Journal of Management (JOM) Volume 5, Issue 6, November December 2018, pp. 157 165, Article ID: JOM_05_06_021 Available online at http://www.iaeme.com/jom/issues.asp?jtype=jom&vtype=5&itype=6 Journal Impact Factor (2016): 2.4352 (Calculated by GISI) www.jifactor.com ISSN Print: 2347-3940 and ISSN Online: 2347-3959 IAEME Publication DIVIDEND POLICY AND FINANCIAL PERFORMANCE OF INDIAN CEMENT COMPANIES AN EMPIRICAL STUDY Manjunatha K Research Scholar, Dept. of Studies in Commerce, Rani Channamma University, Belagavi, Karnataka Prof.S.B.Akash Professor and Chairman, Dept. of Studies in Commerce, Rani Channamma University, Belagavi, Karnataka ABSTRACT The objective of this study is to find out the relationship between dividend payout and firm s financial performance of selected cement companies listed on BSE in India. A set of selected cement companies data of eight years from 2009/10 to 2016/17, have been used for correlation and regression analysis. Return on assets is used as the determinants of firm s financial performance and Dividend payout is used as the measures of dividend policy along with the firm size and leverage as controlling variables. The statistical tools used in the study are Descriptive statistics, Correlation and Multiple regression analysis. The findings of the study are the relationship between Return on Assets and Dividend Payout Ratio is negative but statistically significant. Key words: Dividend Policy, Financial Performance, Cement Industry Cite this Article: Manjunatha K and Prof.S.B.Akash, Dividend Policy and Financial Performance of Indian Cement Companies an Empirical Study. Journal of Management, 5(6), 2018, pp. 157-165. http://www.iaeme.com/jom/issues.asp?jtype=jom&vtype=5&itype=6 1. INTRODUCTION The issue of dividend policy is a very important one in the current business environment. Dividend policy is still important financial policy from the viewpoint of firm and stakeholders. Dividend policy decides how much of funds for investors and how much funds for firm s growth and development. It is very important to decide the payout level as retained earnings would play a significant role in financing the investment needs of firm. Higher the dividend payout lesser is the retained earnings with the firm and vice versa. When this is the case, the striking of a balance between both investors need and expectation, and financing of firm s projects from internal source, i.e., retained earnings is very essential to keep up the image, reputation and financial performance of firm. Financial performance of firm may be improving http://www.iaeme.com/jom/index.asp 157 editor@iaeme.com
Manjunatha K and Prof.S.B.Akash financial objectives of firm-maximization of profit and wealth maximization of shareholders. In accountancy, we measure financial performance of firm by various ratios, of whom Return on Assets is also being used by many researchers in the past and present. There are many factors contributing to the profitability of firm, of whom dividend payout is also one. Dividend payout level flexible due to many factors including changes in net profit, changes in investors preference, availability of new NPV projects, and others. As a result, dividend payout policy varies across time, industry and countries. The present study is an attempt in determining the relationship between dividend payout and firm performance and extent of impact of dividend payout over firm performance of selected top cement companies listed on BSE in India. 1.1. Concept of Dividend Policy Dividend is defined as divisible profit which is distributed among members of a company in proportion to their shares in such a manner as is prescribed by the Memorandum and Articles of Association of a company. In other words, Dividend policy refers to the decision regarding how much of its earnings to be distributed as dividend to shareholders. It is also considered as reward of the shareholders for investments made by them in the shares of the company. This dividend policy has got many types such as constant dividend policy, stable dividend policy, and residual dividend policy. Though there are types of dividend such as cash dividend, scrip dividend, bond dividend, property dividend, etc. Cash dividend is the most common and most preferred by companies. 1.2. Relevance of Dividend Policy and Financial Performance of Companies 1.2.1. Financial Performance Financial performance refers to the act of performing financial activity. Financial performance also refers to the degree to which financial objectives being accomplished. It is the process of measuring the results of a firm s policies and operations in monitory terms. This financial performance can be measured through various financial measures such as profit after tax, financial ratios, return on assets (ROA), return on equity (ROE), return on investment (ROI), earnings per share (EPS) and any market value ratio that is generally accepted. The financial performance of firms associated with their various policies including the dividend policy. Hence studying dividend policy and financial performance is crucial. 2. REVIEW OF LITERATURE The various theories on corporate dividend policy and decisions such as signaling theory, clientele effect, agency theory, tax preference theory, bird in hand hypothesis theory, etc. have already been extensively researched and became part of finance literature. Now, the present research paper reviews available empirical literature relating to dividend payout and firm s financial performance. Anandasayanan and Velnampy (2016) studied the relationship that exists between dividend policy and profitability of listed manufacturing firms in Sri Lanka. Return on equity and return on assets were used as corporate profitability and dividend payout and dividend yield were used as dividend policy. They had used the data of 23 firms for the period of five years from 2009 to 2014 and applied regression analysis using E-view software. And found that there was a significant impact of dividend policy of organizations on corporate profitability and study suggests that organization should have robust dividend policy to increase their profitability and investments.richard Ndibanla and Thomas Korankye (2014) conducted a study of Dividend payout and firm performance of quoted manufacturing firms in Ghana. Panel data of sampled firms from 2004 to 2011were extracted from financial http://www.iaeme.com/jom/index.asp 158 editor@iaeme.com
Dividend Policy and Financial Performance of Indian Cement Companies an Empirical Study statements and analysed with the fixed effect model. Regression results revealed that dividend payout significantly but negatively impacts on firms. The control variables such as size and leverage were inversely related to performance of firm.benjamin I. Ehikioya(2015) investigated the possible impact of dividend policy on the value and performance of firms in developing economies. 81 listed firm s panel data of DPR, RoA, RoE, FSIZE, LEV, Dpolicy and others were used by employing ordinary least square technique. Findings of the study confirm the proposition that the dividend policy is an important determinant of firm performance. Uwalomwa UWUIGBE& et al. (2012) investigated not only the relationship between the firm performance and dividend policy among the listed firms in Nigeria but also the relationship between ownership structure, size of firms and the dividend payouts. The required data of 50 companies for the study were collected from the annual reports for the year 2006 to 2010. The regression analysis technique was used to analyse the data. Study finds that there is a significant positive association between the performance of firms and dividend payout. Fathima Thafani1 and Mohamed Abdullah (2014) tried to see the relationship between dividend payout and firm performance of manufacturing companies listed on Columbo stock exchange in Sri Lanka. Data from 2007 to 2011 was extracted from annual reports. Regression model was employed. The results of the study revealed that there was a significant relationship between dividend payout and corporate profitability. Umar Habibu Umar and Ali Suleiman Saidu (2016) assessed the relationship between dividend policy and financial performance of oil and gas companies in Nigeria. The study finds that dividend payout has a significant positive relationship with the financial performance. Yusuf BR (2015) examined the impact of performance on dividend payout ratio of selected deposit money banks in Nigeria. Study period was from 2004 to 2013. Correlation and multiple regressions were carried out to analyse the data. Study finds that dividend payout ratio is negatively related to bank s leverage and profitability. Argo Teral and others analyzed the influence of financial performance on firm s payout decisions. The result of the study revealed that past financial performance indicators are poor predictors of future dividends. Ngo Thu Giang and Dang AnhTuan(2016) studied the relationship between dividend payment and the market value of listed firms in the food and drink industry in the period 2010 to 2014 in Vietnam. Study finds that food and drink industry would be more attractive in the stock exchange if they pay dividends in cash. Sunday O Kajola (2015)in their study panel data methodology was employed and pooled ordinary least squares was used to seek the relationship between dividend payout and firm financial performance of 25 non financial firms listed on Nigerian stock exchange between 2004 to 2013. Return on assets measured for dependent variable and dividend payout ratio proxied for dividend policy. Control variables include firm size, asset tangibility and leverage. Regression result reveals a positive and significant relationship between dividend payout ratio (DPR) and firm performance (RoA). Ifuero Osad Osamwonyi (2016) examines the effect of dividend policy on firm s returns using data of seventeen manufacturing firms listed on Nigerian stock exchange. Techniques adopted in the study are descriptive statistics, correlation analysis and panel regression technique. The findings reveal that current dividend payout, growth opportunities of firms, and dividend per share have positive and significant effect on earnings per share. From the above review of literature the following variables are selected for the study. They are Return on Assets as one of the measures of financial performance of firms, Dividend Payout Ratio as proxy for dividend policy, and Firmsize & Leverage are selected as controlling variables in the study. http://www.iaeme.com/jom/index.asp 159 editor@iaeme.com
Manjunatha K and Prof.S.B.Akash 3. STATEMENT OF THE PROBLEM A large number of studies have been conducted by researchers to examine, test, seek and establish the relationship between dividend policy and firm performance but yet no such consensus has been reached to say exactly as dividend payout affect financial performance of firms due to mixed results. Most of the research work has been carried out by taking a sample of companies representing different industries in different countries but Sector wise analysis of impact of dividend policy on financial performance of firms is felt necessary to study to derive appropriate findings 4. OBJECTIVES OF THE STUDY 1. To study the relationships among RoA, DPR, leverage and firm size of selected firms 2. To study the level of impact of dividend policy on firm s financial performance 5. HYPOTHESIS The following is the null hypothesis Ho: Firm performance is not significantly influenced by Dividend Payout 6. COMPANIES SELECTED FOR THE STUDY Sample includes select companies of cement industry. They are Ultratech Cement, ACC, Ambuja Cement, Shree Cement, India Cement, J.K.Cement, Ramco Cement, Birla Corp, JK Lakshmi Cement, Orient Cement, Binani Industries, Mangalam Cement, Dalmia Bharat and OCL India. Selecting a sample of companies is done through recognizing the fact of market capitalization, size, and availability of data of dividend payout during the study period, etc. 7. DATA COLLECTION To achieve the objectives of the study, the data from the annual reports of the companies and from the websites like moneycontrol.com, ETMarkets.Com and others for the period from 2009/10 to 2016/17 have been collected. The annual reports are readily available on the websites of companies and easy accessible through internet facility. 7.1. Variables used in the study are: Return on Assets: Return on Assets is used as dependent variable in the present study and it is a measure of firm s financial performance. Return on Assets is calculated as net income over total assets. Dividend Payout Ratio: Dividend payout ratio is used as independent variable and is used as a proxy for dividend policy. Dividend payout ratio is calculated as dividend per share over earnings per share Leverage and firm size: Leverage and firm size are used as controlling variables in the study as they are capable to influence the performance of firm. Leverage is calculated as debt over total capital of firm and firm size is calculated as the log of total asset of firm. http://www.iaeme.com/jom/index.asp 160 editor@iaeme.com
Dividend Policy and Financial Performance of Indian Cement Companies an Empirical Study 7.2. Statistical tools and techniques Descriptive Statistics, Pearson Correlation Test and Multiple Regression Analysis. Ordinary least square model Y= α + β1x1 + β2x2 + β3x3 + ɛ Where Y = Financial performance measured by ROA ratio of profit to total assets. X1 = Leverage ratio of total debt to total capital of a firm X2 = Firm s Size - the log of total assets for a firm X3 = Dividend Payout Ratio Dividend per share/ Earnings per share. α = the constant term βi = Coefficient is used to measure the sensitivity of the dependent variable to unit change in the predictor variables. ɛ = is the error term to capture unexplained variations in the model and which is assumed to be normally distributed with mean zero and constant variance. 8. ANALYSIS AND INTERPRETATION Table 1 Descriptive statistics of the variables selected for the study Variable N(Number of Minimum Maximum Mean Std. Deviation s observation) RoA 112-0.0184910398 0.666666667 0.0544078471 0.0720322315 Leverage 112 0.0000000000 0.877934012 0.5295869715 0.1402191311 Firm 112-1.8971199848 10.678122549 8.6000962491 1.3681908107 Size DPR 112 0.0179083095 4.166666667 0.2912224968 0.4544661835 Source: Research findings/ SPSS results Descriptive statistics of the explained and explanatory variables are presented in the above table for the period 2009/10 to 2016/17. The mean Return on Assets ratio is 0.0544078471 for the firms selected under the study and standard deviation of 0.0723222315. This represents an averaged percentage distribution of about 5.4 for the period. Leverage, Firm Size and DPR have mean value of 0.5295869715, 8.6000962491 and 0.2912224968 and standard deviation of 0.1402191311, 1.361908107 and 0.4544661835 respectively for the sampled listed firms from cement industry. Table: 2 Model Summaries Model R(Correlati Adjusted R Std. Error of the R Square Sig. F R Square F Change df1 df2 on) Square Estimate Change Change 1.811 0.657 0.648 0.0427393607 0.657 69.099 3 108 0.000 Source: Research findings/ SPSS results a) Predictors: (Constant), Lev, FS, DPR b) Dependent Variable: RoA Results of the multiple regression analysis between the dependent (Return on Assets) and independent variables (Leverage, Firm Size and Dividend Payout Ratio) are presented in the above table, model summary. The R square value is 0.657 which indicates that the change in dependent variable, Return on Assets is being explained by the independent variables http://www.iaeme.com/jom/index.asp 161 editor@iaeme.com
Manjunatha K and Prof.S.B.Akash (explanatory variables) is about 65.70%. The R square is also referred to as coefficient of determination and also as measure of the overall fitness of the model explains 65.70 per cent of the change in dependent variable and the rest changes are due to the other factors not included in the model. The R square change is tested with an F-test, which is referred to as the F change. A significant F change tells that the variables added in that step significantly improve the prediction. Table: 3 ANOVA Model Sum of Squares df Mean Square F Sig. 1 Regression 0.379 3 0.126 69.099.000 Residual 0.197 108 0.002 Total 0.576 111 a) Predictors: (Constant), Lev, FS, DPR b) Dependent Variable: RoA Table: 4 Multiple Regression Analysis Model Variables Coefficients Std. error t-statistic P-value VIF 1 (Constant) 0.447 0.029 15.412 0.000 Leverage -0.292 0.029-10.057 0.000 1.009 Firm Size -0.027 0.003-9.083 0.000 1.009 DPR -0.018 0.009-1.981 0.050 1.001 Source: Research findings/ SPSS results From the above table of results of multiple regressions, the coefficients of explanatory and control variables are seen along with their Standard error, t-statistic and P-values. The relationship between Dividend Payout Ratio and Return on Assets is negative but statistically significant. Likewise, the relationship between controlling variables (leverage and firmsize) and Return on Assets (financial performance of firms) are also negative but statistically significant. The above regression model results reveal that leverage was found to be negatively statistically significant variable that affected return on assets as shown by p value of 0.000. The coefficient between this leverage and RoA is -0.292 indicating that if leverage increased in by 1 unit, firm s financial performance (RoA) would decrease by -0.292 units. Firm size was also found to be negatively statistically significant as its coefficient value with RoA is -0.027 with significance value of 0.000. Accordingly, if firm size is increased by 1 unit, then financial performance (RoA) would decrease by -0.027. The regression model also reveals that dividend payout ratio was also negatively but statistically significant variable that affected RoA (financial performance) as shown by coefficient value -0.018 and significance value 0.050. The coefficient obtained from the analysis was -0.018 indicating that if dividend payout ratio increased by 1 unit would increase in financial performance of firms for about -0.018% change. Regression result also includes the value of variation of inflation factors which indicates that there is no problem of high multi co-linearity in the model as values of Variance Inflation Factor (VIF) are just 1.009, 1.009 and 1.001. http://www.iaeme.com/jom/index.asp 162 editor@iaeme.com
Dividend Policy and Financial Performance of Indian Cement Companies an Empirical Study Table 5 Pearson Correlation Coefficient Analysis Variables Pearson Correlation Return on Assets Leverage Firm Size Dividend Payout Ratio Return on Assets Pearson Correlation 1 -.618 ** -.567 ** -0.129 Sig. (2-tailed) 0.000 0.000 0.174 Leverage Pearson Correlation -.618 ** 1 0.092 0.022 Sig. (2-tailed) 0.000 0.337 0.815 Firm Size Pearson Correlation -.567 ** 0.092 1 0.010 Sig. (2-tailed) 0.000 0.337 0.920 Dividend Payout Ratio Pearson Correlation -0.129 0.022 0.010 1 Sig. (2-tailed) 0.174 0.815 0.920 ** Correlation is significant at the 0.01 level (2 tailed) The above table presents the correlation result of among the explanatory variables and between the explained and explanatory variables. The correlation between Return on Assets and Leverage and between Return on Assets and Firm size are -0.618 and -0.567 respectively and are negatively statistically significant at 1 percent, whereas the correlation between Return on Assets and Dividend Payout Ratio is -0.129, at 1 percent, which indicates a weak, negative and statistically insignificant correlation. Table 6 Testing of hypothesis No Hypotheses P-Values Results 01 Firm performance is not significantly influenced by Dividend Payout 0.050 = 0.05 Rejected The above hypothesis is framed based on an assumption that the firm performance (Return on Assets) is being not affected by Dividend Payout. And the same is tested based on the t- statistic and its p-value. Accordingly, the above hypothesis is rejected. 9. CONCLUSION The study empirically examined the relationship between firm performance and dividend payout policy of 14 listed companies of Cement industry in India for the period of 8 years, from 2009/10 to 2016/17. The Return on Assets is used as proxy for firm s financial performance while Dividend Payout Ratio is used as proxy for dividend policy. The results of the study revealed that the Return on Assets and Dividend Payout Ratio is negative but statistically significant. It is evident from this study that the payment of dividend by companies under study is resulting into decrease in their Return on Assets. http://www.iaeme.com/jom/index.asp 163 editor@iaeme.com
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