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Dividend Policy and the Profitability of Selected Quoted Manufacturing Firms

in Nigeria: An Empirical Analysis

Article in Journal of Finance and Accounting · July 2016

DOI: 10.11648/j.jfa.20160404.17

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Journal of Finance and Accounting
2016; 4(4): 212-224
http://www.sciencepublishinggroup.com/j/jfa
doi: 10.11648/j.jfa.20160404.17
ISSN: 2330-7331 (Print); ISSN: 2330-7323 (Online)

Dividend Policy and the Profitability of Selected Quoted

Manufacturing Firms in Nigeria: An Empirical Analysis
Henry Waleru Akani, Yellowe Sweneme
Department of Banking and Finance, Faculty of Management Science, Rivers State, University of Science and Technology Nkpolu, Port
Harcourt, Rivers State, Nigeria

Email address:
henryakani@yahoo.com (H. W. Akani), yellowesweneme@gmail.com (S. Yellowe)

To cite this article:

Henry Waleru Akani, Yellowe Sweneme. Dividend Policy and the Profitability of Selected Quoted Manufacturing Firms in Nigeria: An
Empirical Analysis. Journal of Finance and Accounting. Vol. 4, No. 4, 2016, pp. 212-224. doi: 10.11648/j.jfa.20160404.17

Received: May 23, 2016; Accepted: June 12, 2016; Published: July 6, 2016

Abstract: This paper examined the impact of dividend policy on the profitability of selected quoted manufacturing firms
in Nigeria from 1981 – 2014. The objective was to investigate the existing relationship between dividend policy and
profitability of the selected quoted manufacturing firms in Nigeria. Time series data were computed from financial
statement of the selected quoted manufacturing firms and stock exchange factbook. Return on Investment (ROI) and Net
Profit Margin (NPM) were modeled as our dependent variables while Dividend Payout Ratio (DPR), Retention Ratio (RR),
Dividend Yield (DY) and Earnings per Share (EPS) were proxied as our independent variables. Multiple regressions with
the aid of Statistical Package for Social Sciences Research (SPSS) were used as data analyses techniques. Multi co-linearity,
co-linearity, Durbin Watson, F-statistics and regression coefficient were used to determine the dynamic relationship
between the variables. Findings revealed that all the independent variables have positive relationship with the dependent
variables except dividend yield. The study recommends that operational efficiency of Nigerian financial market should be
deepened and management should strengthen its effort for effective dividend policy that will increase the profitability of the
quoted manufacturing firms Nigeria.

Keywords: Dividend Policy, Profitability, Quoted Manufacturing Firms, Return on Investment and Net Profit Margin

wealth. Like investment and capital structure decision,

1. Introduction dividend policy influences the value and cost capital in the
The conventional thought that dividend policy is relevant firm (Azhagaiah, 2008).
and matters on the performance of the firm can be traced to Profitability is the operational phenomenon of every profit
Graham and Dodd (1934) who were proponents of making organization and constitutes the short and long-run
traditionalist schools of thought, later to Lintner (1956) and management planning and operating strategies. It is a
to Gordon (1960) while Miller and Modigliani (1961) argued qualitative measure of input-output relationship of
that dividend policy is irrelevant under certain assumptions. management and management efficiency in maximizing
Dividend policy decision is a finance management function investor Return on Investment, Return on Assets, Return on
that determines the proportion of company’s profit that can Capital Employed and Earnings per share. Firms’
be distributed to the shareholders as return on investment and profitability can be appraised at the macro and micro level
proportion that will be retained for the company’s (Aburime, 2008). At the macro-level firms profit is a critical
reinvestment (Agrawal and Jararaman, 2004). It is one of the function of management, composition of assets, capital
most important financial decisions that corporate managers structure, ownership structure and dividend policy (Farsioet
encounter (Amidu, 2007). Dividend policy is a micro al, 2004).
prudential determinant of firms’ profitability, firms adopt In the corporate firms, the performance of the dividend
dividend policy that will facilitate the achievement of the function requires a critical examination of the twin effect on
organizational goals such as maximization of shareholders the corporate profitability and the value of the firm. Optimal
dividend policy requires that management allocate payout
 Journal of Finance and Accounting 2016; 4(4): 212-224 213

ratio that will guarantee the maximization of shareholders have the objective of repositioning the Nigerian business
wealth through the vehicle of increase market value of the environment to attract investors and maximize shareholders
firm and its shares (Ezirim, 2005). Companies with high wealth. It is therefore necessary to examine the effect of
dividend payout occasioned by high earnings records are dividend policy on the profitability of the quoted firms
priced high on the Nigerian capital market. Dividend policy through the dividend policy channel.
is the function of dividend payout ratio, ownership structure, Again, there has been attempts to establish a valued and
capital market operations, inflation and the legal framework acceptable relationship between dividend policy and
(Lie, 2005). It can be residual policy, stable or predictable profitability of quoted firms but the result has been
policy, low regular plus extra policy or constant payout inconclusive and difficult for policy application (Adelegan,
policy (Nissim et al, 2001). 2001, Black, 2001, Hakansson, 2006, Petit, 2004). While
However, the agency theory noted that management can some reported positive, others reported negative (Rozeff,
invest shareholder’s fund for personal interest rather than 2005, Harkavy, 2005). In Nigeria, most studies have focused
maximizing shareholders wealth. The Nigerian business has on the relationship between dividend policy and share price
over the years undergone various structural, institutional and of the firm (Amihud, 2004, Adesola, 2004) without
policy reforms with the objective achieving profitable firms considering the profitability. Therefore this paper intends to
that will enhance return on investment and impact on the examine dividend policy and profitability performance of
economy, for instance the deregulation of the economy in the select quoted Nigeria firms.
last quarter of 1986. Furthermore, there are also the
challenges of macroeconomic variables such as monetary 2. Literature Review
policy shocks which can affect negatively the performance of
the corporate firms that also affect the dividend policy. For 2.1. Dividend Policy Models: Walter’s Model Analysis
instance macroeconomic and monetary policy shocks of the
1980s, 1990s and 2000s affected negatively the performance Walter argues that the choice of dividend policies almost
of corporate organizations which also affects the dividend always affect the value of the firm. In his model, theoretical
policy (Adesola, 2004). evidence shows the importance of the relationship between
The relationship between dividend policy and performance the firm’s rate of return, r, and its cost of capital, k, in
of firms has long been one of the most controversial issues determining the dividend policy that will maximize the
among scholars in corporate finance. Despite numerous wealth of shareholders can be mathematically expressed as;
empirical researches, the controversy between dividend
DIV r (EPS − DIV ) / k
policy and performance of the firm remain unresolved P = + (1)
(Azhagaiah, 2008) (Eriki and Okafor, 2002) (Kioko, 2006) k k
(Luke, 2011). Some of the findings deepened the controversy
and cannot be used in policy making. To Gordon (1960) Where;
dividend policy is relevant and has effect on the firm value P=Market Price per Share
while Miller and Modiglani (1961) posited that dividend DIV=Dividend per Share
policy is irrelevant with the assumption of perfect market. EPS=Earnings per Share
The question is “Can market be that perfect that will make r=Firm’s rate of Return (average)
dividend policy irrelevant?” most of the empirical findings k=Firm’s cost of Capital or Capitalization Rate
have been in favor of the dividend policy relevance
hypotheses as postulated by Gordon.
However, most of these findings and the underlying
theories are based on the operational efficiency of the
capital market and the business environment of the
developed country as opposed to the capital market
operations and the business environment of emerging
countries like Nigeria which is characterized by lack of
transparency and poor corporate governance. This makes it
difficult for researchers to determine the relationship
between dividend policy and the profitability of quoted
firms. The management board of Nigerian firms mortgage
shareholders interest for personal interest. For instance the
case of Economic and Financial Crime Commission
(EFCC) Vs the Managing Director of the defected Oceanic
bank where the plaintiff pleaded guilty of N191 Billion
SOURCE: ADAPTED FROM GORDON’S MODEL
Naira, an amount greater than five times capital base of the
bank. The dearth of such research makes this study Figure 1. Equation for Cost of Capital.
imperative. The macroeconomic reforms over the years
214 Henry Waleru Akani and Yellowe Sweneme: Dividend Policy and the Profitability of Selected Quoted
Manufacturing Firms in Nigeria: An Empirical Analysis

DIV + ( r / k )(EPS − DIV ) / k Myron Gordon develops one very popular model explicitly
P = (2) related with market value of the firm to dividend policy can
k be stated as;

00
DIV1 DIV2 DIV00 DIVt
P0 =
(1 + k )
+
(1 + k ) 2
+.+
(1 + k ) 00 ∑ (1 + k ) t (3)
t =1

DIV (1 + g ) DIV (1 + g )2 DIV (1 + g )3 DIV (1 + g )00 00 DIV (1 + g )t

P0 = + + + ... + =∑ (4)
(1 + k ) (1 + k )2 (1 + k )3 (1 + k )00 t =1 (1 + k )t

From Equation (4): rA

P0 = (b = 0) (9)
r
DIV1
P0 = (5)
k −g If r<k then r/k< 1 and from Equation (9) it follows that P0
is smaller than the firm’s investment per share in assets, A. It
From Equation 5: can be shown that if the value of b increases, the value of the
share continuously falls.
EPS 1 (1 −b)
P0 = (6) 2.2. The Bird-in-the-Hand Theory Cum Argument
k −br
Gordon and Lintner (1963) concluded that investors prefer
The equation above explicitly shows the relationship of current dividends to capital gains. They argue that current
expected earnings per share, EPS1, dividend policy as dividends are certain and resolve uncertainty in the investors
reflected by retention ration, β, internal profitability, r, and mind about the future. Because investors are risk averse
the all-equity firm’s cost of capital, k, in the determination of preferring current to future dividends, near dividends are,
the value of the share. Equation (6) is particularly useful for therefore, discounted at a lower rate in comparison to future
studying the effects of dividend policy on the value of the dividends. Because of this, equity costs reduce with high
share. payout ratios. The stock price increases as shareholders get
more dividends in cash as they view the stock as attractive,
EPS1 (1 −b) rA(1 −b) thus, lowering the cost of capital while increasing the value
P0 = = (7)
k −br k −br of common stock.
According to Gordon’s model, dividend policy is irrelevant
(Since EPS = rA, A = assets per share) where r = k, when all other assumptions are held valid. But
If r = k, then when the simplifying assumptions are modified to conform
more closely to reality, Gordon concludes that dividend
EPS1 (1 −b) rA(1 −b ) EPS rA policy does affect the value of a share even when r = k.
P0 = = = = = A (8)
k −br k −br k r

DIV1 DIV2 DIV3 DIVn 00 DIVt t

P0 = + + + ... + =∑ (10)
(1 + k1 ) (1 + k2 )2 (1 + k 3 )3 (1 + kn )n t =1 (1 + kt )t

DIV0 (1 + g )1 DIV0 (1 + g )2 DIV0 (1 + g )n 00

DIVt t
Pb = + + ... + =∑ (11)
(1 + k1 )1 (1 + k2 )2 (1 + kn )n t =1 (1 + kt )t

DIV0 (1 + g ) DIV0 (1 + g )2 DIV0 (1 + g )n DIV1 (1 + g )n (1 − b)EPS

Pb = + + ... + = = (12)
(1 + k1 )1 (1 + k2 )2 (1 + kn )n kt − g k t −br

2.3. The Miller-Modigliani (MM) Hypothesis

Dividends + Capital gains (or loss )
According to Miller and Modigliani (MM), under a perfect r =
market situation, the dividend policy of a firm is irrelevant, Share Pr ice
as it does not affect the value of the firm.
 Journal of Finance and Accounting 2016; 4(4): 212-224 215

DIV + (P1 + P0 )n The value of P1 when dividend is not paid is:

r = (13)
P0 2.4. Dividend Irrelevance Proposition: Modigliani & Miller
Approach (1961)
DIV1 + (P1 + P0 )
r = (14) In 1961, two noble laureates, Merton Miller and Franco
P0 Modigiliani (M&M) showed that under certain simplifying
assumptions, a firms‟ dividend policy does not affect its
DIV1 + P1 DIV1 + P1 value. The basic premise of their argument is that firm value
P0 = = (15) is determined by choosing optimal investments. The net
(1 + r ) (1 + k )
payout is the difference between earnings and investments,
and simply a residual. Because the net payout comprises
n(DIV1 + P1 )n dividends and share repurchases, a firm can adjust its
V = nPo = (16)
(1 + k ) dividends to any level with an offsetting change in share
outstanding. From the perspective of investors, dividends
If the firm sells m number of new shares at time 1 at a policy is irrelevant, because any desired stream of payments
price of P1, value of the firm at time 0 will be: can be replicated by appropriate purchases and sales of
equity. Thus, investors will not pay a premium for any
n(DIV1 + P1 ) + mP1 − mP1 particular dividend policy.
nP0 = (17) M&M concluded that given firms optimal investment
(1 + k ) policy, the firm’s choice of dividend policy has no impact on
shareholders wealth. In other words, all dividend policies are
nDIV1 + nP1 + mP1 − mP1 equivalent. The most important insight of Miller and
= (18) Modiglian’s analysis is that it identifies the situations in
(1 + k )
which dividend policy can affect the firm value. It could
matter, not because dividends are “safer” than capital gains,
nDIV1 + (n + m ) P1 − mP1 as was traditionally argued, but because one of the
= (19)
(1 + k ) assumptions underlying the result is violated. The
propositions rest on the following four assumptions:
MM’s valuation Equation (18) allows for the issue of new Information is costless and available to everyone
shares, unlike Walter’s and Gordon’s models. equally.
No distorting taxes exist
mP1 = 11 − (X1 − nDIV1 ) = 11 − X1 + nDIV1 (20) Flotation and transportation costs are non- existent
Non contracting or agency cost exists
By substituting Equation (19) into Equation (18), MM
2.5. Relevance of Dividend Policy: Gordon’s Model
showed that the value of the firm is unaffected by its
dividend policy, thus: Relevance of dividend policy based on Uncertainty of
future dividends (Gordon, 1962) suggested a valuation
nDIV1 + (n + m ) P1 + mP1 models relating the market value of the stock with dividend
= nP0 = (21)
(1 + k ) policy. Gordon studied dividend policy and market price of
the shares and proposed that the dividend policy of firms
affects the market value of stocks even in the perfect capital
nDIV1 + (n + m ) P1 − (I 1 − X 1 + nDIV1 )
= (22) market. He stated that investors may prefer present
(1 + k ) dividend instead of future capital gains because the future
situation is uncertain even if in perfect capital market.
(n + m ) P1 + P1 − I 1 + X 1 Indeed, he explained that many investors may prefer
= (23) dividend in hand in order to avoid risk related to future
(1 + k ) capital gain. He also proposed that there is a direct
relationship between dividend policy and market value of
The price of the share at the end of the current fiscal year share even if the internal rate of return and the required rate
is determined as follows: of return will be the same. In (Gordon, 1962)’s constant
growth model, the share price of firm is subordinate of
DIV1 + P1
P0 = (24) discounted flow of future dividends. (Diamond, 2005)
(1 + k ) selected 255 US based firms as a sample and studied the
association of firm’s value with dividends and retained
P1 = P0 (1 + k ) − DIV1 earnings reported that there is only weak evidence that
(25)
investors prefer dividends to future capital gain. His
216 Henry Waleru Akani and Yellowe Sweneme: Dividend Policy and the Profitability of Selected Quoted
Manufacturing Firms in Nigeria: An Empirical Analysis

findings also showed a negative association between growth They would prefer investing them in the corporation which
of company and preference of dividend. would result in a future capital gain on the stock price as
the value of the stock increases. Litzenberger et al. (1979)
2.6. Dividend Policy and Agency Problems argue that investors have to pay taxes on dividends received
The level of dividend payments is in part determined by and capital gains realized. Capital gain tax rate is lower
shareholders preference as implemented by their than ordinary income tax rate and capital gain tax is payable
management representatives. However, the impact of when the gain is realized. Hence, from the taxation
dividend payments is borne by a variety of claim holders, viewpoint, investors should prefer capital gains to
including debt holders, managers, and supplier. The agency dividends. The value of a firm with a low payout ratio
relationship exists between should, therefore, be higher than the one with a higher
The shareholders versus debt holders conflict, and payout ratio. Due to this, Litzenberger (1979) argued that
The shareholder versus management conflict MM’s assumption that taxes do not exist is far from reality.
Shareholders are the sole receipts of dividends, prefer to In this theory, it is assumed that taxes on cash dividends are
have large dividend payments, all else being equal; higher than those on capital gains.
conversely, creditors prefer to restrict dividend 2.8. Capital Needs Theory
payments to maximize the firms resources that are
available to repay their claims. The empirical evidence This research adopts the capital needs theory for situating
discussed is consistent with the view that dividends this study, the capital needs theory holds that companies that
transfer assets from the corporate pool to the exclusive have some growth opportunities seek financing opportunities
ownership of the shareholders, which negatively affects from either retention of the earnings of the company or from
the safety of claims of debt holders. the capital market (core, 2001). They achieve this by
In terms of shareholder- manger relationships, all things retaining the profit earned on their investment (increasing
being equal, managers, whose compensation (pecuniary and retention ratio) or by issuing more shares in the form of
otherwise) is tied to firm profitability and size, are interested bonus shares to raise capital for the business.
in low dividend payout levels. A low dividend payout Therefore, such financing or capital needs help to
maximizes the size of the assets under management control, influence the dividend decision of the companies (banks) in
maximizes management flexibility in choosing investments, order to obtain corporate capital as cost effective as
and reduces the need to turn to capital markets to finance possible. This theory perhaps, explains the reason for the
investments. Shareholders desiring managerial the need to variation in the retention ratio and dividend payout ratios of
turn to capital markets to finance investments. companies. This informs the management of companies on
Shareholders, desiring managerial efficiency in investment what quantum of their earnings that should be retained as
decisions, prefer to leave little discretionary cash in capital and what proportion of the earnings that should be
management’s hands and to force mangers to turn to capital paid out as dividend. The capital needs theory also guide
markets to fund investments. These markets provide the financial manager as to what percentage of the dividend
monitoring services that discipline managers. Accordingly, that should be paid in cash and the portion that should be
shareholders can use dividend policy to encourage managers paid in the form of bonus issue, the bonus issue will help to
to look after their owner’s best interests, higher payouts meet the capital needs of the firms without external
ratios and monitoring by the capital markets and therefore borrowing. All these dividend decision when properly taken
provide more managerial discipline. in line with the capital needs of the firm are expected to
influence the financial performance of the firms through the
2.7. Disposition Theory and Tax Differential Theory window of the provision of adequate capital for the
Shefrin et al. (1985) predicted that because investors companies (banks).
dislike incurring losses much more than they enjoy making 2.9. Information Content or Signaling Theory
gains, they will gamble in the domain of losses. Investors
are thus reluctant to sell their shares because they will Stephen Ross, (1977) observed that there is a strong
experience regret if the stock subsequently rises in price. association between dividend payment and share prices.
They hold onto stocks that have lost value (relative to the The theory states that investors regard dividends as signals
reference point of their purchase) and will be eager to sell of managements forecast of earnings. If, for instance,
stocks that have risen in value A second argument was that investors expect a company’s Dividend to increase by 5%,
although many investors are willing to consume out of then the stock price generally will not change significantly
dividend income, they are to “dip into capital” to do so. on the day the dividend increase is announced. If however,
Dividend and sales of stock are not perfect substitutes for investors expect an increase of 10% but the company
these investors. For behavioral reasons, then, certain actually increases the dividend by 20%, this generally
investors prefer dividends to retention of earnings. Tax would be accompanied by an increase in stock price.
Differential Theory states that investors would prefer not to Conversely, a less than expected dividend increase, or a
receive dividends now to avoid paying immediate taxes. reduction, generally would result in a price decline. It is
 Journal of Finance and Accounting 2016; 4(4): 212-224 217

well known that firms are usually reluctant to reduce negative and significant relationship between both measures
dividends and, therefore, managers do not raise dividends of dividend policy and stock price fluctuations
unless they anticipate higher or at least stable earnings in Adelegan (2001) studied of the impact of growth prospect,
the future to sustain higher dividends. This, therefore, leverage and firm size on dividend behaviour of corporate
means that a larger than expected dividend increase is taken firms in Nigeria between 1984 and 1999 observed that the
by investors as a signal that the firm’s management forecast conventional Lintner’s model does not perform quite
improved earnings in the future, where as a dividend creditably in explaining the dividend behaviour of corporate
reduction signals a forecast of poor earnings. Thus, it can be firms for the period under review. Supports that factors that
argued that investors’ reaction to changes in dividend mainly influenced the dividend policy quoted firms are after
payments do not show that investors prefer dividends to tax earnings, economic policy changes.
retained earnings; rather, the stock price changes simply Adesola (2004) examined dividend policy behaviour in
indicate that important information is contained in the Nigeria using Lintner’s model as modified by Brittan
dividend announcements. between 1996–2000 appears to agree with Oyejide and
Nyong’s view that there is substantial and unequivocal
2.10. Empirical Review support for the Lintner’s model.
Baskin (2005) used a different method and examined the Agrawal and Jayaraman (2004) observed that Dividend
association between dividend policy and stock price payments and leverage Policy are substitute mechanism for
volatility rather than returns. He added some control controlling the agency cost of free cash flow hence, improves
variables for examining the association between share price performance. If a firm’s Policy is to pay dividend each year
volatility and dividend yield. These control variables are end to shareholders, the level of activity in the organization
earning volatility, firm’s size, debt and growth. These will increase to obtain more income and have excess retained
control variables do not only have clear effect on stock earnings to meet the standard set.
price volatility but they also affect dividend yield. For Velnampy (2006) examined the financial position of the
instance, the earning volatility has effect on share price companies and the relationship between financial position
volatility and it affects the optimal dividend policy for and profitability with the sample of 25 public quoted
corporations. Moreover, with assumption that the operating companies in Sri Lanka by using the Altman Original
risk is constant, the level of debt might have positive effect Bankruptcy Forecasting Model. His findings suggest that, out
on dividend yield. Size of firm would be expected that of 25 companies only 4 companies are in the condition of
affect share price volatility as well. That is, the share price going to bankrupt in the near future. He also found that,
of large firms is more stable than those of small firms as the earning/total assets ratio, market value of total equity/book
large firm tend to be more diversified. Furthermore, small value of debt ratio and sales/total assets in times are the most
firms have limited public information and this issue can significant ratios in determining the financial position of the
lead to irrationally react of their investors. quoted companies.
Amidu and Abor (2006) conducted a study on the Amidu (2007) noted that dividend Policy affects firm
determinants of dividend policy by using panel data of 20 performance especially the profitability measured by their
firms listed in Ghana Stock Exchange. Dividend payout return on assets. The results showed a positive and
ratio was taken as dependent variable. They proved that significant relationship between return on assets, return on
dividend payout was mostly dependent on the net earnings equity, growth in sales and dividend Policy. This showed
of the firms also those firms with high liquidity pay high that when a firm has a Policy to pay dividends, its
dividends. The association of dividend payout with risk is profitability is influenced. The results also showed a
negative in nature. statistically significant relationship between profitability
Rashid and Rehman (2008) conducted a study in and dividend payout ratio.
Bangladesh. They took 104 non financial firms for a period Zakaria and Tan (2007) also stressed the fact that firms
of 1999 to 2006. They found a positive but non-significant influences the future earnings and future dividends potential.
relationship between dividend yield and stock price volatility Nissim & Ziv (2001) showed that dividend increases were
in the capital market of Dhaka Stock Exchange. They also directly related to future increases in earnings in each of the
found that there is no considerable relation between two years after the dividend change Likewise, Zeckhauser&
declaration of earnings and the stock prices as seen in the Pound (1990) in a related study found out that there is no
developed capital markets. The insignificant relationship significant difference among dividend payouts with or
between stock price volatility and dividend policy may be without large block shareholders.
due to inefficient capital market of Bangladesh or due to Grullon, et. al (2002) analyzed the reaction between
majority of shares held by dominant shareholders also dividend policy changes and a firm’s dividend risk and
working in the company board. growth. Their main goal was to relate dividend policy
Nazir et al (2010) on the non-financial firms listed in changes with a firm’s lifecycle. They found evidence that
Pakistan’s capital market. The data of 73 firms was analyzed dividend increases suggest that firms are in a transition
for a six year period from 2003 to 2008. After using panel between the growth and the maturity phase, since in the
data and applying regression analysis, they also found a latter, investments opportunities start to reduce as well as the
218 Henry Waleru Akani and Yellowe Sweneme: Dividend Policy and the Profitability of Selected Quoted
Manufacturing Firms in Nigeria: An Empirical Analysis

level of required resources, thus allowing higher cash flow, dividend per share.
which could be used for dividend payments. Supporting their Muchiri (2006) studied the determinants of dividend
work on the capital asset pricing model, they concluded that payout among the listed companies in Kenya and concluded
firms that increase dividends had a significant decrease in that the most important factor in dividend policy was the
systematic risk while firms in which dividends decreased, company’s current and future profitability. Other factors
incurred a significant increase in risk. considered important were the cash flow position of the
Njoroge (2001) conducted a study on the relationship company, the immediate financial needs and the availability
between dividend policies and growth in assets, return on of profitable investments.
assets and return on equity at the Nairobi Stock Exchange Kioko (2006) analyzed the relationship between dividend
found that both Return on Equity and return on assets are changes and future profitability of companies quoted at the
positively related to the payout ratio and that growth in NSE and established that at least in the year of dividend
assets is not significant in determining the level of change, there exist a relationship between dividend changes
dividends. & future profitability.
Bitok (2004) studied the effect of dividend policy on the However, for the first and second after dividend change, an
value of the firms quoted at the NSE. According to the study, insignificant relationship was observed. It is observed that
dividend policy is relevant thus implying that an optimal significant proportion of the studies carried out on dividend
dividend policy exists. However, the relationships between policy and the performance of quoted firms looked at
dividend policy and the value for the firms quoted at the NSE dividend and share price or market value of the firm. But in
is weak implying there are other factors (investment and this paper we look at dividend policy and the profitability of
financing) other than dividend policy that affect the value for quoted manufacturing firms such as return on investment and
the time. net profit margin as a function of dividend policy.
Tiriongo (2004), in the study on dividend policy practices
in the companies listed at the NSE, argued that there was a 3. Research Methods
general declining trend of dividend payment pattern
attributed to numbers of factors, such as, dwindling company The research design used in this study is the quasi-
profits and economic performance that were associated with experimental design that is used to test time series
Financial liberalization. relationship. The data is sourced from stock exchange
Wandeto (2005) conducted an empirical investigation of factbook and the time frame covers 1981-2014. Fifteen (15)
the relationship between dividend changes and earnings and quoted manufacturing firms were selected among the
found, using a simple regression model, that there was a population. The annual time series data of the firms were
strong positive relationship between dividends per share aggregated to form the variables. Following the connectivity
and earnings per share with correlation coefficient of 25.3% between dividend policy decision and the profitability this
and concluded that dividend change is most sensitive to connectivity though not very direct, may be through the
earnings. window of increase capital, perception and the value of the
Muindi (2006) studied the relationship between earning firm via increased in profitability. Multiple regressions as
per share and dividend per share of equities for companies formulated and the social sciences statistical package (SPSS)
listed at the NSE. The findings of the study reveal that there are used as data analysis techniques.
is a significant relationship between earnings per share and Model Specification
ROI = f (DPR, RR, DY, EPS) (26)

Model 1: ROI = α 0 + β 1 DPR + β 2 RR + β 3 DY + β 4 EPS + εί (27)

NPM = f (DPR, RR, DY, EPS) (28)

Model 2: NPM = α 0 + β 1 DPR + β 2 RR + β 3 DY + β 4 EPS + εί (29)

Where: RR=Retention Ratio

ROI=Return on Investment DY=Dividend Yield
NPM=Net Profit Margin EPS=Earnings per Share
DPR=Dividend Payout Ratio
 Journal of Finance and Accounting 2016; 4(4): 212-224 219

4. Results and Discussion

Presentation of Data

Table 1. Annual time series data: 1981-2014.

Year ROI NPM/PAT DPR RR DY EPS

1981 186.81 195.98 15.40 20.45 35.09 114.19
1982 207.57 214.61 61.60 36.43 19.84 215.98
1983 223.35 232.73 30.90 21.30 30.81 214.39
1984 242.49 249.88 23.18 21.60 30.15 327.73
1985 267.03 242.48 36.00 20.32 17.91 318.55
1986 253.01 298.83 48.00 20.30 24.76 207.63
1987 309.75 310.31 46.10 20.95 12.26 219.99
1988 329.54 326.29 49.80 20.43 92.13 159.35
1989 319.73 343.62 62.70 21.60 61.45 172.66
1990 360.10 363.19 37.20 21.15 6.93 194.79
1991 366.34 384.52 35.90 24.20 8.03 169.20
1992 375.05 378.89 85.42 22.40 9.69 646.51
1993 411.52 386.19 195.75 21.33 10.71 460.03
1994 421.73 402.42 181.05 28.50 12.11 419.57
1995 428.82 395.46 3.96 55.26 13.36 72.70
1996 413.90 418.14 13.56 31.24 12.02 73.76
1997 440.94 401.25 2.44 38.14 10.01 50.79
1998 437.11 410.54 3.29 42.30 9.68 29.48
1999 469.00 1432.26 4.13 52.22 6.21 38.91
2000 469.70 394.10 5.26 517.77 3.60 40.49
2001 482.76 401.73 3.72 97.94 4.24 48.24
2002 518.13 1802.10 4.71 127.59 3.33 33.82
2003 557.92 388.52 4.91 96.62 3.37 30.03
2004 532.23 373.93 5.19 208.15 3.66 10.17
2005 568.07 361.53 4.50 268.80 3.72 10.20
2006 5332.46 428.68 6.40 255.49 4.15 13.17
2007 735.56 401.60 8.35 378.99 3.89 23.59
2008 662.41 417.00 5.28 176.42 7.64 2.90
2009 641.64 378.34 5.37 119.46 5.03 50.18
2010 718.91 431.98 4.74 80.49 4.80 50.18
2011 759.88 454.92 6.06 81.67 4.48 24.33
2012 758.81 444.94 6.89 71.66 3.70 23.18
2013 845.01 78.22 30.40 19.60 5.87 124.52
2014 869.00 512.89 42.10 21.01 7.44 128.11

Source: Stock Exchange Factbook various Issue

Key note:
ROI=Return on Investment
NPM/PAT=Net Profit Margin/Profit after Tax
DPR=Dividend Payout Ratio
RR=Retention Ratio
DY=Dividend Yield
EPS=Earnings per Share

Test of Colinearity and Autocorrelation of the Variables

Table 2. Tolerance and Variance inflation factor (VIF).

MODEL I TOLERANCE VIF

Model 1: ROI = 0 1
DPR 2
RR 3
DY EPS
4 + εί
EPS = Earnings Per Share .280962 3.560
DY = Dividend Yield .312100 3.204
RR = Retention Ratio .086670 11.538
DPR = Dividend Payout Ratio .064650 15.468

Source: SPSS print out 20.0

Table 2 shows a tolerance of above 0.1 inverse to the rule of the thumb which is contrary to the rule for testing multi-
colinearity on tolerance while only two variables of the variance inflation factor (VIFs) which are dividend payout ratio and
retention ratio satisfies the threshold of being above 0.5 and less than 10 earnings per share and dividend yield are unable to
satisfy the threshold of above 0.5 with a weak value of 3.56 and 3.20 below 10.0.
220 Henry Waleru Akani and Yellowe Sweneme: Dividend Policy and the Profitability of Selected Quoted
Manufacturing Firms in Nigeria: An Empirical Analysis

Table 3. Colinearity Diagnostic and Durbin Watson Test.

Properties
MODEL I Eigen val Cond index Variance Constant
E D C B
1 3.57147 1 0.02081 0.01398 0.011 0.00313 0.00313
2 3.57147 2.034 0.26907 0.00988 0.1704 0.00331 0
3 0.38732 -3.037 0.66667 0.00114 0.17181 0.02686 0.61262
4 0.15409 4.814 0.0015 0.97373 0.23542 0.01897 .02862.
5 0.02359 12.304 0.04196 0.00127 0.41137 0.94748 0.95563
Durbin Watson Test .388823 (Model I)
Durbin Watson Test .40537 (Model II)

E = Dividend Payout Ratio

D = Retention Ratio
C = Dividend Yield
B = Earnings per Share
Source: SPSS (20.0)

The table above illustrated a colinearity and

autocorrelation; the results found that the Eigen values that Table 5. Multiple Regression Results.
correspond with the highest condition index and variance Model II E C D B
constants are less than 0.5 rule of the thumb. The Durbin Variables DPR RR DY EPS
Watson statistics of .38823 and .40537 shows the absence B 2.05274 .053824 -6.73141 .064114
of multicolinearity, portraying a significant relationship SEB .030283 .0363360 9.57293 .017602
between the dependent and the independent variables in the Beta (β) .062574 .128709 1.298441 .100365
model. Corre -.735152 .934467 .494571 .955168
Effect of Dividend Policy on the Return on Investment Partial .000356 .077657 -.036889 .191086
T. test 0.07 1.480 -703 3.642
Table 4. Multiple Regression Results. Sig.t .9946 .1513 .4884 .0012

Model I E C D B Constant (α) = 11529.99471, t-test = 24.514, Sig.t =.0000

Variables DPR RR DY EPS SPSS Printout (20.0)
B .005955 .017253 -1.24689 .042551
SEB .24167 .29017 763959 .014047 The regression result presented in the above table shows
Beta (β) .055728 .042508 3.265119 .071481 that dividend payout ratio, retention ratio, and earnings per
Corel -.577869 .790858 .339243 .823978 share are positively related to the Net Profit Margin of the
Partial Corr .049226 -.118085 -.310314 .518164 selected manufacturing firms while Dividend Yield is
T. test .246 -.595 -1.632 3.029 negatively related to the dependent variable, this is evidence
Sig.t .8074 .5575 .1152 .0056 by the negative coefficient of -0.74 as parameter for
Constant (α) = 99165.651442, t-test = 26.404, Sig.t =.0000
independent variable. The t-test shows that Earnings per
Source: SPSS Printout (20.0) Share is statistically significant while other independent
variables are statistically not significant at 5% level of
The table above shows the relationship between the significance.
dependent and the independent variables in the study. The
result shows a correlation coefficient of 0.57 between Table 6. Model Summary Result.
dividend payout ratio and Return on Investment of the quoted Summary Table Model I Model II
companies. This means that the relationship between Multiple R .85271 .96499
Dividend Payout Ratio and Return on Investment is positive R Square (R2) .72711 .93120
Adjusted R square .68345 .92019
and insignificant. The relationship between Retention Ratio
F-Ratio 16.65310 84.58960
and Return on Investment is positive and significant with a Sig f (5%) .0000 .0000
positive correlation coefficient of 0.79 which is 79.08%.
However, the relationship between Dividend Yield and Source: SPSS (20.0) Output
Return on Investment is positive but weak, the correlation
The estimated models revealed multiple R of .85271 in
coefficient of 0.34 and 0.82 shows that the relationship
model one and .964699 in model two; this signifies the
between Dividend Yield is weak while the relationship
positive and strong relationship between the dependent and
between Earnings Per Share is very strong the regression
the independent variables. The R2 and the adjusted R2
intercept is positive with the value of 99.65 signifying the
of .72711 and .68345 for model one and .93120 and .92019
positive effect of the independent variables on the dependent
for model two signifies that 72.711% and 68.345% variation
variables.
in Return on Investment of the companies can be explained
Effect of Dividend Policy on Net Profit Margin
by the independent variables in the model while 93.120% and
92.019% variation Net Profit Margin can be explained by the
 Journal of Finance and Accounting 2016; 4(4): 212-224 221

independent variables in the model. The f-ratio shows that 2. Retention ratio has positive effect on return on
the models have overall significance in explaining changes to investment and net profit margin. The finding is in
the dependent variable. support of the Gordon’s relevant theory as opposed in
Summary of Major Findings Miller and Modigliani irrelevant theory.
This study examined Dividend Policy and the profitability 3. Dividend yield has negative effect on return on
of selected quoted manufacturing firms. From the forgoing, investment and net profit margin. This finding is
the analysis, the following were found; contrary to empirical result and expectation of the result
1. The findings of the result from model one found that in this study. This is in line with the irrelevant theory of
there is positive correlation between dividend payout Miller and Modigliani as opposed the relevant theory of
ratio, retention ratio, and dividend yield, earnings per Gordons.
share and return on investment. This is evidence by the 4. Earnings per share have positive effect return on
R2, the adjusted R2 and the f-statistics. investment and net profit margin of the quoted
2. The T-statistics shows that earnings per share are manufacturing firms.
positively related to return on investment while other
variables in the model are statistically not significant. 5.2. Recommendations
The insignificant effect of the variables can be traced to 1. Reform in the financial system: The study recommend
management such as the conflict between management that there should be further reforms in the financial
and the shareholders that led to the agency theory. system to enhance the operational efficiency of the
3. The f-statistics of 16.53 at the significance of 0.000 financial market to determine the profitability of quoted
shows the overall significant of the independent firms via the dividend policy channel.
variables in inducing changes on the dependent 2. Management Efficiency: The study recommends that
variable. the management of the quoted firms should be efficient
4. From the rule of thumb, the computed t-value of 3.30 is and effective to achieve increase profitability of the
greater than the critical t-value of 2.08; this means that quoted manufacturing firms.
dividend payout ratio has significant relationship with 3. Consistency in Dividend policy: There should be
return on investment while other variables are not consistent dividend policy that will maximize
significant leading to the rejection of alternate shareholders wealth without mortgaging the
hypotheses. Model II has net profit margin of the firms profitability objectives of the firms.
as the function of dividend payout ratio, retention ratio,
dividend yield and earnings per share.
5. The models findings show that dividend payout ratio,
retention ratio and dividend yield have positive
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