Relationship Between Dividend Payments And Share Price Movement

Dividend Policies

Question:

Share price Movement and dividend Payments are independent of each other -

Critically analyse the above statement with reference to the literature on Dividend Policy and Empirical Evidences, giving your Final View on the Issue.

Dividend payment strategy and share price of a company is directly related to each other. If the company would offer high dividend payout or low dividend payout than it directly affects the share price of a company. Mainly, both the policies which are high dividend policies and low dividend policies make the different impact over the performance and the stock price of a company. Companies’ take the help of various dividend policies to make a better decision about how much dividend must be paid to the investors to keep them satisfied and attract other investors to invest into the operations of the company (Zhang, 2012). Various dividend policies such as relevant theory, residual relevant theory, expectation theory etc have been analyzed. Usually making a decision about the high or low dividend is important for an organization. An organization is required to look over various factors and then make a better decision about the dividends. In this report, various dividend policies of the company have been analyzed and than a better decision have been made (FIRRER 2012).

Dividend policies are mainly of two types which are relevant dividend polices and irrelevant dividend policies. Relevant dividend policies depict that mainly investors look over the market and dividend offered by the company to make a decision about the investment into the company. Relevant dividend theories are bird in hand theory, expectation theory and residual dividend theory whereas irrelevant theories are MM theory. Dividend relevant theories brief that the tax and the transaction cost of the company are also applied and considered while making the decision of the investment. Inflation rate do not exist in this theory (Tucker, 2011). Bird in hand theory mainly considers that high dividend payout ratio must be adopted by the company as it attracts the investors more due to the thought process of the investors that they would be able to earn the more return from the stock of the company.

Further, the residual dividend theory depict that the company must manage all the expenditure, capital expenditure before distributing the divided amount to its shareholders. This depict that the total amount of profit must be distributed to the shareholder but after paying all the capital expenditure (DEEPTEE and ROSHAN, 2009). Expectation theory states that long term interest rate depict about the short term performance of the company. Further, it has been found that all of these theories depict the company to take the use of all the net profit to attract the investors (Davies and Crawford, 2011).

Factors Affecting Dividend Payments

Further, irrelevant dividend policies have been analyzed. It depict that mainly investors do not look over the market and dividend offered by the company to make a decision about the investment into the company whereas they analyze the financial performance and stability of the company (Breuer, Rieger and Soypak, 2014). Miller and Modigliani have invested this approach. They have analyzed through this research that it is not necessary for the investors of a market to consider the dividend payout of the company (Masum, 2014).

They have also approached that the dividend payout of a company could never be enough to analyze about the stability and performance of the company. This theory also briefs that the tax and the transaction cost of the company are also not applied and do not considered while making the decision about the investment (CORRERIA, 2013). This theory mainly considers that it is not required for an organization to deliver high dividend to the investor because this could not depict about the performance of the company (Travlos, Trigeorgis and Vafeas, 2015).

The hypothesis of dividend theory depict that various factors are there which makes an impact over the management and organization choice about the dividends. Leverages, debt constraints, capital rules impairment, cash availability and investment opportunities in front of the company (Barman, 2008). For instance, if the company has a great investment opportunity and for that company wants to raise the fund than company could retain some amount of dividend for further use and it would impact over the dividend policies of the companies.

Further, according to the study of Brealey, Myers and Marcus, (2007), it has been found that the factors are quite important for an investors as well as organization to understand. Many times, the dividend is lowered by the company to raise the profits of the company through some other ways. Investors must look over these points and make a decision accordingly (Bradford, Chen and Zhu, 2013). It would also help the company to maintain the stock price.

Though, from various studies and the reports of the analyst, it has been analyzed that the investors are not well informed and do not have enough knowledge to analyze and evaluate the performance of the company (Bodie, 2013). They only analyze the current performance and the position of the company which could only be analyzed through the current market share price of the company (STEEN et al, 2012).

Impact of Dividend Payments on Share Price

Thus through this analysis, it has been analyzed that the company’s are required to announce the dividend to set the performance and position into the current market so that the investors could get attract towards the company and make high investment into the company. Cash dividends are bit essential for the company to become more competitive and enhance the market price of the stock of the company (CORRERIA et al, 2013).

Dividend payout is the value which evaluates the total dividend paid out by the company to its investors on the basis of the net profit of the company. Dividend payout of a company mainly depends over the policies of the company (Breuer, Rieger and Soypak, 2014). If the company follows the policy of the relevant policies than the dividend payout of the company would be higher whereas if the company would follow the policies of the irrelevant policies than the dividend payout of the company would be lower or nil. The formulas of dividend payout are as follows:

=Total annual dividend of the company / diluted earnings per share (Davies and Crawford, 2011).

There are various factors which affect the lower dividend payout as well as higher dividend payout of a company such as the industry norms, investment opportunity, cash position in the company, competitor’s position, profit position of the company, economical position etc. A company is required to make the decision about dividend payout after considering all the above given factors. Such as if the economical position is not good than must company must retain the profit and use it for further operations of the company rather than dividing it into the shareholders of the company.

Low dividend payout ratio depict that the comapny would offer a lower % of the total net profit to the investors and will retain the extra amount for the further investment in the company so that the company do not require to raise the funds from the external sources. Low dividend payout ratio is not in the favour of the company according to the various analyst of the company (Barman, 2008). At the same time, high dividend payout ratio depict that the comapny would offer a higher % of the total net profit to the investors so that the company. This % would be higher than the affordability of the company. High dividend payout ratio is not in the favour of the company according to the various analyst of the company as this assist the company to face various risks in the market (Brealey, Myers and Marcus, 2007).

Empirical Analysis

A company must consider the high dividend payout ratio only if the market position of the company is well and good and company could enhance the profit at any time and the funds could also be raised by the company from market easily (Shao, Kwo and Guedhami, 2013). So, the management accountant must make the decision of lower dividend policies and higher dividend policies accordingly.  Mainly, it is considered that higher dividend profit is the best option as investor got some money periodically in terms of dividend which makes them attract.

Dividend payment and share price of the company is direct related to each other. Mainly, the share price of a company is affected due to the dividend price although the dividend history and other related factors also make an affect over these values. If the dividend offered by the company gets reduced than it directly affect the share price of the company. Companies’ take the help of various dividend policies to make a better decision about how much dividend must be paid to the investors to keep them satisfy and attract other investors to invest into the operations of the company. Basically, it becomes bit tough for the company to make these decisions.

Market psychology is an outcome of various analysts’ report collectively that depict that basically the share price of a company depends over the total stock of the company which has been issues and fluctuations which could take place into the security market or the economical condition of the company. Naser, Nuseibeh and Rashed, (2013) have expressed that an investor always wants to earn more profits from the market and enhance the worth of the invested amount. So he or she tries to invest into that security from where they could earn more profits.

Bodie, (2013) has expressed in their study that dividend psychology has also been studied and it has been analyzed that it depicts that the many companies always offer the same dividend with a good dividend payout ratio so that the expectation of the investors enhances from the market and they expect that each company would offer them that much of dividend. Thanatawee (2013) says that this creates a positive relationship among the dividend and share price of the company. As due to the dividend, the investors would be attracted more towards the company and then the demand and supply of the stock in the market would enhance and through it the share price of the company would also increase.

Conclusion

Through it and through the market analysis, it has been found that dividend declaration affects the stock price of a company at huge level (Bradford et al, 2013). At the time of delivering the dividend, the share price of the company get fluctuate rapidly and the main reason behind enhancing and decreasing the stock price of the company is its dividend payout value. Baker and Weigand, (2015) have expressed that through the dividend and stock price of the company have positive relations with each other so the company is required to offer a good dividend to the investors to make a good position in the market and enhance the market price of the security.  

For analyzing the relationship of dividend and the stock price of a company. 10 companies of the market have been taken and their share price has been compared before declaring the share price and after the declaration of share price. Through this, it has been analyzed that after the declaration of the dividend, the share price of almost all the stock has been enhanced this depict that the study of the analyst is realistic in the security market.

Comapny	Date	Share price	Share price After	Effect
		Before  30 days	30 days
Anwar Ceramic tiles	13th April	0.143	0.146	Share price has been enhanced.
AHLI Bank	27th March	0.105	0.11	Share price has been enhanced.
Madina Investment	28th June	0.38	0.39	Share price has been enhanced.
ACWA Power Barka	18th June	0.78	0.752	Share price has been reduced.
Bank Dhofar	27th March	0.198	0.202	Share price has been enhanced.
Majan college	29th Nov	0.42	0.46	Share price has been enhanced.
Batinah power	11th June	1.125	1.125	Share price is similar.
Madina Takaful	27th March	0.105	0.109	Share price has been enhanced.
Buriami Hotel	18th June	0.93	0.98	Share price has been enhanced.
Omannia financial securities	21st March	0.253	0.276	Share price has been enhanced.

The above calculation and analysis over the above companies express that the Anwar ceramic tiles, AHLI bank, Medina Investment, Bank Dhofar, Majan college, Madina Takaful, Buriami Hotel and Omannia financial securities depict that the stock price of these securities has been enhanced after announcing the dividend. This has taken place due to the high dividend payout ratio. The dividend announcement has attracted the investors to invest into the company. Further, the stock price of the ACWA power Barka has been reduced due to lower dividend payout ratio. And the share price of Batinah Power has become same even after announcing the dividend due to the fact that the dividend offered by the company was average. Through this study, it has been found that if the normal or good dividend is offered by the company to its investors then the demand of the stock enhances into the market and it directly make an impact over the share price of the company (Hillier, Grinblatt and Titman, 2011).

Conclusion:

To conclude, organizations must look over the analysis and market situation as well as the nature of the investors before announcing the dividend so that the investors could get attract towards the company and company become able to get more dividend from the market. Cash dividends are bit essential for the company to become more competitive and enhance the market price of the stock of the company.

Neither the higher dividend payout ratio nor the lower dividend payout ratio is in the favour of the company as both of these would raise the different issues in front of the company. Through this, it is suggested to the manager of the company to evaluate the dividend payout ratio according to the nature of the company and economical condition of the country.

References:

Baker, H.K. and Weigand, R., 2015. Corporate dividend policy revisited. Managerial Finance, 41(2), pp.126-144.

Barman, G.P., 2008. An evaluation of how dividend policies impact on the share value of selected companies.

Bodie, Z., 2013. Investments. McGraw-Hill.

Bradford, W., Chen, C. and Zhu, S., 2013. Cash dividend policy, corporate pyramids, and ownership structure: Evidence from China. International Review of Economics & Finance, 27, pp.445-464.

Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.

Breuer, W., Rieger, M.O. and Soypak, K.C., 2014. The behavioral foundations of corporate dividend policy a cross-country analysis. Journal of Banking & Finance, 42, pp.247-265.

CORREIA, C. et al. 2013. Financial Management. 7th Edition. Cape Town: Juta andCompany Ltd.2.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

DEEPTEE, P. and ROSHAN, B. 2009. Signaling Power of Dividends on firms futureProfits A Literature Review. Evergreen Energy- Interdisciplinary Journal, pp.1-9.

FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition.Berkshire.McGraw-Hill Companies, Inc.

Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.

Masum, A.A., 2014. Dividend policy and its impact on stock price–A study on commercial banks listed in Dhaka stock exchange.

Naser, K., Nuseibeh, R. and Rashed, W., 2013. Managers' perception of dividend policy: Evidence from companies listed on Abu Dhabi Securities Exchange. Issues in Business Management and Economics, 1(1), pp.001-012.

Shao, L., Kwok, C.C. and Guedhami, O., 2013. DIVIDEND POLICY: BALANCING SHAREHOLDERS'AND CREDITORS'INTERESTS. Journal of Financial Research, 36(1), pp.43-66.

STEEN, E. et al. 2012. stakeholder conflicts and dividend policy. Journal of Banking & Finance, 36 pp. 2852-2864

Thanatawee, Y., 2013. Ownership structure and dividend policy: Evidence from Thailand.

Travlos, N.G., Trigeorgis, L. and Vafeas, N., 2015. Shareholder wealth effects of dividend policy changes in an emerging stock market: The case of Cyprus.

Tucker, J.W., 2011. Selection bias and econometric remedies in accounting and finance research.

Zhang, D., 2012. Managerial dividend-paying incentives. Erasmus University Rotterdam.