Welcome to Our Presentation

Dividend Policy
SQUARE TEXTILES LTD.
 Company Overview
• The name of the company is Square Textiles Ltd. It
incorporated as a public limited company in the year of
1994

• It is listed in DSE in 2002 with authorized capital of

tk.1000 million with paid-up capital of 342.89 million.
• Current Shares Outstanding is 34.29 millions
Vision
• As means to the well being of the investors, stakeholders, employees and
members of the society at large by creating new wealth in the form of goods
and services
Mission
• Our mission is the pole star of our vision for maximization of production of
quality life saving products and services strictly on ethical and moral
standards at minimum costs to the society
Corporate Governance
• Good Corporate Governance is key to successful sustenance. The Corporate
Governance of STL as follows:
a) Top Management:
(i) Board of Directors
(ii) The Top Management
b) Executive Management
 Dividend Policy
Three key issues in Dividend policy:
• What fraction of earnings should be
distributed?
• Should the distribution be in the form of
cash or stock repurchases?
• Should the firm maintain a steady, stable
dividend growth rate?
 Dividend Theories
There are three theories of dividends related to
Investors
• Miller and Modigliani developed the dividend
irrelevance theory.
• The bird-in-the-hand theory holds that the firm’s
value will be maximized by a high dividend
payment ratio.
• The tax preference theory states investors prefer
to have companies retain earnings rather than
pay them out as dividends.
 Dividend Theories

The company believes that the investors like bird-in-the-hand

theory: the more the payout ratio the more the value of the firm
but after a certain payout it follows contrary.

• The dividend payout rate Years Po Pay-out

has historically been 2002 26.9 32%

increasing.
• Price of the stock 2003 43.1 40%
increases up to certain
level of pay-out ratio 2004 138.3 40%
(40%) increase.
2005 81.7 42.50%
• After then it starts to
decline as payout 2006 75.6 45%
increases.
 Types of dividends offered by the
Company

Considering investors Preference it offers two

types of dividends

a. Cash Dividend; dividend paid in cash.

b. Stock dividend; dividend paid in additional

shares rather than in cash.
 Cash Dividend Vs. Stock dividend
Dividend Dividend Dividend Dividend
• Although the Type Declared Declared Declar
per share (stock) ed %
company paid (Cash)
cash dividend 2000 10.00 - 10
over last seven 2001 3.00 - 30
years, 2002 3.20 - 32

2003 3.00 10:1 40

• Both type of 2004 3.00 10:1 40
dividends paid in 2005 3.00 08:1 42.50
the last four years
2006 3.00 100:15 45
of operation
Source: Annual Report 2000-2006
 Cash dividends: A closer Look
FY2006
• Dividends are declared in Annual General Meeting Notice.
• In view of earning per share of Tk. 10.17 (2006) and the available
reserve surplus, the Board of directors has recommended cash
dividend of Tk. 3 per share of Tk. 10 each.
• The Board also recommended for declaration of stock dividend
(Bonus Share) at the rate of 15(Fifteen) shares for every
100(Hundred) shares held
• In sum, effective cash dividend is 41%.
 Stock dividend
• Usage of stock dividend is a crucial company dividend
policy. Stock dividends used on a regular basis will keep
the stock price more or less constrained.
• For example, if a firm’s earnings rises by 10 percent per
year, its stock price would tend to go up at about the
same rate and it would soon be outside the trading
range.
• A 10 percent annual stock dividend would maintain the
stock price within the optimal trading range.
 Stock dividend: A closer look
• When the stock price is lowest (tk.26.90) there was no stock dividend (-).
• As the stock prices increased in the market (DSE and CSE), 10 percent
stock dividend was made by the year 2003 and 2004.
• Further it increased to 12.5 percent in 2005 and to 15 percent in 2006.

Type Dividend Stock Price/ share Stock Price/

Declared DSE share
(stock) CSE The reason is to make

2000 - - - the stock affordable to

2001 - - - trade. The stock prices

2002 - 26.90 26.90 in Dhaka Stock

Exchange and in
2003 10:1 43.10 43.10
Chittagong Stock
2004 10:1 138.30 139.20
Exchange were roughly
2005 08:1 81.70 81.50
equal over the years
2006 100:15 75.60 75.20
under observation
Source: Annual Report 2000-2006
 Dividend Stability (Key Issue)
• Most observes believe that
dividend stability is
T a ka E a rn in g s , C a s h F lo w s , & D iv id e n d s
desirable and that investors
prefer stocks that pay more 25

predictable dividends to 20 CFPS EPS DPS

stocks that pay the same 15

average amount of 10
dividends but in a more
5
erratic manner.
0 Ye a r
2002 2003 2004 2005 2006
• This means that the cost
of equity will be
minimized and the stock
price maximized if a firm
stabilizes its dividends as
much as possible.
 DPS, EPS, MP, & g Components:
Comparison Over Year
Particulars/ Yrs 2002 2003 2004 2005 2006

FV Per share 10 10 10 10 10

DPS 3.2 3 3 3 3

MPPS (DSE) 26.9 43.1 138.3 81.7 75.6

Dividends Yield 11.90% 6.96% 2.17% 3.67% 3.97%

Pay-out 32% 40% 40% 42.50% 45%

RR 68% 60% 60% 58% 55%

ROE 7.12% 14.11% 15.38% 17.85% 21.24%

Growth rate (g) 4.84% 8.47% 9.23% 10.26% 11.68%

Ks 16.74% 15.43% 11.40% 13.94% 15.65%

 Plough Back Ratio
• The graph depicts that from the 80%
RR

year 2002 to 2003, the payout 60%

40%

ratio was increased and after 20%

that with a slight decrease in 0% Year

2002 2003 2004 2005 2006

2004, it was increasing for the

rest of the years.

• The graph depicts that from the Pay-out Ratio Pay-out

year 2002 to 2003, the payout

50%
40%

ratio was increased and after 30%

20%

that with a slight decrease in 10%

0% Year

2004, it was increasing for the 2002 2003 2004 2005 2006

rest of the years.

• The graph represents the Growth Rate g

increasing trend of the G over 14.00%

12.00% 10.26%
11.68%

the years from 2002 to 2006. 10.00%

8.00%
8.47%
9.23%

6.00%
4.84%
4.00%
2.00%
0.00%
Year
2002 2003 2004 2005 2006
 ROE, RR & g
80%
RR ROE g
60%

40%

20%

0% Year
2002 2003 2004 2005 2006

This curve shows that RR decreased throughout the year from

2002 to 2006 and the ROE increased as well. And the g also
increased even though the RR decreased as the ROE’s
constantly increasing offset the effect of RR.
 Dividends Yield g Ks

20.00%

15.00%

10.00%

5.00%

0.00%
2002 2003 2004 2005 2006 Year

This graph shows that the dividend yield decrease dramatically

from the year 2002 to 2004 which brought down the Ke despite
increasing trend in g and increased from 2004 to 2006 which
raises Ke as g does
 Proportion of Earnings Distribution

• The firm uses the residual dividend model to Yr. DPS (Cash)
set the long run target payout ratio at a level
that will permit the firm to meet its equity 2000 10.00
requirements with retained earning.
2001 3.00
• Hence, DPS in 2000 was tk.10, but in 2001
it went down to tk.03 only, again it raised to 2002 3.20
tk.03.20 in 2002 and subsequently it went 2003 3.00
down to tk.03 in 2003 and henceforth, it is
tk.03. 2004 3.00
• No wonder that it could decrease or 2005 3.00
increase again if the profit changes.
2006 3.00
Besides, no stock dividend was paid from
year 2000-2002 as shown in table no.01.
 Proportion of Earnings Distribution
• On the other hand, the company maintains
fixed cash dividend in the last four years
(tk.3/share) and the extent of stock Yr. Dividend Dividend
dividend varied significantly (10:1 in 2003- (stock Declared
04, 8:1 in 2005, 100:15 in 2006) over %
those years, indicating the maintenance of 2000 - 10
optimal dividend policy and usage of
residual dividend model. 2001 - 30
• If a firm use residual dividend model, it
2002 - 32
pays dividends only if more earnings are
available than are needed to support the 2003 10:1 40
optimal capital budget.
2004 10:1 40

2005 08:1 42.50

2006 100:15 45
 Proportion of Earnings Distribution
Pay-out Ratio Pay-out
50%
40%
30%
20%
10%
0% Year
2002 2003 2004 2005 2006

• The graph depicts that from the year 2002 to 2003, the
payout ratio was increased and after that with a slight
decrease in 2004, it was increasing for the rest of the
years.
 •Comparison of Earning, Cash flow, and Dividend

• The graph depicts that in 2002, E a rn in g s & D iv id e n d s in M illio n

the earnings of the company M illio n D ivid e n d s in M illio n E a rn in g s in M illio n

was around 80 million and it 400

350
increased in 2003 and for the 300
rest of the years. 250
200
• However the dividend in 2002 150
100
was around 75 million which was 50
almost the same amount of that 0
Y ear
2002 2003 2004 2005 2006
year’s earnings.
• But in 2003, dividend was
almost 210 million where as
earnings was around 160
million.

•This was the critical situation that the company had to face to keep the target
payout ratio. From the the year 2004 to 2006, the DPS was relatively stable
while the EPS was increasing
 Dividend Pattern of STL
Taka Earnings, CashFlows, &Dividends
25

20 CFPS EPS DPS

15

10

0 Year
2002 2003 2004 2005 2006

Particulars/ Years 2002 2003 2004 2005 2006

Cash Flow/share 16.24 14.47 8.8 1.82 19.45
Earnings/share 2.38 4.9 5.79 7.45 10.17
Dividends/share 3.2 3 3 3 3
DETERMINING OPTIMAL DIVIDEND POLICY
• If the company increases the payout ratio, this increase expected
dividends. This increase in the numerator, taken alone, would cause
the stock price to rise.
• However, if expected dividends are raised, then less money will be
available for reinvestment, that will cause the expected growth rate to
decline, and that will tend to lower the stock’s price.
• Thus, any change in payout policy will have two opposing effects.
• Therefore, the firm’s optimal dividend policy must strike a balance
between current dividends and future growth so as to maximize the
stock price.
• The same thing happens in the company by the year 2004 where
stock price is maximum, growth rate is stable, and Ks and the
dividend yield is minimum in the year.
 Stock Price and Pay-out Ratio

Stock Price
150

100

OPTIMAL PAYOUT 50

0
32% 40% 40% 42.50% 45%
Po

RATIO
Payout Ratio

Ks

20.00%

Years Po Ks D/Po Pay-out G

15.00%

10.00% Ks

% % % % 5.00%

0.00%
32% 40% 40% 42.50% 45%

2002 26.9 16.74 11.90 32 4.84

Dividend Yield
14.00%
12.00%
10.00%

2003 43.1 15.43 6.96 40 8.47 8.00%

6.00%
D/Po
4.00%
2.00%
0.00%

%
%

%
%

0
32

40

40

45
.5
42
11.4
40
2004 138.3 2.17 9.23
40 GrowthRate

2005 81.7 13.94 3.67 42.50 10.3

14.00%
12.00%
Percent

10.00%
8.00%
6.00%
4.00%
2.00%
0.00%

2006 75.6 15.65 3.97 45 11.7

Payout Ratio
32% 40% 40% 42.50% 45%
• We know that the firm’s optimal dividend policy must strike a
balance between current dividends and future growth so as to
maximize the stock price. The same thing happens in the company
by the year 2004 .
• The top graph shows that stock price increases as the payout ratio
increases. The stock price reaches maximum point when the pay-
out ratio is 40%. After that stock price declines as payout increases.
• The 2nd graph shows that cost of equity decreases as the payout
ratio increases. The cost of equity reaches minimum point when the
pay-out ratio is 40%. After that, cost of equity increases as payout
increases.
• The 3nd graph shows that dividend yield decreases as the payout
ratio increases. The dividend yield reaches minimum point when the
pay-out ratio is 40%. After that, dividend yield increases as payout
increases.
• The bottom graph shows that the growth rate increases
decreasingly as the payout increases, and reaches inflection point
at 40% payout. After that, dividend growth increases increasingly as
payout increases.
• So it is evident that optimal payout ratio of the company is 40%.
 Who Gets What? Dividends?
• Only 10 people dominate the company and enjoy dividends. If tk.100 is paid
as dividend tk.53.94 goes to the sponsors.
• General public = 28%
• foreign investors of 11%,
• finally local institutions 7%.
• The irony is that among 10 people, most of them are single family
members.
• A closer look reveals that the poor or middle class segment of our society
participates dividends least. There are 5,464 out of 5,772 share holders
owns share less than 500 shares.
• 95 percent shares holders enjoy only 2.90% of dividend declared and paid.
• Only 2 people hold (as per BO account one person) 54.85% of all shares
and enjoys dividends accordingly.
 Findings
• The Corporate Focus is to fulfill strategic objectives
with emphasis on lowest possible cost

• The company believes that the investors like bird-in-

the-hand theory but after a certain payout it follows
contrary-MM dividend irrelevance theory.

• Although the company paid cash dividend over last

seven years, it paid stock dividend along with cash
dividend in the last four years.

• Stock dividends are used to keep the stock price more or

less constrained.
 Findings
• The analysis shows that dividend was stable over time.
• The firm uses the residual dividend model to set the long run
target payout ratio at a level that will permit the firm to meet its
equity requirements with retained earning.
• The optimal payout ratio of the company is 40% at which
stock price is maximum(Tk.138.3)and cost of equity is
minimum(11.4%).
• Currently its payout ratio is 45%. The stock price decreases
substantially and the Cost of equity rises to about 16% from
11%
 Findings
• Only 10 people dominate the company and enjoy
dividends and most of them are single family members.
• 95 percent shares holders enjoy only 2.90% of dividend
declared and paid. Only one person enjoys 54.85% of
Dividend
• Finally, Our RMG sector is vulnerable to foreign
diplomacy- as seen recently though labor unrest and
invisible hand.
 Recommendation
• Although the optimal payout ratio of the firm is 40%, its current
payout rate is 45% which substantially increases its cost of equity
and reduces it stock price. So the company should maintain the
optimal payout rate of 40%.
• On the other hand, most dividends go to few rich people of our
society which is upward bias of the firm. If possible the bias should
be curbed.
• Our government should take necessary steps to reduce such kind of
diplomatic moves by foreign competitors.
THE END