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STUDENT NO.:09175202



Dividend Policy of Companies listed on the Lusaka Stock Exchange

Introduction The Lusaka Stock Exchange (LuSE) was established with preparatory technical assistance from the International Finance Corporation (IFC) and the World Bank in 1993. The Exchange opened on 21st February 1994. In its first two years of operation the LuSE and Securities and Exchange Commission (SEC) are funded by the UNDP and Government of Zambia as a project on financial and capital market development in Zambia under the multi component private sector development programme. The LuSE is made up of stock broking corporate members and is incorporated as a non profit limited Liability Company. The formation of the Exchange is part of the governments economic reform programme aimed at developing the financial and capital market in order to support and enhance private sector initiative. The Lusaka Stock Exchange is also expected to attract foreign portfolio investment through recognition of Zambia and the region as an emerging capital market with potentially high investment returns. Another important role of the Exchange is to facilitate the divestiture of Government ownership in parastatals and realisation of the objectives of creating a broad and wide shareholding ownership by the citizenry via a fair and transparent process. Dividend Policy Dividend policy refers to the policy chalked out by companies regarding the amount it would pay to their shareholders as dividend. These policies shape the attitude of the investors and the financial market in general towards the concerned company. Dividend policy is an important component of the corporate financial management policy. It is a policy used by the firm to decide as to how much cash it should reinvest in its business through expansion or share repurchases and how much to pay out to its shareholders in dividends. Dividend is a payment or return made by the firm to the shareholders, (owners of the company) out of its earnings in the form of cash. For a long time, the subject of corporate dividend policy has captivated the interests of many academicians and researchers, resulting in the emergence of a number of theoretical explanations for dividend policy. For the investors, dividend serve as an important indicator of the strength and future prosperity of the business, thereby companies try to maintain a stable dividend because if they reduce their dividend payments, investors may suspect that the company is facing a cash flow problem. Investors prefer steady growth of dividends every year and are reluctant to investment to companies with fluctuating dividend policy. Over time, there has been a substantial increase in the number of factors identified in the literature as being important to be considered in making dividend decisions. Thus, extensive studies have been done to find out various factors affecting dividend payout ratio of a firm. However, there is no single explanation that can capture the puzzling reality of corporate dividend behavior. Ocean deep judgment is involved by decision makers to resolve this issue of dividend behavior. The decision of companies to retain or pay out the earnings in form of dividends is important for the maximization of the value of the firm (Oyejide, 1976). Therefore, companies should set a constructive target dividend payout ratio,

where it pays dividends to its shareholders and at the same time maintains sufficient retained earnings as to avoid having raise funds by borrowing money. In this paper I will look at three different companies listed on the Lusaka stock Exchange. Thes e are: 1. Copperbelt Energy Corporation( CEC) 2. First Quantum minerals 3. Ecobank

Copperbelt Energy Corporation, Corporate profile History and Operations The Copperbelt Energy Corporation Plc (CEC) is the outcome of an evolutionary process that commenced more than 60 years ago when the Rhodesia-Congo Border Company (CECs founding predecessor) was founded, with a mandate to provide power solutions to mining companies. Majority owned by Zambian Energy Corporation (Zam-En), CEC has a deep insight into the mining industry, which enables it to provide quality electricity and other power products and services to the majority of the mines in Zambia. In 2007, CEC extended its mandate beyond Zambia, and has since been providing a transmission service to a mining operation in the Democratic Republic of Congo. In November 2009, CEC became a full member of the Southern African Power Pool and is, therefore, well placed to serve mines throughout Southern Africa. CEC is fast positioning itself as a developer of energy infrastructure in Africa and is well respected in the region for its skills in designing and operating transmission systems. Listed on the Lusaka Stock Exchange since January 2008, CEC is a licensed carrier of telecommunications traffic using broadband optic fibre and is now a competitive retail sector player in telecommunications through a joint venture with Realtime Zambia. Infrastructure The Company owns and operates around 900 kilometres of 220kV and 66kV transmission lines, 520 kilometres of optic fibre on power lines, and 250km in trenches, 38 major substations and 80MW of gas turbine generation. CEC accounts for about 50% of power consumed in Zambia. To ensure high quality of supply, the network has a number of reliability enhancing features that include a high degree of network redundancy, stand-by generation, a well-equipped control centre and multiple sourcing points.

Growth Strategy CEC seeks to be a strategic partner in private power projects or public-private partnership power projects within the region and is focused on opportunities that create value for the Company and its investors. To achieve that, we continue to build appropriate partnerships that provide us with the necessary support to pursue and participate in viable new business opportunities. Ownership structure Shareholder % holding Zambian Energy Corporation 52.0 ZCCM-IH 20.0 Individual shareholders 15.8 African Life Financial Services Zambia Limited managed funds 7.2 Copperbelt Energy Corporation Employees Share Ownership Plan

CECs dividend policy CECs dividend policy states that the shareholders will procure that the full amount of CEC profits arising or accumulated from the business of CEC in each year of operation shall be distributed to the shareholders, after: the provision of working capital as determined by the board of directors; and the making of such transfers to reserves and provisions as in the opinion of the board of directors ought reasonably to be made: taking into account the obligation to service all debt and to comply with any financing agreement to which the Company is party; and taking into account the interests of the shareholders in minimising the taxation liabilities.

Over the next few years, CEC will upgrade the Companys existing infrastructure to better meet the needs of existing customers and will develop additional infrastructure in order to provide additional services to existing customers and to supply new customers. The capital expenditure programme as described under section 5.7 of the prospectus dated 13 November 2007 will be funded out of the Companys own resources and funds specifically borrowed, as set out in section 5.6 of the same prospectus. It is currently envisioned that dividends will be declared in February and August of each year, and will be paid within six weeks of declaration.

Dividends Proposed and Paid During the period under review, a dividend of ZMW20,000,000 was proposed and paid, which represented a dividend of ZMW0.02 per share. 2. First Quantum Minerals Dividend Policy 03/18/2005 Inaugural Dividend Of Cdn $0.06 Per Share First Quantum Minerals Ltd. (TSX Symbol "FM", LSE Symbol "FQM") announces that it will pay an inaugural dividend of Canadian $0.06 per share in respect of the year ended December 31. 2004. The dividend was to be paid on April 25, 2005 to shareholders of record on April 11, 2005. In addition the Company established a dividend policy which implemented a progressive dividend with future payments established in line with annual results and cash flow. Under this policy, the Company expected to pay two dividends a year, an interim dividend declared after the release of the second quarter results and a final dividend to be declared upon announcement of the full year results. The interim dividend was to be set at one-third of the total dividends paid in the previous financial year. The final dividend amount was to be determined subject to the financial performance of the Company. Philip Pascall, Chairman and CEO commented, "The adoption of the dividend policy has been made possible by a strong cash flow and net profit in 2004, as well as the positive outlook for the Company, in particular the Kansanshi copper-gold mine in Zambia. Our dividend policy will be guided by a balanced allocation of free cash flow for the financing of our development projects and distribution to shareholders." According to First quantum, the below statements form part of the dividend policy and highlights a number of factors that shall determine the payment of the dividend. Certain of the information contained in this news release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, including but not limited to those with respect to the prices of gold, copper and sulphuric acid, estimated future production, estimated costs of future production, the Company's hedging policy and permitting time lines, involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the actual prices of copper, gold and sulphuric acid, the factual results of current exploration, development and mining activities, changes in project parameters as plans continue to be evaluated, as well as those factors disclosed in the Company's documents filed from time to time with the British Columbia Securities Commission and the United States Securities and Exchange Commission.

4. ECOBANK DIVIDEND POLICY The objective of Ecobank is to optimise shareholders return on investment, mainly through an increase in the value of shares and payment of dividends. Dividends are payable in cash and or as bonus shares. Cash dividends payable are derived from yearly profits or from retained earnings accrued profits, whilst bonus share are payable from the same sources as well as other reserves that are non-statutory in nature. Given the need of the group to extend its capital resources, strengthen its operational base and fund its expansion plans, the companys dividend distribution is guided by the following principles:

Special efforts is made to pay dividend each year. The level of the dividend pay-out does not compromise the maintenance of adequate reserves against exchange rate movement and the growth of other capacity building reserves. Cash dividends paid out shall not exceed dividends received from the groups subsidiaries and affiliates. Whilst maintaining adequate dividend cover, dividend shall be increased in accordance with the growth in earnings per share.

The following table outlines the rate of dividend pay-out by ETI since 2008 : Dividend Year Cash (US cents per share) 2008 0.2 2009 0.3 2010 0.4 2011 0.4 2012 0.4

Factors affecting Dividend Policy When deciding on the dividend policy, several factors need to be taken into account. These factors are as follows: Stability of earnings The nature of business has an important bearing on the dividend policy. For example industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings.

Usually enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods. Age of Corporation Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy, while on the other hand an older company can formulate a clear cut policy and more consistent policy regarding dividend. Liquidity of funds Availability of cash and a sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, therefore, the greater the funds and the liquidity of the firm the greater the ability to pay dividends. The liquidity of the firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, the company can distribute the cash dividend.

Extent of Share distribution Nature of ownership also affects dividend decisions. A closely held company is likely to get the accent of the shareholders for the suspension of dividend or for allowing a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such accent because they will emphasise to distribute higher dividend. Needs for additional capital Companies return part of their profits for strengthening their financial positions. The income may be conserved for meeting the increased requirements of working capital or for future expansion. Small companies usually find difficulties in raising finance for their needs of increased capital for expansion programs. They having no other alternative, use their ploughed back profits. Therefore, such companies distribute dividend s at low rates and retain a big part of profits. Trade Cycle Business cycles also exercise influence on dividend policy. Dividend policy is adjusted according to business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by companies in dull years if the adequate reserves have been built up.

Government policies The earnings capacity of the enterprise is widely affected by the change in the fiscal, industrial, labor, control and other Government policies. Sometimes Goverments restricts the distribution of dividends beyond a certain percentage in a particular industry or in all spheres of business as can be done in an emergency. The dividend policy has to be modified or formulated accordingly in those enterprises. Need for funds Dividends paid to stockholders use funds that the firm could otherwise invest. Therefore, a company running short of cash or with ample capital investment opportunities may decide to pay little or no dividends. Alternatively there may be an abundance of cash or a dearth of good capital budgeting projects available. This could lead to very large dividends being paid out. Management expectations If a firms managers perceive the future as being relatively bright, on the one hand, they may begin paying large dividends in anticipation of being able to keep them up during the good times ahead. On the other hand, if the firms manager perceive the bad times coming ahead, they may decide to build the firms reserves for safety instead of paying dividends. Stockholders preferences Reinvesting earnings internally, instead of paying dividends would lead to higher stock prices and a greater percentage of the total return common stockholders receive coming from capital gains. Capital gains are profits earned by an investor when the price of the capital asset, such as common stock increases. Common stockholders may prefer to receive their return from the company in the form of dividends. Capital gains are not taxed at all unless they are realized. That is unless the stock is sold. The board of directors should consider stockholder preferences when establishing the firms dividend policy Restriction on Dividend Payment Afirm may have dividend payment restrictions in its existing bond indentures or loan agreements. For example, a companys loan contract with a bank may specify that the companys current ratio can not drop below 2.0 during the life of the loan. Because payment of a cash dividend draws down the companys cash account, the current ratio may fall below the minimum level required. In such a case, the size of the dividend may have to be cut or omitted. In addition, many countries prohibit dividend payments if they would create negative retained earnings on the balance sheet. This restriction is a prohibition against raiding the initial capital. Below is a summary of factors that influence the dividend decision

Does the firm need the cash for reinvestment?

No Yes Yes No

Dividend more likely Dividend less likely Dividend more likely Dividend less likely Dividend more likely Dividend less likely Dividend more likely Dividend less likely Dividend more likely Dividend less likely

Does the firm have acces to cash or borrowing opportunities?

Does the management expect the futire to be Yes bright? No Do stock holders prefer capital gains? No Yes No Yes

Are there restrictions on dividend payments by law or agreement?

Conclusion Not every dividend policy fits a company. When deciding on how much dividend should be distributed to their investors, factors such as legal constraints, contractual constraints, and other s stated above have to be considered to obtain the most suitable and appropriate dividend policy.

References 1. www.first-quantum.com, Geoff Chater and Bill Iversen, 8th Floor. 543 Granville Street Vancouver, British Columbia, Canada V6C 1X8 2. Asquith, P., and D. Mullins. "The impact of initiating dividends on shareholder wealth." Journal of Business 56 (1983) 3. Born, Jeffery, James Moser, and Dennis Officer. " Changes in dividend policy and subsequent earnings." Journal of Portfolio Management, summer 1988, pp. 56-62. 4. Ghosh, D., and S. Khaksari (eds) (1994), Managerial finance in the corporate economy, publisher: Routledge, London, United Kingdom. 5. Miller, M. H. and Rock K. (1985) Dividend policy under asymmetric information, Journal of Finance, 40, September, 1031-51 6. www.cecinvestor.com 7. www.ecobank.com/group/dividend policy 8. Financing for the small business Brian H, 1990, 9. Financial Management, Principles and Practice,4th edition. Gallagher, T. J and Andrew, J.D. 2007 10. www.luse.co.zm

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