ABSTRACT

The study titled determinants of dividend payout of listed consumer goods firms in Nigeria was designed to investigate factors that influence the dividend payout of listed consumer goods firms in Nigeria. The study period was a ten year period i.e. 2008-2017. The study involved the use of a correlational and ex-post facto research design using 10 out of the 27 listed consumer goods firms in Nigeria. The study employed secondary data. This study found that there was a positive and statistically significant relationship between explanatory variables (corporate tax, profitability and firm size) and the explained variable (dividend payout). The retaining three explanatory variables (leverage, sales growth, and liquidity) shows an insignificant relationship with dividend payout. The study recommends that since the corporate tax has a positive influence on dividend payout board of directors of listed consumer goods firms listed in Nigeria shouldn’t retain their dividend payouts, somewhat increase it even in the presence or increment of corporate tax. Also in respect of the positive relationship between profitability and dividend payout, it was recommended that the management of consumer goods firms in Nigeria should utilize the retained earnings for expansion in order to improve turnover as it increases profitability which invariably determines dividend payout of the firm. Above all, the management of listed consumer goods firms in Nigeria should keep on improving the volume of assets in order to be paying a dividend to the shareholder.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

Dividends have been seen as one of the controversial subjects amongst accounting and finance research. For more than half a century this subject has been the goal of several studies and it still continues to puzzle investigators (Azeez & Muhibudeen, 2015). The primary motive of Shareholders buying a share is to receive a dividend. Investors always take into consideration various factors before subscribing for a firm’s shares, such as the dividend track record of the firm, the stock price at the floor of the stock exchange, the profile of board of directors as well as the nature of firm’s investment. In this regards, to ensure prompt payment of dividend, management attempts to grasp a reasonable price for her stocks. Growth in dividend payout is expected to result from an improvement in earnings record by a firm.

The dividend policy of each firm affects the management in determining part of the earnings to be dispersed as dividends to investors. It indicates the part of firm’s earnings that are paid to equity shareholders as dividend. The distribution of this portion of the firm’s profit as cash dividend to equity shareholders is based on the number of shares held by the equity shareholders that is pro rata basis. Before arriving at residual profit appropriated to equity shareholders of the firm, statutory deductions are made. The indicator that a firm healthy and has the capability of maintaining and improving upon both short and long run of the current level of financial performance will depend on the dividend declared by firms’ board of directors at its annual general meeting (Ethel, Okwo, & Inyiama, 2015).

The disparity in capital gains taxes and ordinary dividends, the policy of paying lower dividends and maximizes share value is a contentious issue in finance as shareholders valued payment of dividend now than higher future capital gain. As Demirgüneş (2015) explained, companies set their dividend policies to minimize their tax liability and to maximize their after-tax return of their shareholders. In a related development, negative relationship between dividends and corporate tax was found by Rehman and Takumi (2012) and Rafique (2012) confirms that an increase in firms’ corporate tax will lead to an upward review in dividend payout ratio by the firm. The researchers arrived at this implication as they found a positive significant relationship between dividend payout ratio and corporate tax. Therefore, increment in dividends provides a positive signal to both existing and potential investors. Though capital gains have a lower tax rate compared to dividend,  in exchange for the positive signal dividend payout has on the value of firm’s stock, equity holders are ready to pay a higher tax for their dividends. Therefore, in this research work, the researcher has chosen to dismiss all consideration regarding taxes. To validate any of these impacts of the firm’s corporate tax on dividend payout ratio will depend on the analysis of the data in this study.

A number of previous researchers have found profitability as one of the factors that influence firm’s dividend payout ratio, and there is a divergence in their findings. Demirgüneş (2015) have suggested that there is a highly negative and significant relationship between profitability and dividend payout ratio, which shows that the firms prefer no pay dividend in favour of investing in firms’ assets.  Mahdzan, Zainudin and Shahri (2016) have found that the higher the return on equity, the greater is the firms retained earnings for reinvestment or the lower is the dividend payout to firms’ shareholders. Contrary to this, Hassonn, Tran, and Quach (2015) and Zayol, Theophilus and Mirian (2017) found a positive relationship between profitability and dividend payout. This is in line with signal theory, as the positive relationship between profitability shows how healthy and profitable the firm is. The finding of this research work will authenticate any of these previous findings.

In this research study, researchers have different findings as regards to the size of a firm as one of the determining factors of dividend payout. Ramachandran and Packkirisamy (2010) found large-sized firms prefer to pay less dividend as firm size has a negative relationship with dividend payout. But the study of Uwuigbe, Olowe, and Agu (2012), Lamia, Muhammad, and Hina (2015) and Hassonn et al. (2015), confirm that there is a significant positive relationship between what the firm payout as dividend and the size of the firm that an increase in firm size will lead to improve in dividend payout. Some studies carried out found an insignificant influence of firm size on the dividend payout like that of Mehdi, Mehdi, and Shahnaz (2010) and Ethel et al (2015) found out that there is insignificant relationship between what the firm payout as dividend and the size of the firm, which implies that the firm size has no effect on dividend payout by the firm. These are different findings from some of the previous studies, can it be true that firm size has a positive and significant statistical relationship with the dividend payout of listed consumer goods firms in Nigeria or not? The outcome of the analysis of the data of this research work will validate or invalidate this assumption.

The researchers have recorded different view based on their findings regarding leverage as one of the factors influencing determinant of dividend payout of firms. The explanation for the relationship between leverage and dividend payout was provided by agency cost theory. Some authors are of the view that firms with high leverage ratios attract high transaction costs which place such a firm in a weak position to pay reasonable dividends. Mehdi et al. (2010), Hassonn et al. (2015) provide a piece of empirical evidence to this assertion. It is however expected that the relationship that exists between leverage and dividend payout is negative. The study of Sunday, Kajola, Desu, and Agbanike (2015) found a positive significant relationship between leverage and dividend payout. The finding of Agyemang (2013) and Zayol et al. (2017) found an insignificant influence of leverage on dividend payout. These controversies will continue as various studies finding varies. Therefore, this research work will verify to know the kind of relationship the leverage of listed consumer goods firms in Nigeria has with the dividend payout.  

Rafique (2012) asserts that investment policy can be substituted for dividend payouts, hence, because it reduces the free cash flow and also reducing the agency problem. The study of Musiega, Alala, Douglas, Christopher, and Robert (2013) argues that growth in sales has no influence on dividend payout. Recent experiences have shown that growth in revenues tends to pay lower dividends (Zayol et al., 2017). As a firm is growing faster there will be a high demand for the fund. To this end, priority needs to give to new project when deciding portion of the firm’s earnings to be distributed as dividend according to pecking order theory. More so, high growth opportunities firms may not willing to pay a higher dividend to their shareholders rather than to retain a greater portion of their earnings for expansion projects financing. This study is interested in finding out whether the growth rate in sales has any influence over determinant of dividend payout of listed consumer goods firms in Nigeria.

Liquidity of a firm is one of the important factors in determining the dividend payout (Rehman & Takumi, 2012). Highly Liquid Firms are in a good position pay a reasonable dividend to their shareholders compared to illiquid firms. Payment of dividend depends more on money streams which mirror the organization's capacity to pay a dividend. A poor liquidity position implies less dividend because of the deficiency of cash. Nuhu et al (2014), in their examination, does in support of the significance of liquidity as one of the variables impacting dividend payout and found that liquidity is unimportant in affecting the profit payout choice. Lamia et al (2015) in their study determinants of dividend payout in Pakistan evidence from Karachi stock exchange for financial sector listed firms affirm that liquidity of a firm has a positive effect on its dividend payout. This implies that the result of the relationship between liquidity and dividend payout evidence from previous studies has been mixed. Is it possible for liquidity to have an influence on the determinant of dividend payout of listed consumer goods firms in Nigeria? The outcome of this research work will provide an answer to this.

The foregoing reveals that there is no unified picture regarding dividend payout policies and this is one of the most debated issues within the field of corporate finance by researchers over the years. A famous quotation by Black (1996) states that “the harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don’t fit together”. The researcher thinks that it would be interesting to conduct research regarding determinants of dividend payout of listed consumer goods firms Nigeria, even though several studies have been carried out on this topic, there are still many pieces in the dividend puzzle that are missing.

1.2 Statement of the Problem

Dividend policy is yet to have a universally accepted explanation upon the research conducted on it for many decades. As dividend policy described by Brealey, Myers, and Allen (2008), is one of the most difficult unsolved issues in financial economics. This assertion is in accordance with the view of Black (1996), who affirm that the more we look at the dividend picture, the more it seems like a puzzle, with pieces that are unfit together. A lot of research has been done on the subject of dividend policy for various countries but the actual influence of dividend decision still remains unsettled in corporate finance and further research is crucial in order to increase the understanding of the subject (Kent, 2009). Therefore, lack of a universal solution for the topic of dividend policy motivates many researchers in continuing to carry out studies on this field in order to obtain a stronger theoretical and empirical analysis on the subject and solve this dividend puzzle.

Dividend payout policy for listed consumer goods firm in Nigeria differs as each company decides on what, how and when to pay the dividend to its shareholder. Some firm pays higher and others pay less dividend although operate under the same business environment. The questions on the partner used by consumer goods firms in determining their dividend payout posed a problem in the Nigeria context. These reveal that there is no universally accepted formula regarding the portion of firms’ earnings to be paid as a dividend to its shareholders and this remains the debated issues in the field of corporate finance.

This also could be justified in line with the fact that there are so many factors influence dividend policy and no law subject a firm to pay a certain percentage of its earnings as a dividend to its shareholders in Nigeria. Hence Ahmed and Javid (2009), in their study affirm that dividend policy remains a puzzle. Also argued by Brealey, Myers, and Allen (2008) that upon the effort of numerous researchers to solve the “dividend puzzle” recognized in Black (1996), but these studies have not yet arrived at a universal recognized solution.  A lot of research in various countries has also been conducted in order to pinpoint the factors that influence the dividend payouts to firms’ shareholders. Nevertheless, many studies have been conducted, the results contradict one another between countries and sectors concerning which factors that have an influence on dividend payouts. For example, a study conducted by Mahdzan et al. (2016) on the investigation of determinants of dividends payout in Malaysia and they found a strong negative relationship between the profitability and dividend payout. The result is contrary to the study of Hassonn et al. (2015) conducted in Palestine. The study revealed positive relationship profitability and a dividend of the firms.

Moreover, when referring to the prior empirical carried out on dividend policy, a larger number of studies have been conducted mainly in developed countries but only a few in developing countries. The researcher observed that a few of the studies on factors influencing dividend payouts of consumer goods firms have been conducted in Nigeria and they are not up to date. The researcher, therefore, thinks that it would be interesting to investigate the issue on listed consumer goods firms in Nigeria. These firms were consciously chosen because of its significance and contribution to the economy and as the federal government of Nigeria led by President Muhammadu Buhari is championing on locally produced goods. Therefore, dividend payout is very important to the shareholders of the listed consumer goods firm in Nigeria. Consequently, the researcher considers it necessary to conduct a research concerning the relationship between a number of preselected factors and the dividend payouts of listed consumer goods firm in Nigeria that may proffer further insights for substantial factors to be considered. Among the study conducted in Nigeria according to online literature, corporate tax hasn’t been selected as one of the independent variables. This study, therefore, includes corporate tax, other preselected factors are profitability, firm size, leverage, sales growth, and liquidity. The question is what can these factors influence dividend payout of listed consumer goods firms in Nigeria be?

This study is expected to answer the following questions.

a)     Does corporate taxation have a significant effect on the dividend payout of listed consumer goods firms in Nigeria?

b)    Does profitability have a significant effect on the dividend payout listed consumer goods firms in Nigeria?

c)     Does firm size have a significant effect on the dividend payout listed consumer goods firms in Nigeria?

d)    Does leverage have a significant effect on the dividend payout listed consumer goods firms in Nigeria?

e)     Does sales growth have a significant effect on the dividend payout listed consumer goods firms in Nigeria?

f)     Does liquidity have a significant effect on the dividend payout listed consumer goods firms in Nigeria?

1.3 Objectives of the Study

Assessment of factors influencing dividend payout of listed consumer goods firms in Nigeria is the main purpose of this research. Other specific objectives are to:  

i.    examine the effect corporate tax has on the dividend payout of listed Consumer Goods Firms in Nigeria.

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