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Financial Factors Affect The Dividend Policy Of Food And Beverage Industry Finance Essay

Dividend policy has been a thing of concern to the financial managers and the firm at large. Many companies are faced with dilemma of sharing dividend to shareholder and retaining their earning with the view to reinvest it back into the business so as to foster and enhance the further growth of the business (Okpara & Chigozie, 2010USER2010-10-31T21:29:00

http://www.eurojournals.com/ajsr_8_07.pdf). Dividend policy is mean that the trade-off between retaining earning and paying out cash or issuing new shares to shareholders (Nnadi & Akpomi, 2008). USER2010-10-31T21:29:00

http://www.eurojournals.com/irjfe_19_04.pdfApart from this, a company uses dividends as a mechanism for financial signaling to the outsiders regarding the stability and growth prospects of the firm. Moreover, dividends play an important role in capital structure of any company (Saxena, 1999).USER2010-10-31T21:29:00

http://www.westga.edu/~bquest/1999/payout.html

Dividends are payments made by a company to its shareholders. Normally, when a company earns a profit, the money can be put into two uses which are either re-invested in the business or called retained earnings, or can be paid to the shareholders of the company as a dividend (Zambare, 2010a). Paying dividends is not an expense of a company; rather, it is the division of an asset among shareholders. Many companies will retain a portion of their retained earnings as made investment and pay the remainder as a dividend to their shareholders (Zambare, 2010bUSER2010-10-31T21:29:00

http://www.wikinvest.com/wiki/Dividends). In fact, high-growth companies rarely offer dividends to their shareholders because all of their profits are re-invested to help sustain higher than average growth. Conversely, larger companies have less potential for rapid capital growth but are more likely to pay healthy dividends which are steadily rising as the years go by (BursaWave, 2010USER2010-10-31T21:29:00

http://www.bursawave.com/2007/12/24/dividend/). Therefore, a company must be very careful in deciding the allocation of earnings to these two objectives.

Theoretically, corporate dividend polices are known to be a function of many factors. The purpose of this paper is to verify whether the dividend policy of a company depends not only on business profit but also on other factors, amongst which the both the theoretical and empirical literature point to the following such as the liquidity of the company, the opportunities for investment and corporate taxation. The interplay of these factors remains a critical issue in distribution of corporate after tax earnings between retained earnings and dividends.

Background of Malaysia

Malaysia is a tropical paradise endowed with breathtaking natural beauty, exotic cultures and friendly people. Malaysia is made up of Peninsular Malaysia and the two states of Sabah and Sarawak on the island of Borneo. The area of Malaysia is 329,758 sq km and the population estimated 26 million. The Capital of Malaysia is Kuala Lumpur. Besides, the ethnic groups of Malaysia comprise 59% Malay and other indigenous, 32% Chinese and 9% Indian. Although Islam is the official religion in Malaysia but all other religions are practiced freely. Manufacturing constitutes the largest single component of Malaysia’s economy. Tourism and primary commodities such as petroleum, palm oil, natural rubber and timber are major contributors to its economy (Sawadee PCL, 2005USER2010-06-26T16:05:00

http://www.2malaysia.com/info.htm).

Background of food and beverage industry in Malaysia

Malaysia’s food and beverage industry is rich tropical and agricultural resources combined with the diverse cultures in Malaysia society which is Malay, Chinese and Indian, it have resulted in a fascinating range of processed food and beverage with an Asian twist (Brandt & Yong, 2008a). Malaysia has been seen a steady increase in the standard of living. The changes of lifestyle in Malaysia have led to an increase in the demand for convenience food and health food (Brandt & Yong, 2008b).

Figure 1: Percentage of intermediate input consumed to gross output, 2007

The figure 1 indicates that the percentage of intermediate input consumed by selected subsectors. It shows that Food products & beverages recorded the highest ratio of intermediate input to gross output which is 88.1 per cent.

Figure 2: Production indices of selected processed food and beverages products

(Source: Department of Statistics, Malaysia)

The figure 2 shows that the production indices of selected processed food and beverages products of Malaysia. The food and beverage industry contributed about 10% of the Malaysian manufacturing output and is predominantly Malaysian-owned. The processed foods are exported to more than 80 countries with an annual export value of more than RM7 billion which amounts to two-thirds of the total food exports of over RM10 billion. This sector encompasses such as cocoa and chocolate products, fishery products, cereal products, bakery products, beverages and etc (Brandt & Yong, 2008c).USER2010-06-28T23:56:00

http://malaysia.ahk.de/fileadmin/user_upload/Dokumente/Sektorreports/Food_E__08.pdf

Research Problem

The problem has been studied in this research is some of the shareholders withdrawal their share owned due to dissatisfied with the dividend policy of some food and beverage manufacturing company. The nature of business has an important bearing on the dividend policy. A company 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.

Research Objective

There are four research objectives consist in this research:

To assess whether the profit influence the dividend policy of food and beverage industry or not.

To assess whether the liquidity position influence the dividend policy of food and beverage industry or not.

To assess whether the investment opportunities influence the dividend policy of food and beverage industry or not.

To assess whether the taxation influence the dividend policy of food and beverage industry or not.

Research Question

This study will attempt to find the answer of the following question:

Does increase of profit will also rise up in dividend distribution?

Does increase of taxation rate will cut back in dividend distribution?

Scope of study

This study is a comprehensive survey in a factor analytic framework to capture the different dimensions that affecting the dividend policy decision of the Nestle and Dutch Lady. There are several studies have been done on how the identified financial factors affect that corporate finance managers which is Nestle and Dutch Lady consider in laying down the dividend policy. It is believed that the findings of the present study will be of use to academia and practitioners in learning how these two corporate determine dividend policy.

Significant of Study

Business profit has always been considered as a primary indicator of dividend payout ratio. Dividend payout has been an issue of interest in financial literature. Academicians and researchers have developed many theoretical models describing the financial factors that managers should consider when making dividend policy decisions. Over time, the number of factors identified in the literature as being important to be considered in making dividend decisions increased substantially. Thus, it is essential to find out various financial factors affecting dividend payout ratio of a company.

1.9 Research design

The quality of a research project will be enhanced by a good understanding of the research design. This paper is organized into 5 sections. Section 1 provides the introduction of this paper. Section 2 gives a discussion of the literature review of dividend policies theories. Section 3 describes the research methodology and reports some descriptive statistics for the sample. Section 4 presents the finding of the research. Section 5 concludes the paper.

1.10 Definition of key term

Dividend – Dividend is refer to the distribution of current or accumulated earnings to shareholders of a company pro rata based on the number of shares owned. Generally, dividends are issued in cash but may be issued in the form of stock or property (Duhaime, n.d.).USER2010-10-29T11:31:00

http://www.duhaime.org/LegalDictionary/D/Dividend.aspx

Dividend policy – Dividend policy is a policy or guidelines followed by a firm with respect to dividend payments. It is a trade-off between retained earnings and paying out dividend to shareholders (Pietersz, 2010USER2010-10-29T11:48:00

http://moneyterms.co.uk/dividend-policy/).

Dividend yield – Dividend yield is the amount of the payment expressed as a percentage of the value of the stock. This is a factor in the calculation of the total return on investment (Adkins, 2009USER2010-10-29T12:04:00

http://www.ehow.com/about_5471708_dividend-yield-definition.html).

Dividend payout ratio – Dividend payout ratio is expressed as the percentage of earnings paid to shareholders in dividend. It is a measurement of the amount of current net income paid out in dividends rather than retained by the business (Mysmp, 2010USER2010-10-29T12:29:00

http://www.mysmp.com/fundamental-analysis/dividend-payout-ratio.html)

Liquidity - Liquidity is a relatively broad concept which in this case refers to the ability to trade large volumes quickly, at low cost, and without moving the price.

Investment opportunities – Investment opportunities refer to the possibilities for making investment which will be profitable.

Net present value - Net present value is a way of comparing the value of money now with the value of money in the future. A dollar today is worth more than a dollar in the future because inflation erodes the buying power of the future money, while money available today can be invest and grow (Finaid, 2010USER2010-10-30T15:45:00

http://www.finaid.org/loans/npv.phtml).

Independent variable - An independent variable influences the direction and the volume of change of the dependent variable (Black, 2010USER2010-10-30T15:11:00

http://www.wisegeek.com/what-is-an-independent-variable.htm).

Dependent variable - Dependent variable is an observed variable in an experiment whose changes are determined by the presence or degree of one or more independent variables.

Correlation coefficient – Correlation coefficient is a measure of the strength of the straight-line or linear relationship between two variables (Ratner, n.d.)USER2010-10-30T15:48:00

http://www.dmstat1.com/res/TheCorrelationCoefficientDefined.html


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