable from the

xxv
shareholder as increasing their current wealth and dividend level determines share
price as well as indicates the prospect of profitability of the firm. Dividend payout
reduces the amount of earning to be retained in the firm and affect the total amount of
internal financing. When dividends are treated as a financing decision the net earning
of the firm may be significant source of financing the growth of the firm.
The important aspect of dividend policy is to determine the amount of earning
to be declared as a dividend and the amount to retain in the firm. Retained earnings
are the most significant internal sources of fund for financing the corporate growth of
the firm and dividend constitutes the cash flows that accrue to shareholders. Although
both growth and dividend are desirable, the two goals are often in conflict, high
dividend rate means low retained earnings and consequently, a slower rate of growth
in earnings and stock prices. Residual earnings are all those earning after all other
obligation of the firm have been met and as such are the prerogative of the firm’s
common stockholders ; since share preferences heavily influences the firms dividend
decision. On the other hand, dividends are desirable from shareholders point of view
as it increase their current wealth.

2.2.1 TYPES OF DIVIDEND POLICY

There are different types of dividend polices by many author. These include constraint
payout, progressive policy, residual policy, zero dividend policy, alternative policy.

CONSTANT OR FIXED POLICY- The Company pays out a fixed amount of its
profit after tax as dividend. Thus, a company maintains a fixed payout ratio of
dividend. Pandy (2005) define payout as the ratio of dividend to earnings. A company
may as a matter of policy, decide to constantly payout sixty percent of its after tax
profit as dividend to its shareholders and retaining the remaining fraction. This type of
policy allows the shareholders the opportunity to clearly known the amount of
dividend to expect from their investment in the company. However as noted by
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Watson and Head (2004), the policy could be traumatic to companies experiencing a
volatile or fluctuating profit earning. This because of the uncertainty of its profit it
capital project are to viable capital projects, the policy can be chaotic.

2.2.2 PROGRESSIVE POLICY- Payments on dividend is on a steady increase

usually in line with inflation. This could result in increasing dividend in money
terms. The firm uses the policy as a ratchet. Every effort is made to sustain the
increase even though marginal. Seldom, the company may be constrained to cut
down on dividend payout. This is to enable it sustain its operations. This though
not a frequent action as it bend a wrong signal to investors. Firms operating this
policy will avoid paying dividends during the period rather than consistently cut
down on the dividend (Kolb and Rodriguez, 1996).

2.2.3 RESIDUAL POLICY- Dividends are just what is left after the company
determine the retained profits required for future investment. The policy gives
preference to its positive NPV (Net present value) projects and paying out
Dividends if there are still left over funds available. Dividend becomes a
circumstantial payment only paid when the investment policy is satisfied. There
is a tendency therefore that this type of policy could give rise to zero dividend
structure. Firms may need to modify this policy to ensure that investors of the
different clienteles are not chased out by a strict application of the policy.

2.2.4 ZERO DIVIDEND POLICY: Some firm may decide not to pay dividend.
This is especially common newly formed companies that rather require capital
to execute its projects. All profit is retained for expansion of the business,
investors who prefer capital gain to dividend because of taxation will naturally
be lured by this kind of policy. This type of policy is quite easy to operate and
xxvii
 avoids the entire cost associated with payment of dividends. (Watson and Head
2004).

2.3 DIVIDEND POLICY AND THE PROVISION OF COMPANIES AND

ALLIED MATTERS ACT 1990 AS AMENDED
The Companies and Allied matters Decree 1990 with all the amendments in
section sub section 1-5 provides that:-
1. A company may, in the annual general meeting, declare dividends in respect of
any year or other period only on the recommendation of the directors.
2. The company may from time to time pay to the members such interim
dividends as appear to the directors to be justified by the profit of the company.
According to sub-section (3), the general meeting shall have power to decrease
the amount of dividend recommended by the directors, but shall have no power to
increase the amount recommended. While sub-section (5) stated that, subject to the
provisions of these act dividend shall be payable only out of the distributable profit of
the company.
Furthermore, section 381 of CAMA states that a company shall not declare or
pay dividends if there are reasonable grounds for believing the company is or would
be, after, unable to meet up with or pay its liabilities as they become due.
A. DISTRIBUTABLE PROFIT
Subject to the company being able to pay its debts as they fall due, the
company may paid dividends out of the following profits.
(a) Profits arising from the use of the company’s property although it is washing
asset
(b) Revenue Reserves
(c) Realized profits on a fixed asset sold, but where more than one asset is sold, the
net realized profit on the assets sold.

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B. RESTRICTION OF DECLARATION AND PAYMENT OF DIVIDEND
A company shall not declare or pay dividend if there are reasonable grounds for
believing that the company is or would be after the payment, unable to pay its
liabilities as they become due.
C. UNCLAIMED DIVIDEND
Section 382 sub-section 1-4 of the decree stated that:
1. Where dividend are retained to the company unclaimed, the company shall
send a list of the names of the persons entitled with the notice of the annual
general meeting to the members.
2. After the expiration of three months of the notice mentioned in sub-section of
this section, the company may invest the unclaimed of this section dividend for
its own benefits in an investment outside the company and no interest shall
accure on the dividends against the company.
3. Where dividends have been sent to members and there is an omission to send to
some members due to the fault of the company, the dividends shall earn interest
at the current bank rate from three months after the date in which ought to have
been posted.
4. For the purpose of liability, the date of posting the dividend warrant shall be
deemed to be the date of payment and proof of whether it has been sent is a
question of fact.

D. RESERVE AND CAPITALIZATION

On reserve and capitalization the CAMA, 1990 as amended made the following
provision.
1. The director may, before recommending any dividend, set aside out of the
profit of the company such sums as they think proper as a reserves which shall,
at the discretion of the directors, be applicable for any purpose to which the
profits of the company may be properly applied and pending such application
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 may, the like discretion, either be employed in the business of the company or
be invested in such investments (or other than shares of the company) as the
director may from time to time, think fit, and the directors may also without
placing the same to reserve, carry forward any profit which they may think
prudent not to distribute.
2. The company in general meeting may upon the recommendation of the director
resolve that it is desirable to capitalize any part of the amount for the time
being standing to the credit of any of the company’s reserve accounts or to the
credit of the profit and los account or otherwise available for distribution.
3. Such sum may be set free for distribution among the members who would have
been entailed to dividends in the same proportions on condition that the same
be not paid in cash but be applied either in or toward paying up any amount for
the time being unpaid and only share held by such member respectively or
paying up in full unissued shares or debenture of the company to be allotted
and distributed to creditors as fully paid up.
4. The company may decide, by a resolution what part is to be distributed in cash
or in shares and the directors shall give effect to such resolution.
5. Share premium account and capital redemption reserve fund may for the
purpose of the sub-section, only be applied to members of the company section
fully paid bonus shares.
6. Where a resolution is under sub-section 2 to 5 of this section passed, the
directors shall make all appropriations and applications of the undivided profit
resolved to be capitalized thereby and all allotments and issues of fully paid
shares debentures, if any, and general do all acts and things required to give
effect to it.
7. The provision stated that the directors shall have power to make such
provisions by issue of fractional certificate or by payment cash or otherwise as
they think fit in the case of shares or debentures becoming distributable.
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8. Any person may be authorized by the directors to enter on behalf of all the
members entitled under this section into an agreement with the company to
provide for the allotment to them, or credited as fully paid-up, of any further
shares or debentures to which they may be entitled upon such capitalization.
The researcher further discovered from the provisions of Act, that if
under contract of service an employee is entitled to share in the profit of the
company as an incentive, he shall be entitled to share in the profits of the
company whether or not dividend have been declared.
E. RIGHT OF THE SHAREHOLDERS TO SUE FOR DIVIDENDS
The researcher noticed that dividends shall be special debts due to and
recommended by shareholders within 12 years and actionable only when declared.
F. LIABILITY FOR PAYING DIVIDEND OUT OF CAPITAL
The provision requires that all directors who knowingly pay or are party to the
payment of dividend out of capital or otherwise in contravention of this part of Act,
shall be personally liable jointly and severally to refund to the company any amount
so paid.
Such directors as reminded by the provision shall have right to recover the
dividend from shareholders who received it with knowledge that the company had no
power to pay it.

2.4 EVOLUTION OF STOCK PRICING

The need to determine a value in exchange or price began with the earliest trade
in ancient times. There were informal markets for livestock over 3,000 years BCE as
evidenced by tablets in summer for counting sheep in cuneiform. Price gained its
usefulness and importance with the monetization of an economy and the development
of organized markets with standardized products, weights and measures. Informal
markets for privately owned companies, in contrast with the stock exchanges and
other organized markets for shares of stock in publicly traded corporations.
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 Commodity prices are expressed as unit prices to enable quick and easy
comparisons. Examples includes; price per pieces, price per gallon, prices per yard
etc. financial assets or claims on physical assets have similar units prices.
In the first stage of the evolution of the pricing of a company as a going
concern, the pries for private companies were expressed in the same way that prices
for commodities were expressed, but the units were different. As a result of the
invention of double entry book- keeping in the 14th century and subsequent
improvements, there are three major units and resulting statement, per unit of earnings
based on the fund flow statement. This was not scientific pricing, but it was an
advance.
In the second stage, the emphasis shifted from pricing whole companies to
pricing shares of business ventures and companies. Stock market investors followed
the unit pricing practices in the private markets for closely held companies when they
expressed share prices in terms of prices of price/ earnings ratio, price/book value
ratio, and price/ cash flow ratio. Because of the great importance of cash dividends
paid to investors in publicly traded companies, price. Dividend ratio was included.
This was not scientific pricing but it was a further advance.
In the third stage, the emphasis shifted from heuristics for pricing to scientific
measures of prices. Discounted cash flow (DCF) techniques based on the theory of
interest and the time value of money led to the Dividend Discount Model (DDM). The
DCF techniques were used by john Burr William in his book 1938 book entitled “The
theory of investment”. Strictly speaking, the DCF technique are used to determine, not
price, but rather the intrinsic value of one investment asset/ individual company at a
time. The firm valuation process is different from the stock pricing process, but DCF
values can be used as estimate of fair prices. Scientific valuation is more efficiently
than is the case with non – scientific procedures. DCF techniques for valuation are
scientific and they were a further advance.

xxxii
 In the fourth stage, the emphasis shifted form price ratios for pricing to
scientific models for pricing and from pricing shares of stock in one company to
pricing and from pricing shares of stock in one company to pricing portfolios of
stocks in number of companies usually publicly traded corporation. This led to
Modern Portfolio Theory (MPT) by Harry Markowitz in 1952 ( journal of finance)
and to related Capital Asset Pricing Model ( CAPM) with its sole explanatory
variable, market- Beta MPT and CAPM are scientific but they apply only to portfolios
stocks instead of individual companies.
In the fifth, the emphasis shifted from scientific models of return for stock
portfolio pricing to pseudo- scientific models for stock portfolio pricing. Similar to the
second stage, these models for stock portfolio pricing followed the pricing practices in
the private markets for closely held companies but with a change from unit prices to
price yields. Unit price have company price as the numerator. Price yields are the
inverse of unit prices. Some of these return models include risk factors that are price
yields such as book –to-market equity ratio ( Equal to book-to-price ratio), earning/
price ratio, and dividend/ price ratio,
According to Robert (2006) price related risk factors in a return model are not
scientifically valid and this is because of the fallacy of circular reasoning. An example
is the FF3F (three factor model). It is devolution rather than an advance.

2.5 VALUATION CHARACTERISTICS

Hamilton Rayners (1986) stated that “Valuation of stock is purely subjective”.
There is no such thing as objective truth in the assessment of value. Value is an
infinity fluid concept, changing in time and varying from place to place.
Defining value is precise terms is almost impossible. That is why Owen and
Beach (1990) view value as a psychological concept which is a function of people’s
desire, principles, attitude and emotion. An important characteristic of value is

xxxiii
however, that it is expressible in terms of a single lump sum of money considered as
payable or expendable at a particular time in exchange for property.
Price and value are separate but related concepts. Price is the monetary
consideration received for the sale and payment for the purchase of goods and
services. The market price of a stock may have various intrinsic values to different
prospective buyers. As a buyer of a stock for transaction purpose may have a value
different from a buyer with intention of board membership attached to that stock.

2.6 STOCK VALUATION MODELS/ METHODS

In financial market, stock valuation is the method of calculating theoretical
values of companies and their stocks. The main use of these methods is to predict
future market prices, or more generally potential market prices, and thus to profit from
price movement, stocks that are judged undervalued are sold, in the expectation that
undervalued stocks will, on the whole, rise in value, while overvalued stock will on
the whole fall.
According to John Maynard Keynes, stock valuation is not a prediction but a
convention, which serves to facilitate investment and ensures that stocks are liquid
despite being underpinned by an illiquid business and its illiquid investments such as
factories.
It is pertinent to that securities have a type of values;
1. The Intrinsic value (actual worth): This is the actual worth of the theoretical
price of share determined by the economic facts about the company that issued
the security. It is found by substituting the economic or financial data of the
company into any of the various valuation models that have been developed in
finance theories including; earning method, dividend valuation model etc.
2. The Extrinsic value (market value): This is the price at which the share of
the company can be sold in the open market. The e current market value is a
function o f a discount rate, level of investment which determines the level of
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 profit, future prospects of the company (which relates to; analysis of past result
/ financial account of the company future plans of the company, factor affecting
the industry or economy as a whole). Thus, market value of securities is mostly
determined by market forces.

As a result of these factors securities that are expected to have high return and/
or low risk would be in high demand and therefore normally attract high prices and
vice versa. Thus, market value of securities is mostly determined by market forces.

Viewing stock valuation from a similar perspective, it is noted that stocks have
two types of valuations. One is value created using some type of cash flow, sales
or fundamental earning analysis. The other value is dictated by how much an
investor is willing to pay for a particular share of stock and by how much other
investor are willing to sell a stock ( in others words by supply and demand). The
latter is very hard to understand or predict and it often drives the short term stock
market trends while the former which is based on historic ratios and statistics is
typically what drives long – term stock prices. Both of these values changes
overtime as investors change the way they analyze stocks and as they become
more or less confident in the future of stocks.

They are many different ways to value stock. The key is to take each approach
into account while formulating an overall opinion of the stock. If the valuation of a
company is lower than other similar stocks, then the next setup would be to determine
the reasons.

For the purpose of this study, some of the models will summarized briefly while some
others would just be stated and can be further read on “stock valuation- Wikipedia,
free encyclopedia”.

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2.6.1 FUNDAMENTAL VALUATION ANALYSIS

The fundamental valuation is the valuation that people use to justify stock
prices. The most common example of this type of valuation is P/E ratio. This form of
valuation is based on historic ratios and statistics and aims to assign vale stock based
on measurable attributes. They provide an analytical framework for rational and
informed investment decision making. The fundamentalist carry out an Economy –
industry – company analysis (E.I.C). They evaluate stock using auditor’s report, profit
and loss account, balance sheets sales data, managerial ability etc, of the company to
forecast future business conditions.

This analysis involves an estimate of the intrinsic value of a security by

evaluating the basic financial and economic facts about the company that issues the
security (Steve 2005). The assumption which forms the point of departure is that each
share has a definable economic worth generated from its present and future earning
capacity. The analysis does not encourage an investor to purchase or sell share on the
basis of tips.

Fundamental analysis has been found inadequate in predicting share price

movements which are recorded daily on the NSE. Such day to day fluctuation usually
reflects the effects of the market forces at a given time, investors’ confidence, interest
rate, investor’s hunches etc on share price.

2.6.2 TECHNICAL ANALYSIS

This analysis deals with the action of the market itself. it is the science of
recording usually in graphic form, the actual history of trading i.e. prices changes and
volume of transactions in a particular stock or in the averages and then deducing the
probable future trend. These analysts believe that prices are determined by supply and
demand. It is concerned with the identification and analysis of prevailing market
trend. They lay emphasis on price movement resulting from a number of factors
xxxvi
which could be real or imaginary, rational or irrational etc. all of which are
automatically weighed and synthesized in producing the process at which buyers and
sellers strike deals at the stock market.

Technical analysis is widely used among traders and financial professionals,

but is considered in academia to be pseudoscience. Tools used in technical analysis
includes; line chart and head chart etc. an example of technical analysis is the “
Darwin Theory” which attempts to establish trends in share value and channel in
trend.

2.6.3 MARKET CRITERIA (POTENTIAL PRICE)

If the stock is listed in a well organized stock, with a large volume of

transactions, the listed price will be close to the estimated value. This is called the
efficient market hypothesis.

Thus in addition to fundamental economic criteria, market criteria also have

taken into account market based valuation. Valuing a stock is not only to estimate its
fair value, but also to determine its potential price range, taking into account market
behavioral aspects.

2.7 THE DIVIDEND THEORIES

Dividend decision of a firm is one of the crucial areas of financial

management. The dividend decision in corporate finance is a decision made by the
directors of a company. It relates to the amount and timing of any cash payments
made to the company’s stock holders. The decision as stated by Pandey (2005) is an
important one for the firm as it may influence the financial structure and stock price of

xxxvii
the firm. In addition, the decision may determine the amount of taxations that
stockholders pay.
The important of dividend decision in term of making an investment decision
has been debated by many writers. There are basically two divergent schools of
thought as regard to this. At one and of the Spectrum, William (1978) argues in favour
of dividend as a determinant of corporate value. This view is identical to that held by
Graham, Odd and Cottee (2006) when they said that the typical investor would most
certainly prefer to have his dividend paid and let tomorrow take care of itself.
In the same view, Jahnke (1995) contents that earnings growth is actually a
surrogate for what really matter, namely dividend growth. All these view re-interate
the relevance of the dividend decision in Investment decision making. At the other
end of the Spectrum is the argument that dividend are Irrelevant in the determination
of stock price and the value of firm. Modigliani and Millar (1978), they show that
since it is possible to state the value of the firm without dividend, then dividend has
no effect on the value of when external financing is used.
Brown (1978) said that “an average, the market correctly anticipated earning change
even before their announcement. White beck and Kisor (1978) argue that investor
should look forward to the future earnings growth of common stock rather than past.

2.7.1 FACTORS THAT INFLUENCES A FIRM’S DIVIDEND DECISIONS

There are three main factors that may influence a firm’s dividend decisions, these
are:-
i) Free cash flows
ii) Dividend clientele and
iii) Information signalling.

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i) FREE CASH FLOW THEORY OF DIVIDEND: According to Pandey
2005, the payment of dividend is very simple, the firm simply pays out, as
dividend, any cash that is surplus after its invest in all available positive net
present value projects. Criticism of the theory is that it does not explain the
observed dividend policies of real world companies. Most companies pay
relatively consistent dividend from one year to the next and managers tend to
prefer to pay a steady increasing dividend rather than paying dividend that
fluctuates dramatically from one year to the next. These criticisms have led to
the development of other models that seek to explain the dividend decision
(see, Brigham, 1995).

ii) DIVIDEND CLIENTELE: A particular pattern of dividend payments may

suit one type of stockholders more than another. A retiree may prefer to invest
in a firm that provides a consistently high dividend yield, whereas, a person
with a huge income from employment may prefer to avoid dividends due to
their high marginal tax rate on income. If Clientele exists for a particular
pattern of dividend payment, a firm may be able to maximize its stock price
and minimize its cost of capital by catering to a particular clientele; this model
may help to explain the relatively consistent dividend policies followed by
most listed companies. ( Okafor, 1983), According to the clientele effect
theory of dividend policy, the tendency of a firm to attract the type of investor
who likes its dividend clientele is that investors who do not need to rely upon
the firm to provide the pattern of cash flows that they desire. An investor who
would like to receive some cash from their investment always has the option of
selling a portion of their holding. This argument is even more cogent in recent
times with the advent of very low cost discount stockholders. Thus, it remains
possible that there are taxation based clientele for certain types of dividend
policies (Pandey, 2005).
xxxix
iii) INFORMATIONAL CONTENT OR SIGNALLING: Investor’s regards
dividend changes as signals of management earning potentials. The model was
developed by Ezra in 1983. It suggests that dividend announcements convey
information to investors regarding the firm’s value prospects (Ezra, 1983). He
say many earlier studies had shown that stock prices tend to increase when an
increase in dividend announcement and tend to decrease when a decrease or
omission is announced. Therefore, Ezra pointed out that this is likely due to
the information content of dividends or when investors have complete
information about the firm, they will look for other information that may
provide a clue as to the firm’s future prospects and also managers have more
information than investors about the firm and such information may inform
their dividend decision. It could be seen therefore that when managers lacks
confidence in the firm’s ability to generate cash flows in the future, they may
keep dividends constant or possibly even reduce the amount of dividends paid
out, thus, conversely, managers that have access to information that indicates
very good future prospects for the firm are more likely to increase dividends
(See, Ezra, 1963)
In buttressing the signalling effect of dividend decision of the firm, Pandey
(2005) say investors can use the knowledge about managers’ behaviour to inform their
decision to buy or sell the firm’s stock, bidding the price up in the case of a positive
dividend surprise or selling it down when dividends do not meet expectations. This
view was supported by Miller and Rock (1985). Thus, this in turn may influence the
dividend decision as managers know that stockholders closely watch dividend
announcements looking for good or bad news. As managers tend to avoid sending a
negative signal to the market about the future prospects of their firms, this also tends
to lead to a dividend policy of a steady gradually increasing payment (See, Bhaumik,
2007). In general, as states by Pandey (2005) the dividend decision is usually taken by
considering at least the three questions of how much excess cash is available?, What
xl
do our investors prefer?, And what will be the effect on our stock prices of
announcing the amount of the dividend? Therefore, as confirm by Patra (2005), the
dividend decisions is the major decision area of financial management, therefore, a
firm is to decide what portion of earnings would be distributed to the shareholders by
way of dividend and what portion of the same would be retained in the firm for its
future growth. Therefore, Patra confirms that dividend and retention are desirable but
they are conflicting with each other. Therefore, from the forgoing, a finance manager
should be able to formulate a suitable dividend policy which will satisfy the
shareholders without hampering future progress of the firm.

2.8 RELEVANCE OF DIVIDEND POLICY

Scholars belonging to school of thought argue that dividend policy is relevant
under condition of uncertainty that investor is not indifferent as to whether he receives
his return on investment in dividend income or in determining the market value of a
share.
Gordon (2000, pg 96-105) came up with a models that relates the market value
of firm to its dividend policy. He believes that uncertainty increase with futurity
because that further one looks into the future more certain dividend becomes. His
dividend capitalization model asserts that the market value of a share is equal to the
present value of an infinite stream of dividend to be received whereby the dividend
per share is expected to grow when earning are retained.
Gordon’s model was based on the following assumptions:
1. The firm is an equity firm and it has no debt; no external financing available;
the internal rate of return of the firm is constant
2. The firm and its streams of earnings are perpetual; the appropriate discount rate
for the firm remains constant
3. Corporate taxes does not exist
4. Constant retention and the cost of capital are greater than its growth rate.
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 Gordon model’s conclusion about the dividend policy are similar to that of the
Walter’s model, this similarly according to Pandey (2005) is due to the similarities of
assumptions that underline both model, thus, the Gordon’s model suffers from the
same limitations as the Walter’s model.
P = E (1 – b)
K – br
Where El = Current earning
B = Dividend policy
K= All equity firm’s cost of capital
R = Internal profitability
Through this model, Gordon established that the market value of the share is
not affected by dividend policy When r = k. This is deficient because during
uncertainty investor are generally risk –averse and attach less risk to current as
opposed to future dividend or capital gain because dividends and regular certain
returns while future capital gain are less certain.

The bird-in-hand argument of krishman (1933) was that a firm dividend policy is
relevant. This view is based on the assumption that under conditions of uncertainty,
investors tend to discount near dividends at a higher rate than they discount near
dividends. Investors thus behaving rationally are risk averse and therefore, have a
preference for near dividends to future dividend (Pandey, 2005).

The logic underlining these bird-in-hand arguments can be captured in the words of
Krishman (1933), when he said;

xlii
 If two stock with identical earnings record, and prospects, but the one paying
a larger dividend than the other, the former will undoubtedly command a
higher price merely because stockholder prefer present to future values.
Myopic vision plays a part in the price making process. Stock holders often
act and upon the principle that a bird-in-hand is worth two in the bush and
for this reason arewilling to pay a premium for the stock with the higher
dividend rate. Just as they discount the one with the lower rate
(See Pandey, 2005:284).

The above statement was confirmed by Graham and Dodd, et al (1994:327) have a
similar view when they state;
“The typical investor would most certainly prefer to have his dividend today
and let tomorrow take care of itself. No instances are on record in which; the
withholding of dividends for the sake of future profits has been hailed with
such enthusiasm as to advance the price of the stock. The direct opposite has
invariably been true” (See. Pandey, 2005:385).
Myron Gordon also expresses the bird-in-hand argument more convincingly and in
formal forms. According to him, uncertainty increases with futurity, that is the further
one looks into the future, the more uncertain dividend becomes, accordingly, when
dividend policy is considered in the context of uncertainty, the appropriate discount
rate cannot be assumed to be constant (see, Pandey,2005). In fact according to him, it
increases with uncertainty and investors prefer to avoid uncertainty and would be
willing to pay higher price for the share that pays the greater current dividend all other
things held constant.
Gordon concludes that dividend policy affects the value of the share as
investors value a Naira of dividend income to a Naira of capital gains income. This
investor prefer dividend above capital gains because dividend are easier to predict less
certain and less risky and are therefore discounted with a lower discount rate.
xliii
 Walter J. E. (1963: 175) said that the choice of dividend policies almost always
affect the value of the enterprises. His model, one of the earliest theoretical works
shows the importance of the relationship between the firm’s rate of return and its cost
of capital in determining the dividend policy that will maximize the wealth of
shareholders.
Walter’s model was based on the following assumptions according to Francis (1972)
1. The firm finance all investment through retained earnings, that is, debt or new
equity is not issued.
2. The firm’s rate of return and its cost of capital are constant.
3. All earnings are either distributed as dividends or reinstated internally
immediately
4. There is a constant EPS and DPS
5. The firm has a very long or indefinite life (See Pandey, 2005).

According to Ezra (1963), in Walter model dividend policy is a financial decision

but when the dividend policy of a firm is treated as a financing decision, the payment
of cash is a passive residual.
In line with this, market price per share can be calculated.
P = D + r (E – D) / k
K k
Where P = Market value per share
D = Dividend per share
E = Earning per share
R = Internal rate of return
K = Cost of capital
In Walter’s model, the optimum policy depends on the relationships between the
firm’s internal rate of return r and cost of capital (k). This idea can further be
perceived in the three categories.
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 First, there are individual investors in low brackets. They are likely to prefer
some dividend if they desire current income or favour resolution of uncertainty.
Second, pension funds pay no taxes on either dividend or capital gain. Because
they face no tax consequences, pension funds will also prefer dividend if they have a
preference for current income.
Finally, company can exclude at least 70% of their dividend income but cannot
exclude any of their capital gain. Thus, company would prefer to invest in high
dividend stocks, even without a desire to resolve uncertainty or a preference for
current income.

SOME AUTHOR HOWEVER HAVE CRITIZED WALTER MODEL

Pandy M.I (1999: 277) holds that a firm cost of capital or discount rate k, does
not remain constant but changes directly with the firms risk so that present value of
the firms income moves inversely with the cost of capital.
Lante, Tuttle et al (1970:41) said that reduction in uncertainty occurs because
dividend unlike any given period earnings tend to be an indicator of long term future
earnings as it is the fundamental basis for a stock present value. On this basis, they
agree with Gordon that due to uncertainty investors tend to discount potential
dividend or capital gains return at larger rates than returns in the form of current
dividend.
Brook E. (2006:90) and Horin B. (1997: 342) argue against bird – in – hand theory on
the basis that risks are transformed from the incumbent stockholders to new ones
whenever firms sell stock and pay dividend.
Capital gains have been argued to have advantage of being taxed less than dividend
income. Tax on capital gains is a terminal event which implies that tax is at the will of
investors. This generates tax savings which is ploughed back into the firm for
reinvestment.

xlv
 Consequently, firms are encouraged to retain more earning than paying out
dividend investors with high tax brackets will buy more shares in the turns that pay
low tax resulting in the rise of stock value of such firms.
Horne. J. Van (2000:333) argued that when investors are tax exempt or pay low tax,
the advantage of capital gains over dividend income is cost such investors go for firms
that pay higher dividends.
What is exploited when earning are retained ploughed back into the firm are
flotation cost, postage cost and dividend payment accounting which made internal
financing cheap and external financing.

2.8.1 IRRELEVANCE OF DIVIDEND POLICY

Miller and Modigliani (MM, 1961) are the chief advocate of the dividend
irrelevance argument, they say under a perfect market situation, the dividend policy of
a firm is irrelevant, as it does not affect the value of the firm. They argue that the
value of the firm depends on the firm’s earnings that results from the investment
policy, then when investment decision of the firm is given, dividend decision which is
the split of earnings between dividend and retained earnings is of no significance in
determining the value of the firm. This theory was propounded by Modigliani and
Miller (1961: 411-433). “MM’’ came up with the assertion that dividend policy of a
firm is irrelevant as it does not affect the wealth of the shareholders rather it is the
investment policy of the firm is dependent on the firm’s earnings which result from its
investment policy so when investment decision of the firm is given, dividend decision
– the spilt of earning between dividends and retaining earnings is of no significant
determining the value of the firm. This argument depends on number of key
assumptions.

xlvi
 • There are neither taxes nor brokerage fees and no single participant can affect
the market price of the security through his or her trade. An economists say the
perfect market exist when these condition are met.
• All individual have the same belief concerning future investment, profit and
dividend. These individual are said to have homogenous expectation.
• The investment policy of the firm is set ahead of time and is not altered by
change in dividend policy.
• Risk of uncertainty does not exist

• That the firm has investment policy.

Therefore, the MM (1961) dividend irrelevance proposition states that changes in
dividends are offset one-for-one by changes in proceeds from net new issues of
securities, so that investment and earnings are unaffected or does not affect equity
valuation (Leroy, 2005). Recently, these irrelevance propositions have been
questioned by De Angelo and DeAngelo (2007) who assert that dividends pay out
rules like investment plans can be sub optimal. They specifically claimed that the
dividend irrelevance proposition is true only in environment that are simplified in a
way that is not generally appreciated. They assert that in a more general setting, the
dividend policy is relevant inexactly the same sense as investment policy is relevant.
Thus they exist feasible dividend policies that do not maximize the net present value
of the dividend stream and that firms pay dividend at level that are too relative to its
dividend pay capacity, thus, the value of the firm will be strictly below the minimum
attainable value just as if the firm have adopted a negative NPV investment project. A
similar point was made by Ross (2005)

LIMITATION TO THE ASSUMPTION

xlvii
 Their assumption about non- existence of taxes is unrealistic because investors
are compelled to pay taxes on dividend paid. Normally such taxes are already
deducted before delivery from the dividend as dividend warrants which shareholders
get periodically.

Furthermore, MM argument regarding both internal and external financing sources

being equal is untrue. Retained earnings being internal source, do not attract flotation
cost as does the external sources.

Modigliani and Miller assertion that wealth of shareholder will remain constant
whether or not dividend is paid. For example in the absence of dividend, a shareholder
decides to sell his shares, she has to pay brokerage fee and may even suffer some
inconveniences which may not be easily evaluation in monetary term. Modigliani and
Miller irrelevance principle does not hold in the presence of personal tax.

Three points for a regime of personal taxes.

• A firm should not issue stock to pay a dividend

• Managers have an incentive to seek alternative uses for fund to reduces
dividends.
• Through personal taxes militate against the payment of dividends, these taxes
are not sufficient to head to eliminate all dividend.

Modigliani and Miller realized that there is considerable evidence that change in
dividend policy do influence stock prices. An increase in dividend conveys a type of
information to the shareholder namely, that management expect future earnings to be
higher similarly a cut in dividends in viewed as conveying unfavorable information
about the firms earning prospect. Modigliani and Miller argued that informational
content of dividend policy influences share prices and not the patterns of dividend
payment. Modigliani and Miller said that each firm tends to develop its own clientele

xlviii
of investors. For investors who seek capital gain income will be attracted to low
dividend securities while investors who favour large current income that is high
dividend will be attracted to high dividend payout securities. Thus a firm that changes
its dividend policy could loose some shareholders to other firm with a more appealing
dividend policy. This in turn may cause a temporary reduction in the price of the
firm’s stock. Other investor who prefers the new adopted dividend policy will view
the firm as being undervalued and will purchase more shares.

From empirical evidence, Hwin .B. (1987) observe payment of dividend to be

of no significance in some United State of America (USA). Computer industries paid
virtually no dividend. He said that if payment of dividend is of any significance to the
value of a firm, firm like prime computer will not agreed to accept such restriction as
non- payout of dividend with its creditors. Considering the information, Hankinson .J.
(1987) postulate that whether informative or not dividends serve no useful role when
investors are substantially homogenous have additive utility and market are complete.

Brealey, Myers et al (1994:331-352) said that because investors do not need

dividends to get their hands on cash in a perfect market, they will not pay higher
prices for the shares of firms with high payout. This is because such investors can
home- make- dividend. They posited that firms ought not to worry about dividend
policy but that they should allow dividend policy but that they should allow dividend
fluctuate as a by-product of their investment and financing decision.

Hirts, G.A, Block et al (1983: 141) said that dividend increase generally
increased common stock value a company with questionable performance even
without earning, dividend may not encourage investors. He agreed that dividend is
irrelevant at the development and growth stages of firm because investor at the state
purchase shares for capital gain based on expected growth. Considering dividend
policy in isolation of borrowing and investment decisions. Scolt B. (1988: 41) argued

xlix
that the effect of dividend policy on stock values will be unequivocally state to be of
no relationship with change in price of common stock.

ANALYSTS VIEW ON PAYING LOW LEVEL OF DIVIDEND

Analysts take the view that paying low level of dividend does not result in
under-valuation of the firm; the value of a firm with a given current capital is the same
under low or zero future dividends as high future dividend. This view is known as the
Neutrality of dividend policy and is held by Black and Scholes (1976). Black and
Scholes argue that shareholders trade-off the benefits of dividend against the tax
losses. Based on this trade off, that shareholders make, they would be classified into
three clienteles; a clientele that consider dividend are always good; clientele that
considers dividends are always bad and clientele flat is indifferent to dividend.

Pandey (2005), most shareholders in high tax brackets may belong to high payout
clientele since in their case; the tax advantage may outweigh the benefit of dividends.
On the other hand, shareholders in low tax bracket may fit into payout clientele as
they may suffer marginal tax disadvantages of dividend while tax-exempt investors
are indifferent. Between dividends and capital gains, since they pay no taxes on their
income. So, the supply of dividends and demand for dividend matches, there will be
no gain if a firm changes its dividend policy, the investors have already made their
choices or there exist opportunities for shareholders to shift from one firm to another.

2.9 THE RESIDUAL THEORY OF DIVIDEND POLICY

The word “Residual” implies left over and residual theory states that dividends
should paid only out of left over earning.

l
Ozoani, G.C. (1998, pg.132), defined the residual theory of dividend policy based on
the premise that investors prefer to have a firm retain and reinvest earnings rather than
pay them out in dividends, if the rate of return of the firm can earn on reinvested
earning exceeds the rate of return, investors can obtain for themselves on other
investments of comparable risk.

A firm using the residual theory of dividend would follow these four major steps:

• Determine the optimal capital budget

• Determine the amount of equity required to finance the optimal capital budget
recognizing that the funds used will consist of both equity and debt to presume
the optimal capital
• To the extent possible use retained earnings to supply the equity required.
• Pay dividend only if more earnings are available than are needed in support of
the optimal capital budget.

2.10 SECURITIES VALUATION TECHNIQUE

Okafor, F.O. (1993) defined Security Valuation models as the process of

security evaluation which seeks to determine whether a given security is appropriately
priced or mis-priced. The basic approach to determine the intrinsic value of a security
and compare such a value with the market price.

The intrinsic value of a security reflects and is indeed determined by what most
investors expect to be the ultimate financial consequences of owning it. This depends
on the nature and amount of benefits expected the price of the security and its
expected level of risk. Non – financial consequences have no direct relevance in the
valuation process, expect in so far as they elucidate the ultimate evaluation results.
This basic idea governs security valuation theory, whether it is applied to bond

li
valuation or to the evaluation of variable income securities such as equity stock.
These include:

2.10.1 DISCOUNTED CASHFLOW

This is the widely accepted approach as the appropriate way of valuing a

company/stock. It calculates the present value (PV) of a company’s free cash flow to
determine its intrinsic value. This approach is more adaptable to the valuation of a
firm with high level of asset and low level of uncertainty about future cash flows (Joss
and Zhdaous 2007). Cash flows available for discounting include dividend, fee cash
flow to equity and the firm. The discount rate could be either cost of equity, cost of
debt or the weighted cost of capital (WACC).

The advantage of the DCF is that it can be used with a wide variety of firms
that don’t pay dividends and even companies that pay dividend. Companies using this
model must have predictable free cash flows which must be positive. The formula is;

V =∑ FCF
(1 +K) 2
Where v= present value of security
K = cost of capital/ capitalization rate
FCF = free cash flow.

2.10.2 ASSEST VALUATION TECHNIQUE

This method of valuation equates the value of shares to the net tangible assets
of the firm divided by the number of share. The difficulty in the use of this method
lies in ascertaining the assets value for inclusion in firm’s new assets. All tangible
assets should be excluded unless they have a marketable value e.g. patents or copy
right which be sold. Surplus value arising from recent revaluation reduced where such
revelation were not professionally certified.

lii
The asset valuation model is expressed as

Vo = A – L

Where, VO = Value of share A= market value of share

L = liabilities N = number of existing shares

The steps for using this method could be summarized as;

i) Value the assets of the company

ii) Establish value of outstanding liabilities

2.10.3 DIVIDEND VALUATION MODEL

The dividend valuation model recognizes dividends as the critical variables

which determine the investment worth of equity stock. In specific terms, the appraised
value of equity stock, V, is presumed to be the sum of the present value of its stream
of dividends, d, capitalized at a rate, r, appropriate to the risk level of the firm. It is
derived directly from equation.

VO = d1 d2 d3 d

(1+ r) + (1 + r)2 + (1+r)3 + ( 1+r) α……(1)

The implicit assumption is that equity stock is held in perpetuity (n= α and
therefore, that owners would expect no other income apart from dividends. Dividend
valuation model is conceptually inappropriate for the investor with limited horizon i.e.
liii
anyone who plans to sell the stock after sometime. For such a person, the resale price
of the stock at the end of the holding period constitutes an additional source of value.
If the stock will be held for three years.

VO = d1 d2 d3 p3

(1+ r) + (1 + r) 2 + (1+r) 3 + (1+c)

Where P3 is the expected price of the share at the end of the third year.

These two equations do not contradict themselves. If the market is efficient and
valuation process consistent then.

P3 =V3 d4 d5 dα

(1 + r) 4 + (1+r) 5 + (1+r) α

It follows the equation 1 is equal to equation 2 because P3 =V3 is defined in equation

3.

2.10.4 EARNING VALUATION MODEL

This model uses the stream of expected earnings rather than dividends. Apart
from the difference, the model is similar to dividend valuation model.

Vo = E1 - l1 E2 - l2 + (E α -1) α

(1+r) (1+r) 2 (1+r) α

Where Vo =appraisal value per share

E+ = earnings per share per period

1+ = retained internal investment per share during period +

r = appropriate capitalization rate.

liv
It is observed that this model is directly related to dividend valuation model because
the effected dividend per period (d) is equal to total earnings minus retained for the
reinvestment (E-1)

Investor with finite horizons applies in earning valuation. i.e.

VO = E1 - l1 + E2 - l2 + (E n -1n) + Pn

(1+r) (1+r) 2 (1+r) n (1+r)

2.11 DIVIDEND POLICY PAYMENT PROCEDURES

Dividend payment is an important factor in the performance of a firm

that its effect on the price of the firm’s shares has generated much. Dividends
are those earnings which are distributed to shareholders. Pandy M.I (1979
:277-295) said that the issue that dividends are irrelevant I not correct once we
modify the assumptions underlying this view to consider the realities of the
world he asserted that every firm follows some kind of dividend policy of most
of the firm is to retain a portion net earnings and distribute the remaining
amount to shareholders.

Some question relating to dividend policy of a firm are:

1. What are the performance of shareholders, do they want dividend income or

capital gain
2. What are the financial needs of the company
3. How much should be paid out a dividend. What are the constraints on paying
dividend
4. Should the company follow a stable dividend policy?

lv
 5. What should be the form dividend stability of dividend refers to the amount
paid out regularly, stability of dividends is considered as a desirable policy by
the management of most companies, shareholders also generally favour this
policy and value stable dividends higher than fluctuating ones. Stable dividend
tends to have positive impact on the market price of share all other things been
equal.

Some forms of such stability are:

2.11.1 CONSTANT DIVIDEND PER SHARE

Some companies pay a fixed amount for share as dividend every year
irrespective of the fluctuations in the earnings. This policy does not imply that
the dividend per share will never be increased. In a situation where a company
reaches new level of earnings and expects to maintain it, the annual dividend
per share may be increased.

2.11.2 CONSTANT PERCENTAGE OF NET EARNING

The percentage of earnings paid as dividend is called payout ratio. A

high payout ratio means more dividend and less funds for expansion and
growth. Low payout on the other hand results into more growth.

Some companies follows a policy of constant ratio, that is, paying a

fixed percentage of net earnings every year with this policy the amount of
dividend will fluctuate in direct proportion to earnings.

lvi
2.11.3 SMALL CONSTANT DIVIDEND PER SHARE PLUS EXTRA
DIVIDEND

The amount of dividend I set at a high level under the constant dividend
per share policy. This policy is very common with companies with stable
earning. For companies with fluctuate earnings, the policy to pay a minimum
dividend per share with a step – up feature is quite popular. The small amount
of dividend is fixed to reduce the possibility of ever missing a dividend
payment.

By paying extra dividend in periods of prosperity an attempt is made to

prevent investors from expecting that the dividend represents an increase in the
established dividend amount of dividend regularly without a default and allows
a great deal of flexibility for supplementary the income of shareholder only
when the company earning are higher than the usual without committing itself
to make longer payments as part of the future

2.12 DIVIDEND PAYMENT TIMELINE

Dividend in publicly traded firms are usually set by the board of

directors and paid out to stockholders a few weeks later. There are several key
dates between the time; the board declares the dividend until the dividend is
actually paid.

1. Declaration Date: This is the first date, the date on which the board of
directors declares the dividend that will pay for that quarter (or period). This
date is important because by announcing its intent to increase, decrease or
maintain dividend, the firm convey information to financial markets. Thus, if

lvii
 the firm changes its dividends, this is the date on which the market reactions to
the change occur.
2. Ex- dividend date: At that time, investors must have bought the stock to
receive the dividend because the dividend is not received by investors buying
stock after the ex – dividend date, the stock price will fall on that day to reflect
the loss. To avoid inconsistencies created by such delay, brokerage firm set the
ex-dividend date four business days prior to the record date. Anyone
purchasing a share on or after the ex-dividend date does not receive the
dividend. Prior to the ex-dividend date stock is said to be trading cum-dividend
(with dividend subsequently, it trades ex- dividend.
3. Holders of the record date: At the close of the business a few days after the
ex – dividend date, the company closes its stock transfer books and make up a
list of the shareholders. These shareholders will receive the dividends. There
should be generally be no price effect on this date.
4. Dividend payment date: It involves mailing out the dividend check on the
payment date. In most cases, the payment date is two or three weeks after the
holder of record date.
Although stockholders may view this as an important day, there should
be no price impact on this day either.

ILLUSTRATION OF DIVIDEND TIMELINE

Announcement date Ex- dividend day Holder of record day Payment day
2 to 3 weeks 2 to 3 days 2 to 3 weeks
Board of directors announce Stock has to be bought Company closes book and Dividend is paid to
quarterly dividend per share by this date for investor records owner of stock. shareholder.
to receive dividend

2.13 MEASURES OF DIVIDEND POLICY

lviii
 Dividend policy can be measures in two different ways:

1. Dividend yield
2. Dividend payout.
1. Dividend yield: Dividend yield relates to dividend paid to the price of the
stock.
Dividend yield = Annual dividend per share + price per share.
The dividend yield is important because it provides a measure of that
component of the total return that comes from dividend with the balance from
price appreciation.

Dividend yield + price appreciation= Expected return on stock.

Some investors use the dividend yield as a measure of risk and as

investment that is they invest in stocks high dividend yields. Stocks with high
dividend yields after adjusting for market performance and risk excess returns.

2. Dividend payout ratio: Dividend payout ratio relates dividend paid to earning
of the firm. The payout ratio is used in number of different setting. It is used in
valuation as a way of estimating dividends in future period because most
analysts estimate growth in earnings rather than dividend.

Second the retention ratio. The proportion of the earning invested in the
firm. Retention ratio= 1- dividend payout ratio is useful in estimating future
growth in earning than firms with lower retention ratios (higher payout ratio).

Third, dividend payout ratio tends to follow the life cycle of the firm
starting at zero. When the firm is in high growth and gradually increasing as the
firm mature and its growth prospects decrease.

Dividend payout ratio = Dividend

lix
 Earning

2.14 FACTOR INFLUNENCING DIVIDEND POLICY

Before dividends are actually declared, there are a lot of factors influencing the
decision of a firm. Such factors could be seen in the following areas:
1. LIQUIDITY: This is a very crucial factors in dividend decision. As dividend
represent a cash out flow, the greater the cash position and overall liquidity of a
company, the greater its ability to pay of dividends. Here, a distinction could be
made between a mature and growth company. It is believed that a mature
company is generally liquid and is pay a large amount of dividends. Such a
company has less investment opportunities, the fact that their funds are not tied
up in permanent working capital and therefore a sound liquidity position.

A growing firm faces the problem of liquidity, such a firm might be

profitable but it still needs fund for expanding activities and permanent
working capitals. The insufficient cash or pressures on liquidity in case of
growth firm might be limiting factors to the ability of management to declare
dividend

2. CONTROLS: The aim of maintaining control over the company by the

existing management group or the body of shareholders can be an important
variable in the company’s dividend policy. Payment of large dividend affects
the company’s cash position. The result of this will be issue new shares to raise
funds to financial investment programmes. A situation where by the existing
shares do not or cannot buy the additional shares will result in division of
control. The payment of dividends may be with hold and earning may be
retained to finance the firms investment opportunities under these situations.

lx
3. NATURE OF SHAREHOLDERS: The shareholder are the owners of the
company in a closely held companies, management usually knows dividend
desires of the share holders and may act accordingly. The firm can establish a
low dividend payout if most share holders are in a high tax bracket and prefer
capitals gains to current income. The low pay out will of course depends on the
availability of profitable investment opportunities in which to employ retained
earnings. In a widely held company, it is a formidable task to know the
dividend desire of share holders.

4. INVESTMENT OPPORTUNITIES: A firm that retains earning would only

be justified if there is a profitable investment opportunity. Growth firms
normally have profitable investment opportunities therefore they favour
retention of earning. Matured company that does not have much investment
opportunities will normally declare dividend stability of earnings.

According to Horin Ben (1987:342) dividend must be set at a level that the
firm can afford in the long run. Thus dividend should be lower, the higher the
volatility of a firms earning.

5. INFLATION: With rising prices funds generated from depreciation are not
sufficient to replace and/or restore existing assets as they wear and become
obsolete. Weston and Copeland et al (1988:552) posited that tax position of a
firm’s owner greatly influences the dividend payout legal rules. They moreover
agree that law plays a major part in determining the legal rules concerning
dividend payment. The described these law as

i. Net profit rule

ii. The capital impairment rule
iii. The solvency rule

lxi
 iv. Tax on improperly accumulated earning. They also argue that various
governments have from time imposed restrictions on the amount of
profit which companies may distribute as dividend.
6. RESTRICTION IN LOAN AGREEMENTS: Creditors order to protect their
own interest when the firm is faced with liquidity or profitability difficulties
may put restrictions on dividend payments. As such the firm agrees as part of a
contract with a lender to restrict dividend payment. As an example, a loan
agreement may restrict payment of dividend as low as the firms debt- equity or
liquidity ratio does not conform with certain stipulated standards or may
require the firm to pay dividends only when some amount of current earnings
has been transferred to as sinking fund established to retire debt.
Based on these factors, firms develop models with which to determine the
amount of earning the retain and amount for dividends pay out. Pioneering
work in this direction was done by linter john (1994:48) his model was based
on current earning and target pay out ration of current dividend
7. OWNER CONSIDERATIONS: In establishing a dividend policy the primary
concern should be how to maximize the firm’s owner wealth over the long run.
Although it is impossible to establish a policy that will maximize each owner’s
wealth the firm must establish a policy that has a favourable effect on the
wealth of the majority of the owners. Three factors that must be considered are
the tax status of the owners their investment opportunities and dilution of
ownership.
8. MARKET CONSIDERATION: In establishment dividend policy, it is
important to consider certain behavioral aspect of the securities market. Since
the wealth of the firm’s owners is reflected in the market price of the firm’s
shares, an awareness of the market probably response to certain types of
dividend policy. The market place views the firm’s dividend as a source of
information. The firm should attempt to develop a dividend policy that provides
lxii
 owners and prospective investor with positive information, therefore reducing
their uncertainty about the firm’s future success.
2.15 FACTOR INFLUENCING SHARE PRICE BEHAVIOUR IN THE
NIGERIA STOCK MARKET
The price at which a security can be bought or sold on the stock exchanges will
depend, as in other markets, on the relative strength demand and supply of that
particular security at a particular time. All sorts of influence affect the price of shares
through supply or demand. If business prospects are good the price of shares will
generally be high; if prospects are poor price will be low. The publication of a
company’s balance sheet will affect the price of its shares favorable or adversely as
the case may be.
Other factor which influence stock exchanges prices are such things as Bank
rate, change in the bank rate affect the price stock favorable or adversely when the
bank rate high or low.
Another factor is change in the government policy, the publication of foreign
trade figures or even rumors of impending political change. At the present day, there
are large institutional buyers in the market and their influence on price is considerable.
The Government broker intervenes in the gift edged market in order to
influence the rate of yield on government stocks, making use for this purpose of the
fund of those government department which have money to invest .if the aim is to
keep up the rate of yield on government stocks the broker will enter the market to sell
in order to reduce the price stock, if the aim is to keep down the rate of the yield he
will go into the market as a buyer in order to raise the price of stock. Thus, the rate of
yield on government stocks is largely determined by the government itself.

2.16 EFFECTS OF DIVIDEND POLICY ON REQUIRED RATE OF

RETURNS

Some of the effects of dividend policy on required rate of return are as follow:

lxiii
2.16.1 CAPITAL GAINS TAX RATE

Dividends are taxed at both federal and state government rates. Presently, the
tax and capital gain is generally limited to twenty percent. This makes wealthy
investors tend prefer capitals gain on dividends. To the extent that this factors is
important, Ks will be smaller, the lower the pay out, other things hold constant. Large,
publicly owned firms have stock holders whose tax brackets range from zero to about
sixty percent. This makes it difficult to accommodate all stock holders and thus
creates a problem for group of stock holders, should dividend policy be set.

2.16.2 STOCK HOLDERS DESIREE FOR CURRENT VERSE FUTURE

INCOME.

Ozoani G.C.(1998:135) stressed that some stock holders desire current

income, he used retired individual and university endowment fund as an example.
Other stock holders have no need for current investment income and simply reinvest
any dividend received, after first paying income taxes on the dividend income. If the
firm retains and reinvest income taxes on the in dividend income rather than paying
dividends, those stock holders who need current income will be disadvantaged. They
will presumably receive capitals gains but they will be forced to sell off some of their
shares to obtain cash.

2.16.3 RISK DIVIDEND VERSUS RISK OF CAPITALS GAIN

Some authors have argued the investors regard returns coming in the
form of dividend as being less risky than capital gains returns. On the hand, if
lxiv
 someone receives dividends then turns around and reinvest them in the same
firm or one of similar risk, there would appear to be of little difference in risk
between this operation and having the company retain and invest the earning in
the first place.

REFERENCES
Brealey R. and Mysers .S. (1994) The dividend Controversy, Principle of Corporate
Finance 2nd Edition Mc Graw-Hill.
Brigham, E.F. (1990) Foundational of Financial Management. 2nd Edition Hinsdale
Illinois, the Dryden press.
Collier P. A (1988) Common Stock, Financial and Treasury Management. Heinemann
publishing limited. Oxford.
Davies T. and Pain B. (2002) Business Accounting and Finance. Berkshire : Mc Graw
– Hill.
Dividend Online Etymology Dictionary Douglas Harper 2001 retrieved 2006.
Frankfurter M., George and Wodbob,G. (2003) Dividend Policy theory and practice,
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Graham, B.D.C and S. Cottles (1996) Security Analysis New York Mc. Graw - Hill

Gordon, M.J. (2000) The Investment, financing and Valuation of Corporation. R.D.
Irwin Inc.
lxv
Hirt G.A and Block S.B (1983) Economic and Industry Fundamental of Investment
and Strategies. Milnor’s Richard Dillinois Inc Illinois.

Horin, B. (1997) The dividend decision: Procedure Policy and Effect on Value
Essential of Corporate finance, Publishing House Boston, London.

James C. Van horne (200) Dividend and Valuation : Financial management and
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Kolb R.W and Rodriguez (1996) Financial Management 2nd Edition Cambridge.
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Ozoani G.C (1998) Basic of Financial Management and Analysis: Enugu, Veamark
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sPandy I.M (1999) Dividend Theories Financial Management: India, Vikas publishing
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Pandy I.M (2005) Financial Management 9th Edition Delhi Vikas publishing house
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Weston J.F and Copeland T.E (1988) Dividend Policy Management Finance. 2nd
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JOURNAL

Nigeria Companies and Allied Matters Act 1990 with all the amendments page 165 -
167.

Black F. and Scholes (1996) The Dividend Puzzle. Journal of Finance, volume 18 no
2, 264

Graham. and Dodd C.D ( 1994) Security Analysis, Principles and Technique
American Economic review volume 64

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Gordon, M.J.(1993) Optimal Investment: Journal of Finance volume XVIII NO 2 264
-272.

Linter John (1994) Distribution of Income of Corporation among Dividend Retained

Earnings and Taxes Quarterly. Journal of Economic Volume LXXXVIII page 48 –
95.

Miller M. H and Modigliani F. (1996) Dividend Policy, Growth and the Valuation of
Shares, Journal of Business, volume 34 page 411

Uzoaga W.O. and Alozieuwa J.U (1994) Dividend Policy in an era of Indigenation
Nigeria Journal of Economics and Social Studies. Volume XVI No 3 page 97-118

CHAPTER THREE

RESEARCH METHODOLOGY

The term “Research Methodology” described all activities involved in the

collection of all necessary data and information required for the research work or
project. Research Methodology refers to the arrangements of conditions for collection
and analysis of data in a manner that that aim relevance of the research purpose with
economy of procedure. Therefore the chapter further throws light on the procedure
that were followed, and the instrument used for collecting this data. i.e. research
design, source of data, method of data collection and population of the study. Other
issues that it will examine are sample size determination, statistical tools for data
analyst

3.1 RESEARCH DESIGN

lxvii
 In the view of Onwumere (2009:111), Research design is a kind of blue
print that guides the researcher in his or her investigation of problems.
Research design is the framework which specifies the type of data. It is the
basic plan for data collection and analysis of the study.

For the purpose of this study, ex-post design was used for the study. The
method is considered adequate, objective and most appropriate because it
helped the researcher to describe, examine, record, analyze,interpret and cannot
manipulate the variables that exit in the study

3.2 SOURCES OF DATA

In order to accomplish the goal of the research a earlier stated in this work, the
thesis is based on data drawn from secondary data.

SECONDARY DATA: The secondary source of data accounts for large

proportion of data collected for the purpose of this study. Since the research is
not empirical, it is based mainly on data research. Specifically the data
collection sources to be used for extracting secondary data for this study
include relevant documents, textbooks, journals, libraries, some unpublished
works related to dividend policy, some materials were obtained from the
internet and annual reports and account of the sampled companies were
obtained from the library of the Nigeria Stock Exchange at Onitsha branch.

3.3 METHOD OF DATA COLLECTION

According to Olannye P.A (2006) defined Data collection as a gathering

of relevant information for addressing the questions raised in the research and

lxviii
 the problem. Data collection method involves the basic definitions for the
concepts to be investigated specific wording of inquire to communicate these
concepts, delineation of environment in which the data will be collected,
specified field procedures and the design of instruments for recording the actual
data.

All the data for this study were collected from secondary sources precisely the
data were sourced as shown below:

• The companies market share value: The market share value for securities for
the period under the study 2005 -2010 were collected from Nigeria stock
exchange daily official list.
• Dividend per share, Earning per share and Shareholder fund for the period
under the study 2005 -2010 were collected from the annual report of the
companies.

3.4 POPULATION OF THE STUDY

According to Onwumere (2009), a population therefore represents a universe of

element with similar characteristics hence it is a census of all relevant elements and
may be finite or infinite.

The population of the study comprised of public quoted manufacturing firms

that are listed and registered with the Nigeria stock exchange at Onitsha which is forty
(40).

lxix
3.5 SAMPLE OF THE STUDY

Sample is a group of variables or items derived from a relevant population for

the purpose of analysis. It is derived or extracted from a population.

Determining the size of the sample (i.e. the number of elements constituting the
sample) from the population can be done in a number of ways; the researcher
employed the use of Yaro Yamani 1964 formula with 20% error tolerance.

N= n

1 + n (e) 2

Where N = Population

n = Sample size

e = Maximum acceptable margin of error

1 = Theoretical constant
In applying this formula in determining the sample size for this study, we substitute as
follows:
n = N
1+Ne2
n = 40

E = 20% (0.2) 2

N= ?

By substitute the formula

N= 40

1 + 40 (0.2)2

lxx
 N= 40

1 + 40 0.04

N= 40

1 + 1.6

N= 40

2.6

N = 15 companies

3.6 TECHNIQUE OF DATA ANALYSIS

Data collected in the course of this study were presented and analyzed using
suitable statistical tools. They were presented in tabular form and analyzed using the
Pearson product moment correlation coefficient correlation coefficient.

Pearson product moment Correlation coefficient is a statistical index employed to

measure the degree of association between variable.

Formula = n ∑xy - ∑x ∑y

n∑x2- (∑x2) x n∑y2- (∑y2)

DECISION RULE

lxxi
In testing of hypotheses

• If the value of the correlation coefficient (r) is greater than zero i.e. positive it
means that the variable correlated then by accept H1 and reject H0.
• If the value of the correlation coefficient (r) is less than zero (i.e. negative) or
equal to zero. It means that the variables are uncorrelated hence accept H0 and
reject H1.

3.7 MODEL OF SPECIFICATION

The Statistical model to be adopted for this research is Pearson product moment
correlation coefficient. It is defined as

Formula = n ∑xy - ∑x ∑y

n∑x2- (∑x2) x n∑y2- (∑y2)

Where r = correlation coefficient

n = number of observation

∑ = summation sign

x = independent variable

y = dependent variable

REFERENCE

lxxii
Churchill G. (1991) Marketing Research : Methodological Foundation, New York :
The Dryden press.

Olannye P.A (2006) Research method for business. “A skill building approach”.
Lagos: peen publication.

Onwumere J.U.J. (2009) Business and Economic Research Method 2nd Edition Enugu
: Vougasen limited publisher

CHAPTER FOUR

PRESENTATION OF DATA, ANALYSIS AND INTERPRETATION

4.0 INTRODUCTION

The focus of this chapter is on the presentation and analysis of data generated
through tested and analyzed the generated statistical data such as Pearson correlation
coefficient test in respect of the dependent and independent variables. The firms
under study are analyzed on a firm by firm basis as well as on aggregated as is
consistent with firms in the same industry or the industry (Brealey, Myers and Marcus
2004). The presentation and interpretation was concentrated on the discussion of the
magnitude and direction of the relationships between the dependent and independent
variables and as well as explaining whether value is created as a result of the firm’s
share value of dividend policy at a predetermined benchmark.

It must be stressed here however that the data presented and subsequently
analyzed and discussed are only those which bear direct relevance to the problem
and objectives of the study and which apparently are relevant to the hypothesis
formulated in this study. The aim was to draw conclusion on an appraisal of the
effect of dividend policy on manufacturing firms’ share value.

lxxiii
4.1 DATA PRESENTATION
The data utilized in this study are presented below. This includes earning per
share, dividend per share, market share price and shareholder funds of some
selected companies between 2005 to 2010.

4.1A GUINESS NIGERIA PLC

YEARS SHAREHOLDERFUND EPS DPS SP

2005 18,227,4442 412K 300K 80.77

2006 25,667,544 631k 300k 96.51

2007 31,638,842 784k 346k 136.45

2008 36,862,557 804k 450k 72.5

2009 31,524,707 918k 1280k 129.95

2010 34,199,119 931k 750k 180.01

Total 178,120,211 4480k 3426k 696.19

lxxiv
 Source: Annual report, Facts book, NSE daily Official list from 2005 -2010

EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price.

As shown from table 4.1, In 2010, the company had the highest shareholder rate of
34,199,119 while in 2005 was the lowest shareholder fund rate of #18,227,442. EPS
According to Patra (2005) is the reward of an investor for making his investment from
the book value figures of the firm. As shown in the table above, in the year 2010 had
the highest earning per share of 91k followed by in the year 2009, 2008 while in 2005
was the lowest earning per share of 412k. It should be noted that the figures are in
kobo. Dividend per share is a ratio that measures the amount of dividend payable to
shareholders on per share basis as a reward for their investment in the firm.
From the table, it shows that most companies with high earning per share also
had a high dividend per share while the lowest dividend per share is in both 2005 and
2006.
In share price value, the highest price is in the year 2010 while in 2008, the price is
low which is 72.5. The price was fluctuating.
4.1B PATERSON ZOCHONIS INDUSTRIES PLC (P.Z)
YEARS SHAREHOLDERFUND EPS DPS SP

2005 21,925,758 127k 75k 12.11

2006 28,808,462 127k 69k 25.00

2007 30,567,446 138k 71k 26.89

2008 32,714,196 124k 62k 11.97

2009 35,565,450 152k 68k 24.50

2010 38,707,544 177k 86k 33.00

Total 188,288,85 845k 431k 133.47k

lxxv
 Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price.
As shown in the table 4.1B, the company had the highest shareholder fund in the
year 2010 which is 38,707,544. In 2005, the shareholder fund was the lowest which is
21,925,758. In earning per share, in the year 2010 was the highest reward. In the year
2005 and 2006 the earning per share was the same while 124k was the lowest in the
year 2008. In dividend per share and share price value, the value was the highest in the
same year 2010which is 86k and 33.00. In dividend per share and share price value, the
lowest price value is the same in the year 2005 which is 62k and 11.97.

4.1C NIGERIA BREWERIES PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 34,724,241 109k 65k 25.90
2006 36,249.331 144k 120k 37.25
2007 43,188,242 250k 159k 49.00

2008 32,229,181 340k 485k 40.85

lxxvi
 2009 46,570,094 369k 180k 53.02k
2010 50,172,162, 401k 354k 77.10
TOTAL 243,128,113 1613k 1363k 283.12
Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
From the table above, the shareholder fund in the year 2010 followed by the
year 2009 and 2007. Which was 50,172,162, 46,570,094 and43, 188,242 while the
lowest fund is in the year 2008 which is the sum of 32,229,181. In earning per share
and dividend per share, the year was the same and the figure was different which is
401k and 354k. it should be noted that the figure are in kobo. In the year 2005, the
earning per share is 109k and dividend per share is 65k in the same year 2010 which
was the lowest figure. In share price, the value is 77.10 which are the highest in the
year 2010 and the lowest value is 25.90 in the year 2005 which is 25.90. It should be
noted that the figure are in naira (#).

4.1d SEVEN UP BOTTLING COMPANY PLC.

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 4,409,059 233k 125k 21.80
2006 5,576,272 285k 125k 42.65
2007 6,280,351 238k 130k 46.50

2008 7,223,047 314k 150k 40.85

2009 7,984,017 298k 150k 29.40

lxxvii
2010 8,973,770 369k 175k 21.80

TOTAL 40,446,519 1737k 855k 203

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
In table 4.1d, the highest shareholder fund is 8,973,770 in the year 2010, while the
lowest shareholder fund is 4,409,059 in the year 2005. In Earning per share and
dividend per share, the values are 369k and175k in the same year 2010 while the
lowest price is 233k in the year 2005. Dividend per share, the value occur twice in the
year 2005 and 2006 which is 125k while in the year 2008 and 2009, the value still
occur twice which is 150k but the highest value is 175k in the year 2010. The share
price value is 46.50 which is the highest in the year 2007 followed by 42.65 while the
lowest value is 21.80 in the year 2005 and 2010 which the value occur twice.

4.1E UAC OF NIGERIA PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 15,228 127k 100k 14.17
2006 18,099 249k 100k 25.60
2007 27,354 219k 170k 44.53

2008 41,157 331k 200k 30.51

2009 37,487 314k 130k 36.50

lxxviii
 2010 32,330 199k 110k 39.50

TOTAL 171,655 1439k 810k 190.81

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
As shown in the table 4.1E of UAC plc in the year 2008, the shareholder fund is the
highest among the other years which is 41,157. In the same year 2008, earning per
share and dividend per share was the highest value, the value sometimes decrease and
increases. In the year 2005 to 2006 the dividend per share are the same which the
value is 100k. in the year 2007, the share price value which is 44.43 while the lowest
value is 14.17 in the year 2005

4.1F BERGER PAINT

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 883,924 (235.09)k - 4.11
2006 965,293 37k - 3.25
2007 1,077,878 52k - 8.40

2008 1,214,448 95k - 9.45

2009 1,343,073 89k - 3.20

lxxix
 2010 1,676,664 203k - 8.29

TOTAL 7,161,280 240.91k - 36.61

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
As shown in the table, in the year 2010 the value of shareholder fund and earnings per
share value are the highest value which is 1,676,664 and 203k.In the year 2005, the
earning per share is negative in value. The company (Berger paint) did not pay
dividend from 2005 to 2010 which is the payable to shareholders on per share basis as
a reward for their investment in the firm. In the year 2008, the company share price is
9.45 while the lowest value is in the year 2005 which is 4.11. In the year 2005,
Earning per share was negative in the value.

4.1G CADBURY PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 10,868,170 270k 130 48.00
2006 2,186,795 (428)k - 54.15
2007 34,822 (66)k - 34.00

2008 (3,012,770) (244)k - 30.85

lxxx
 2009 12,665,235 (84)k - 11.04

2010 12,944,281 38k - 29.56

TOTAL 7,161,280 (514)k 130 207.6

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
As shown from the table, In the year 2010, the value is 12,944,281 which is the
highest value followed by the year 2009 which is 12,665,235. The lowest value is in
the year 2006. In earning per share from the year 2006 to 2009, the value was negative
which makes the grand total have negative value. In the year 2005, the earning per
share was 270k while the lowest value was in the year 2010 which is 38k. In the year
2005, the dividend per share was paid 130k but in other year, dividend was not paid.
Share price value is 54.15 which is in the year 2006 and is the lowest value in the
shareholder fund and highest negative value.

4.1H FLOURMILL PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 11,650,705 130k 70 16.61
2006 16,203,839 112k 85 63.50
2007 22,966,212 259k 120 78.80

2008 31,926,430 278k 100 40.62

2009 34,185,607 145k 50 37.99

lxxxi
 2010 49,852,077 783k - 72.01

TOTAL 166,784,870 1707k 425 309.53

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
From the table, the highest shareholder fund is in the year 2010 which is
49,852,077. In the same year, earning per share is 783k. In the year 2007, dividend per
share is 120k which is the highest value among other years. In the year 2010, the
company did not pay dividend per share. The share price value is 78.80 in the year
2007 which is the highest value followed by the lowest value in the year 2005 which is
16.61.

4.1i GLAXOSMITHKLINE
YEARS SHAREHOLDER EPS DPS SP
FUND
2005 883,296 102k 40 8.20
2006 8,869,207 13k 45 17.80
2007 8,719,161 87k 45 23.00

2008 9,611,281 134k 60 18.05

lxxxii
 2009 12,078,361 178k 75 23.62

2010 14,737,912 257k 120 28.70

TOTAL 54,899,218 771k 385 309.53

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price
In table 4.1i, the shareholder fund was increasing year by year. In the year 2010,
shareholder fund was the highest value among other years. In the same year, earning
per share, dividend per share and share price value was the highest value while the
lowest value in shareholder fund was in the year 2005. Earning per share is in the year
2006 followed in the year 2005 for dividend per share was the lowest value. In the year
2006 to 2007, the value was the same in dividend per share. In the year 2010, the share
price value increase to 28.70 and decrease to the value of 8.20 in the year 2005.

4.1J NESTLE PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 5,980,312 10.04 7.00 146.56
2006 6,360,492 10.71 10.00 237.00
2007 6,236,521 8.79 8.99 260.00

lxxxiii
 2008 9,031,240 12.61 8.40 201.51

2009 10,543,935 14.81 12.55 240.00

2010 14,865,353 19.08 12.55 400.00

TOTAL 53,017,853 76.04 59.49 1485.07

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings Per Share, DPS = Dividend Per Share, SP = Share Price.
From the table, in the year 2010 the shareholder fund was the highest value followed
in the year 2009. In earning per share, the value increase to 19.08in the year 2010 and
decrease 8.79 in the year 2007. The value of the dividend per share occurs twice in the
year 2009 to 2010 which is 12.55 and the value decrease to 7.00 in the year 2005. In
share price value, the value increase to 400.00 in the year 2010 and decrease to146.56
in the year 2005.

4.1K UNILEVER PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 5,570,611 0.43 - 14.70
2006 3,953,348 (0.43) - 12.90
2007 5,030,844 0.28 - 20.00

2008 6,681,553 0.69 - 11.75

lxxxiv
 2009 8,202,734 1.08 - 19.00

2010 8,335,227 1.11 - 28.00

TOTAL 37,774,317 3.16 - 106.35

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price.
From the table, in the year 2010, the shareholder fund, earning per share and
share price was the highest value followed in the year 2009. The company did not pay
dividend from 2005to2010.The share price in the year 2010 was the highest value
which is 28.00. In earning per share the value increase to 1.11 in the year 2010and
decrease to a negative value which is (0.43) in the year 2006.

4.1L ASHAKA CEMENT PLC

YEARS SHAREHOLDER EPS DPS SP

FUND
2005 11,633,603 303 232 25.00
2006 11,618,184 231 150 51.97
2007 10,725,113 110 150 52.50

lxxxv
 2008 12,795,158 121 1.50 15.39

2009 13,141,588 47 0.30 11.60

2010 16,146,282 151 0.30 22.75

TOTAL 76,059,828 963 534.1 179.21

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price.
From the table above, in the year 2010, the shareholder fund is the highest value
followed by the year 2009, 2008. In the year 2005, the earning per share is 303 and
dividend per share is 232 in the same year. In the year 2007, the share price is 52,50
which is the highest value and lowest value is 11,60 in the year 2009. In dividend per
share, the value was the same in the year 2009-2 010 which is 0.30.

4.1M OKOMU OIL PALM COMPANYPLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 3,682,074 221 100 16.99
2006 3,340,227 124 - 34.00
2007 3,188,175 29 - 38.12

2008 4,282,998 253 25 32.79

lxxxvi
 2009 43,534,494 115 25 23.94

2010 5,866,406 342 30 14.40

TOTAL 63,894,824 1084 180 160.24

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price.
From the table, the shareholder fund value is 43,534,944 which is the highest in
the year 2009. The earning per share is 342 in the year 2010 while dividend per share
is 100 in the year 2005. In 2006 and 2007, the values are zero in dividend per share and
they are the lowest value. The share price value was decreasing and increasing up to
the year 2008 and the highest value is38.12 in the year 2007 and the lowest value is
14.40 in the year 2010.

4.1N VITAFOAM NIGERIA PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 785,436 17 15 3.00
2006 962,274 34 12 3.80
2007 1,401,588 54 25 9.15

2008 S1,895,134 85 30 5.30

lxxxvii
 2009 2,160,210 63 25 5.60

2010 2,468,243 63 30 6.00

TOTAL 9,672,885 316 137 32.85

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share Price.
From the table above, the company highest shareholder fund is 2,468,243 in the
year 2010 while the lowest fund is 785,436 in the year 2005. Earning per share in the
year 2007 is the highest value while in 2009 to 2010; the earning per share is the same
value. The lowest value is 17k in the year 2005. In dividend per share, in the year 2008
and 2010, the values are the same which is the highest value while the lowest value is
12k in the year 2006.
The share price value in the year 2007 is the highest value which is 9.15 while
the lowest value is 3.00 in the year 2005.

4.1O NEIMETH INTERNATIONAL PLC

YEARS SHAREHOLDER EPS DPS SP
FUND
2005 540,919 53 20 3.40
2006 1,576,000 30 20 3.00
2007 1,6,234,717 18 15 4.92

2008 1,634,840 15 12 4.04

2009 1,072,787 (55) - 1.65

lxxxviii
 2010 950,740 (15) - 1.98

TOTAL 7,398,238 46 57 18.99

Source: Annual report, Facts book, NSE daily Official list from 2005 -2010.
EPS = Earnings per Share, DPS = Dividend per Share, SP = Share
Price.
As shown in the table, in the year 2008, the highest shareholder fund is
16,347,840 while the lowest fund is 540,919 in the year 2005. In earning per share,
from 2009 to 2010, it has a negative value. From 2005 to 2006, dividend per share is
the same value and is the highest value for the year while in 2008, the lowest share is
12k and the company did not paid dividend from 2009 to 2010.
In the company, the share price for the year 2007 is 4.92 which is the highest
value and the lowest value is 1.65 in the year 2009.

4.2 TEST OF HYPOTHESIS AND ANALYSES OF DATA

To test the hypotheses listed in chapter one the work adopted the following statistical

tool: Pearson’s correlation coefficient test for analysis to test the three major

hypothesis as earlier stated in chapter one. Pearson’s correlation coefficient was used

in testing all the hypothesis and below is the analyses and the testing of the

hypotheses formulated to answer the research questions asked to guide the study.

4.2.1 TEST OF HYPOTHESIS ONE

The hypothesis is restated in both null and alternative form.

HO : There is no effect of dividend policy on manufacturing firms’ share

value

lxxxix
 H1: There is no effect of dividend policy on manufacturing firms’ share
value

ANALYSIS OF HYPOTHESIS ONE USING CORRELATION COEFFICIENT

Firms Dividend Share xy x2 y2

(x) value(y)
1 3426 696.19 2385146.94 11737476 484680.5161
2 431 133.47 57525.57 185761 17814.2409
3 1363 283.12 385892.56 1857769 80156.9344
4 855 203 173565 731025 41209
5 810 190.81 154556.1 656100 36408.4561
6 - 36.61 - - 1340.2921
7 130 207.6 26988 16900 43097.76
8 425 309.53 131550.25 180625 95808.8209
9 385 119.37 45957.45 148225 14249.1969
10 59.49 1485.07 88346.8143 3539.0601 2205432.905
11 - 106.24 - - 11310.3225
12 534.1 179.21 95716.061 285262.81 32116.22241
13 180 160.24 28843.2 32400 25676.8576
14 137 32.85 4500.45 18769 1079.1225
15 57 18.99 1082.43 3249 360.6201
Total 8792.59 4162.41 3579670.8583 15857100.8701 3090741.269

Correlation Formula = n ∑xy - ∑x ∑y

n∑x2- (∑x2) x n∑y2- (∑y2)

xc
n = number of years (15)

∑x = 8792.59

∑y = 4162.41

∑x2 = 1587100.8701

∑xy = 3579670.8583

∑y2 = 3090741.269

r = 15 (3579670.8583 – (8792.59) (4162.41)

15(1587100.8701 – (8792.59)2 (15 (3090741.269 – (4162.41)2)

r= 53,695062.38 -36598364.54

237,856513.1 – 77,309,638.91 (46361119.04 – 17325,657.01)

r= 17096697.8

160546874.2 x 29035462.03

r= 17096697.8

12670.7093 x5388.456368

r= 17096697.8

68275564.21

r= -0.250407272
xci
 The correlation co –efficient is r = -0.25

DECISION RULE

From the analysis above, hypothesis one was tested in consistent with Whitaker
(2005) rules which applied as follows.

• If the value of the correlation coefficient (r) is greater than zero i.e. positive it
means that the variable correlated then by accept H1 and reject H0.
• If the value of the correlation coefficient (r) is less than zero (i.e. positive) or
equal to zero. It means that the variables are uncorrelated hence accept H0 and
reject H1.

Therefore from the table above, the computed value of correlation coefficient
showed a negative and uncorrelated (r =- 0.25) between variables. Therefore we
accept the null hypothesis which states that There is no effect of dividend policy on
manufacturing firm share value.

4.2.2 TEST OF HYPOTHESIS TWO

The hypothesis is restated in both null and alternative form

HO : There is no significant relationship between dividend per share and earning

per share

H1: There is no significant relationship between dividend per share and earning
per share.

xcii
ANALYSIS OF HYPOTHESIS TWO USING CORRELATION COEFFICIENT

YEARS Dividend Earning (y) xy x2 y2

(x)
1 3426 4480 15348480 11737476 20070400
2 431 845 364195 185761 714025
3 1363 1613 2198519 1857769 2601769
4 855 1737 1485135 731025 3017169
5 810 1439 1165590 656100 2070721
6 - 240.91 - - 58037.6281
7 130 (514) (66820) 16900 26419.6
8 425 1707 725475 180625 2913849
9 385 771 296835 148225 594441
10 59.49 76.04 4523.6196 3539.0601 5782.0816
11 - 3.16 - - 9.9856
12 534.1 963 514338.3 285262.81 927369
13 180 1084 195120 32400 1175056
14 137 316 43292 18769 99856
15 57 46 2622 3249 2116
Total 8792.59 14807.11 22277304.92 15857100.8701 34514796.7

Correlation Formula = n ∑xy - ∑x ∑y

xciii
 n∑x2- (∑x2) x n∑y2- (∑y2)

n = number of years (15)

∑x = 8792.59

∑y = 14807.11

∑x2 = 15857100.8701

∑xy = 22277304.92

∑y2 = 34514796.7

r = 15 (22277304.92) - 8792.59(14807.11

15(15857100.87 – (8792.59)2 (15 (34514796.7– (14807.11)2

r = 334159573.8 - 130192847.3

237856513 - 77309638.91 x 517721950.5 – 219250506.6

r = 203966726.5

160546874.2 x 298471443.9

r = 203966726.5

12670.7093 x 17276.32611

r = 203966726.5

218903305.9
xciv
 r = - 0.9317663142

The correlation co –efficient is r = - 0.932.

DECISION RULE

From the analysis above, hypothesis one was tested in consistent with Whitaker
(2005) rules which applied as follows.

• If the value of the correlation coefficient (r) is greater than zero i.e. positive it
means that the variable correlated then by accept H1 and reject H0.
• If the value of the correlation coefficient (r) is less than zero (i.e. positive) or
equal to zero. It means that the variables are uncorrelated hence accept H0 and
reject H1.
Therefore from the table above, the computed value of correlation coefficient
showed a negative and significant relationship (r = - 0.932) between variables.
Therefore we accept the null hypothesis which states there is no significant
relationship between dividend per share and earning per share.

4.2.3 TEST OF HYPOTHESIS THREE

The hypothesis is restated in both null and alternative form

H0: Dividend policy does not satisfy the objective of maximizing owners
wealth

H1: Dividend policy satisfy the objective of maximizing owners wealth.

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ANALYSIS OF HYPOTHESIS THREE USING CORRELATION
COEFFICIENT

YEARS Dividend (x) Shareholder xy x2 y2

(y)
1 3426 178120205 6102398223 11737476 3172680743
2 431 188288856 8115249694 185761 3545269329
3 1363 243128113 331383618 1857769 5911127933
4 855 40446516 3458177118 731025 1635920657
5 810 171655 139040550 656100 2946543903
6 - 7161281 - - 5128394556
7 130 41712073 5422569490 16900 1739897034
8 425 166784870 7088356975 180625 2781719286
9 385 54899218 2113619893 148225 3013924691
10 59.49 53017853 3154032075 3539.0601 2818089274
11 - 37774317 - - 1426899025
12 534.1 76059828 4062355413 285262.81 5785097435
13 180 63894824 1150106832 32400 4082548534
14 137 9672885 1325185245 18769 9356470422
15 57 7398238 421699566 3249 547339255

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 Total 8792.59 1168530732 4288417469 15857100.8 5389192208
7

Correlation Formula = n ∑xy - ∑x ∑y

n∑x2- (∑x2) x n∑y2- (∑y2)

n = number of years (15)

∑x = 8792.59

∑y = 1168530732

∑x2 = 15857100.8701

∑xy = 4288417469

∑y2 = 5389192208

r = 15(428841769) – (8792.59) (1168530732)

15(15857100.87) - (8792.59)2x 15 (5389192208 – (1168530732) 2

r= 6432626204 – 1027441163

237856513.1 – 77309638.91 x 8083788312 – 1365464072

r= 5405185041

160546874.2 x 6718324240

xcvii
 r= 5405185041

12670.7093 x 81965.3844

r= 5405185041

1038559558

r= 5.204501754

The correlation co –efficient is r = 5.205

DECISION RULE

From the analysis above, hypothesis one was tested in consistent with Whitaker
(2005) rules which applied as follows.

• If the value of the correlation coefficient (r) is greater than zero i.e. positive it
means that the variable correlated then by accept H1 and reject H0.
• If the value of the correlation coefficient (r) is less than zero (i.e. positive) or
equal to zero. It means that the variables are uncorrelated hence accept H0 and
reject H1.

Therefore from the table above, the computed value of correlation coefficient
showed a positive and significant relationship (r = 5.205) between variables.
Therefore we accept the alternate hypothesis which states Dividend policy satisfy the
objective of maximizing owners wealth.

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 CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.0 INTRODUCTION

This chapter provides an overview of salient findings emanating from the

research. The results are aligned with the various objectives and hypotheses set out
in chapter one of the project research. Conclusions were drawn and necessary
recommendations were made from the research findings. Contribution and
suggestions for further research were also made.

5.1 SUMMARY OF FINDINGS

From the data analysis, the following are the majors findings of research
investigation.

There is no effect of dividend policy of dividend policy on manufacturing firm’s

share value. This is based on the result of test hypothesis one as computed in chapter
four when correlation coefficient is used.

xcix
 The study found out that there is no significant relationship between earning per
share and dividend per share with the use of correlation coefficient in hypothesis two.

The researcher also found out that dividend policy satisfies the objective of
maximizing owner’s wealth.

OTHER FINDINGS ARE:

The most important factor that influences shareholders as well as prospective

investor in their bid to invest in company securities is dividend policy. This is
followed by the corporate performance of such firm.

Modiligiani and Miller realized that there is no considerable evidence that change in
dividend policy do influence stock price. An increase in dividend conveys a type of
information to the shareholder namely that management expects future earnings to be
higher.

It was also found out that payment of dividend reduce agency cost, discretionary fund
avalaible to management to seek financing in capital market.

Shareholders prefers a stable dividend payout policy to a fluctuating or no dividend

payout at all the shareholder measures the grow of firm with dividend declared.

Finally, some investors prefer dividend above capital gain because dividend are
easier to predict less risky and are discounted with a lower discount rate.

5.2 CONCLUSION

c
 On the basis of research findings the following conclusions were made:
The study concluded that dividend payment is more attractive but for
stimulating investment decision. The critical issue in dividend policy is whether
dividend has an influence of the firm’s stock or not. Again corporate decisions are
expected to analyze in term of how alternative cause of action will affect the value of
the firm’s share .given the tax effect on dividend and uncertainty of capital gains, it is
quite plausible that some investors would prefer high payout companies while others
would prefer low payout companies.

Dividend policy of firms may have informational value about their profitability but
highly unstable economic environment.

Therefore, I conclude that dividend policy does not have effect on most
manufacturing firm share value.

5.3 RECOMMENDATION

Sequel to the findings and conclusions, the following recommendations are:

Financial manager should have information on the factors in the economy that
affects the behavior of investors in their purchase of stock before any public reissue.

Financial manager should ensure that he understands the various conflicting

factors which influence dividend policy and firm’s share value before deciding on the
allocation of firm’s earning.

In making investment decisions, investor should focus more on thee shoreline and
tendencies of the management of the different firms and not just on their dividend
rates

ci
 Nigeria stock exchange should maintain its reliance on the forces of demand and
supply alongside its daily biding system because it tends to give the firms a fair
assessment before the public is an unstable business environment.

5.3 SUGGESTIONS AREA FOR FUTER RESEARCH

Future researchers should endeavor to find out possible answer to the following
question.

Firstly, Is dividend the best way to remunerate shareholders.

Can companies grow without paying dividend.

BIBLIOGRAPHY

Brealey R. and Mysers .S. (1994) The dividend Controversy, Principle of Corporate
Finance 2nd Edition Mc Graw-Hill.
Brigham, E.F. (1990) Foundational of Financial Management. 2nd Edition Hinsdale
Illinois, the Dryden press.
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publishing limited. Oxford.
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Academic

Graham, B.D.C and S. Cottles (1996) Security Analysis New York Mc. Graw - Hill
Gordon, M.J. (2000) The Investment, financing and Valuation of Corporation. R.D.
Irwin Inc.

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Hirt G.A and Block S.B (1983) Economic and Industry Fundamental of Investment
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Horin, B. (1997) The dividend decision: Procedure Policy and Effect on Value
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James C. Van horne (200) Dividend and Valuation : Financial management and
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Kolb R.W and Rodriguez (1996) Financial Management 2nd Edition Cambridge.
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JOURNAL

Black F. and Scholes (1996) The Dividend Puzzle. Journal of Finance, volume 18 no
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Bhattacharya S. (1999) Imperfect Information, Dividend Policy and The Bird – in- the
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Linter John (1994) Distribution of Income of Corporation among Dividend Retained

Earnings and Taxes Quarterly. Journal of Economic Volume LXXXVIII page 48 –
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