Dividend is that part of the earnings of a corporation that is distributed to its shareholders which is usually paid quarterly.
But why do companies pay dividends? In Finland, dividend policy has always been the main concern according to some few empirical studies. But they normally based it on assumptions that each security has an intrinsic value based on the economic conditions of the firm. These economic conditions are determined on many things like: earnings, dividends, capital structure and growth potential. We called it the fundamental stock analysis.
Some stocks, especially blue chips, pay dividends. This means that for every share you own, you are paid a portion of the company’s earnings. For example, for every share own, you will get sent $0.15 every year. Most companies pay dividends (four times a year). This study focuses on dividend policy of companies listed on the stock exchange of Mauritius. Since early 1960, the dividend debate has been lively interesting, why it is like that? As some economists have analysed the effect on the value of the firm and explored the data of evidence that dividend policy affects security prices and investors behaviour.
In developed countries managers and economists together have recognised that dividend policy plays an important role in the overall corporate strategy since the decision between paying dividends and retaining earnings has been taken seriously by investors. Indeed the dividend debate has not been restricted not only to equity markets in developed countries but has been carried out in emerging markets. Some Studies have shown that dividend policy in those markets is often different from the norms that have been accepted. In developed countries and that in emerging markets firms place more emphasis on dividend payout ratios than they do on the level of dividend paid. As a result dividend payments tend to be more volatile in emerging markets than in the developed countries
1.2-How Mauritius is as an emerging Market
Mauritius is a fast developing independent island in the Indian Ocean. It has followed a classic pattern off economic development, moving from agricultural based economy in the 1960 to a manufacturing based in the 1970 and 1980. Since then, we can see how Mauritius how developed its economy. The Mauritian economy was then noticed by exceptionally high increase in GDP (GROSS DOMESTIC PRODUCT) and the achievement of full employment. Its Normal that Mauritius could not sustain such an economic growth rate by relying only on Agriculture and manufacturing industries. That is how Mauritius comes with the idea to diversify its economy and henceforth integrate into the world economy. He first diversifies f into the financial sector. The successful economic achievement in the 1980’s brings a rapid growth in this sector and hence in 1988 the stock Exchange was established in Mauritius.
1.3-Objective of Study
This study focuses on dividend price on the seven companies listed on stock exchange of Mauritius for the year 2010.It is intended to find out how dividend changes before the final dividend date and after the final dividend date .
1.4-Structure of Project
The Project was mainly based on dividend reactions on the Seven Companies .It Includes data downloaded from the website or taken from authors of dividend policy and also some communication which was exchanged by the Head of department of Sbm Securities which helped me to find out the data.
2 LITERATURE REVIEW
2.1 Theoretical View Points
Normally we have two different theories that explain what the relationship between Dividend Policy and the Price of Shares. They are categorized into two groups:
The Irrelevance School
The Relevance School
In the Irrelevance School we have Merton and Miller .
This man clearly state that dividend don’t really affect value , He also said that there was now a substantial agreement within the academic community which is based in turn on many careful, scientific statistical studies and there is no systematic exploitable relation between a firm dividend policy and the value of its shares.
Normally that value is governed by its earnings or more precisely by its earnings power.
It is of considerable importance the effect of a frim dividend policy on the current price of its shares …not only to the corporate officials . but also to those investors who are planning portfolios and also to the economists that are seeking to understand and appraise the functioning of the capital Markets.
According to similar ideas like JOHN FREEAR (1980), the whole question of dividend policy is controversial. Like some say that it has no effect whatever on the finance market ‘assessment of the value of a company, others argue that the market pays much more attention in assessing dividends that to earnings. Indeed the relationship between dividend and the value of the share is not clear cut. Normally a Finance Manager must understand the various conflicting factors first which influence the dividend policy before he decide how to allocate its company‘s earnings into dividends and retained earnings. Another important aspect of the dividend policy is that we must determine what the amount of earningsthat should be distributed to shareholders and which amount we must kept in the firm .Indeed it can be a tough task for Mauritius as we have just diversify into the Financial Sector .
Retained earnings are the most significant internal sources of financing the growth of the firm whereas dividend constitutes the used of the firm funds.
From a shareholder point of view, dividends may be considered desirable because they tend to increase their current wealth. Objective of a dividend policy accordingly should be to maximise a shareholder‘s return so that value of its investment is maximised. As the shareholder’s return consists of 2 components:
Capital Gains where Dividend policy has a direct influence .
Black and Scholes(1974)
Black and Scholes (1974) views of dividend they argued that in equilibrium setting with the taxes the supply of shares which have specific dividend yields will equal the demand for shares with the same dividends. It can be seen as a clientele effect where it will prevent any corporation from affecting the market price of the shares. This is done through manipulation of the dividend yield. In(1978) Miller and they have again come with a new point that vehicles do exist to compensate for the different taxes on dividend and capital gains . we can see the how the irrelevancy of dividends applies here as dividends in valuation may even hold in a world with taxes.
GRAHAM AND DODD’s
Graham and Dodd (1969) argued that the sole purpose for the existence of the corporation is to pay dividends and firms that normally pay higher dividends must sell their shares at higher prices. in a perfect market, everything is perfect thus dividend policy has no effect on either the price of a firm’s stock or its cost of capital, shareholders wealth is not affected by the dividend decision and therefore they would be indifferent between dividends and capital gains.
Other different Views have been developed by bhattacharya (1979) ,Miller and Rock(1985) and John and Williams (1985) suggest that firms change their dividend payout to signal future performance . Since the management knows much more about its firm than outsiders so, the only way for management to relay the information to the market is by changing their dividend payout pattern . Many empirical studies have confirmed the theory. For example, Aharony and Swary (1980) find that the market still reacts positively to the announcements even after controlling the contemporaneous earnings announcements. Asquith and Mullins (1986) investigated the first dividend announcement in the corporate history or dividend initiation after 10 year interval and find that the stock market reacts stronger to this type of extreme dividend announcements. Healy and Palepu(1988) find similar evidence on the firms that initiate and omit their dividend . The magnitude of negative stock market reaction is more severe on dividend omission firms .Employing more samples size, Michaely et al.(1995) and robin(1998)they both reached to the same conclusions. Docking and Koch (2005) find that stock market reaction to dividend announcement is sensitive to the direction or volatility of the stock market . Agency theory provides an alternative explanation of the market reaction to dividend announcements. Easterbrook (1984) and Jensen (1986) suggest that dividend act as discipline tool to the management.
Both hypotheses imply that the stock market should react in the same direction as dividends payment. If the market is efficient, then the subsequent operating performance should improve .However, the evidence on the subsequent performace is mixed. These contradictory results suggest that the evidence so far on the post operating performance of dividend paying firms is inconclusive. Based on this reasoning the stock market reacts positively to announcements of a dividend increase. Firms that tend to reduce their dividend payout the, stock market reacts negatively on the chance that the management might invest in an unprofitable business.
Briston and Tomkins (1970)’s
Briston and Tomkins (1970) agreed with Lintner’s conclusions when they studied the impact of corporation‘s tax on dividends – where earnings rise, the increase tends to be shared between retentions and dividends, with retention which tend to take the larger share.
Gordon and Lintner they didn’t agree with Merton and Miller, as they said that dividends are less risky than capital gains.
Gordon in his 1959 study found that the payout ratios and the price earnings ratios positively they are related. They conclude that the causal mechanism was from Dividend to share value, that is high pay out meant high prices relating to current earnings .
Lintner 1956’s study of Dividend Policy
Dividend as the main method of distributing cash to shareholders has received considerable prior attention in the finance literature. Lintner (1956) suggest that firms prefer to smooth their dividend and reluctant to change their payout policy . The management is reluctant to cut dividend because it might send negative signal o investor and reluctant to increase payout for fear that it might not sustainable in the future. Following this, many empirical studies have been preformed and concentrated on how the stock market reacts to the announcements . Almost all of the studies agree that dividend payout and stock market reaction move in the same direction. That means Stock Market reacts positively on dividend increase announcement. Almost all of the studies agree that dividend payout and stock market reaction move in the same direction. That means stock market react positively on dividend increase announcement and negatively on dividend decrease announcement. Two of the most widely discussed hypotheses on the stock market behaviour on dividend announcement are the information signalling hypothesis and the free cash flow hypothesis.
Andrew P.Shepherd (1972)’s
The effect of a firm’s dividend policy on the current price of its shares is a matter of considerable importance, not only to the corporate officials, who must set the policy, but to investors planning portfolios and to economists seeking to understand and appraise the functioning of capital markets. Do companies with generous distribution policies consistently sell at a premium over those with small payments? Is the reverse ever true? If so, under what conditions? Is there an optimum payment ratio or range of ratios that maximises the current worth of the shares?” Although these questions of fact have been the subject of many empirical studies in recent years, no consensus has yet been achieved.
2.2 DIVIDEND POLICY: CONCEPTS AND TERMINOLOGY
Dividend policy may be defined as a trade off between retaining earnings on the one-hand and paying out cash and issuing new shares normally the word dividends describe the periodic payments which company make to service their equity capital. When we analylse a firm dividend policy the key statistics is the payout ratio which is the proportion of distributable profit actually distributed.
Dividend pay-out ratio= (Dividend per share /Earnings per share)
2.3-THE RELEVANCE SCHOOL
Relevance of DIVIDEND POLICY: Bird in- the- Hand theory
Gordon (1963) and Lintner(1962) disagreed with M&M ,arguing that dividends are less risky than capital gains ,so a firm should set a high dividend payout ratio an offer a high dividend yield to maximise its stock price . Merton and Miller called this the bird –in –the- hand fallacy .The fallacy is that cash (Non-Investment) which is preferable to investment .It actually ignores the fact that the procedure for evaluating an investment takes account of the investment risk ,which is independent of the source of finance.
Moreover, in some cases, the firm will be able to borrow at preferential rates and enjoy better facilities. On the other hand, Bhattacharya (1979) explains that there is a certain level of risk associated with dividends. This risk is based on the micro a macro environment of the firm; That is the business line the firm operates, the location of the business, labour power, human capital, competitive forces etc. The risk adjusted discount rate takes into account this risk.
2.4 CLIENTELE EFFECT
The clientele effect is a theory which describes the intention of investors to invest in firms which suits their factor endowment; among the most common ones is their tax circumstance. It can be said that there is an inverse relationship between stock returns (Dividends) and tax levels. For instance an investor in a high tax bracket would prefer to invest in stock giving a low rate of return so as to pay less tax .on the other hand, an investor in a low tax bracket would definitely invest in stocks with higher returns as he currently does not have large tax liability. Petit (1977) showed that older investors (retired persons) were more likely to hold high dividend shares because they pay lower income tax. In this case we call it the tax clientele effect. Hence the clientele effect refers to firms making their dividend policy decisions based the customers they would like to attach to themselves. (Litzenberger and Ramasawmy 1979).
Most firms do not behave in a manner completely consistent with theory. In fact firms appear to have an overriding preference for stable, gradually increasing dividends, regardless of apparent investment opportunities. The danger of such a policy is that companies with stable dividend policy create a clientele which depends on dividend income to meet their living and operating expenses. Because of the serious depressing effect on investors due to a dividend cut, directors have to maintain stability of dividends during lean years even though financial prudence would indicate elimination of dividends or a cut in it.
2.5 Earnings Theories
Many researchers are critical of dividend theories. In traditional earning theories, the market price of a share depends on the company profits. Dividends have no effect on the share price. Shareholders are presumed to be so traditional that, when the company keeps the profits and does not pay dividends, they expect the firm to invest capital so that it gives at least their rate of return. Dividend policy then does not affect the market price of the share.
3 Stock Market of Mauritius
The Stock Exchange of Mauritius Ltd (SEM) was incorporated in Mauritius on March 30, 1989 under the Stock Exchange Act 1988, as a private limited company responsible for the operation and promotion of an efficient and regulated securities market in Mauritius. Since October 6th, 2008, the SEM has become a public company, and throughout the coming years. SEM is today one of the leading Exchanges in Africa and a member of the World Federation of Exchanges (WFE).
The SEM operates two markets: the Official Market, the Development & Enterprise Market (DEM). The Official Market started its operations in 1989 with five listed companies and a market capitalisation of nearly USD 92 million. In Today Operations, there are 37 companies listed on the Official Market representing a market capitalisation of nearly US$ 6,015.64 million as at 28 February 2011. The DEM (Development and Enterprise Market) has been launched on 4 August 2006 and there are presently 50 companies listed on this market with a market capitalisation of nearly US$ 1,851.96 million as at 28 February 2011.
The stock market was opened to foreign investors along with the lifting of exchange control in 1994. Foreign investors do not need to seek approval to trade their shares unless its purpose was for the management control or anything with legal purpose or if its concerned with the control of more than 15% in a sugar industry… Foreign investors also benefit from numerous incentives such as revenue on sale of shares can be freely repatriated and there are no withholding tax on dividends and no tax on capital gains.
Central Depository System (CDS) was implemented in January 1997 has brought about efficient clearing and settlement of trades and at the same time reduced some of the inherent risks in the process. CDS has the support of the Bank of Mauritius whch acts a as a clearing bank he ensures delivery versus payment (DVP) on a T+3 rolling basis. The CDS also provides for a Guarantee Fund Mechanism to guarantee settlement failures of participants.
SEM’s Automated Trading System (SEMATS) was launched on 29th June 2001. It has an electronic trading system built on third generation technology. SEMATS puts an end to traditional trading patterns. . Trading in securities is conducted through dedicated trading workstations located at intermediate dealers and linked by communication lines to the SEM trading engine.
Treasury Bills trading on the market has been introduced by the SEM in December 2003, a first step of a process aimed at the setting up of an active secondary market for government instruments.
They attained Membership status of the World Federation of Exchanges (WFE) in November 2005whch also constituted an important milestone that has enabled the SEM to join the league of stock exchanges that are compliant with the stringent standards and market principles established by the WFE. SEM set up in 2006 the Development & Enterprise Market (DEM), which is a market designed for Small and Medium-sized Enterprises (SME’s) and newly set-up companies which possess a sound business plan and demonstrate a good growth potential. It is meant for companies wishing to avail themselves of the advantages and facilities provided by an organised and regulated market to raise capital to fund their future growth, improve liquidity in their shares, obtain an objective market valuation of their shares and enhance their overall corporate image.With this membership all securities that are traded on the Stock Market wil have to meet the HMRC interpretation.It also reinforces SEM attractiveness for the global funds specilalizeez products .
Presently SEM is orienting its present activities and gradually moving away from an equity-based domestic Exchange to a multi-product internationally oriented Exchange. In early 2010, the SEM has brought some major changes to its Listing Rules to align them with the Collective Investment Schemes Regulations 2008 with a view to positioning the SEM as an attractive venue for the Listing of Global and Specialised Funds. Also some changes in the Listing Rules so to attract the listing of Global and Specialised Funds on the Exchange which fits very well with the strategic shift currently underway at the SEM. The Listing Rules has been made more flexible to reflect the specific attributes and characteristics of the Specialised Funds it would like to list on the SEM. Since the Month of March 2010 SEM been elected by the Cayman Islands Monetary Authority(CIMA),which is an Approved Stock Exchange by virtue of its membership of the World Federation of Exchanges . The purpose of this was for the CIMA’s Mutual Funds Law, Banks and Trust Companies Law etc..
This 31 January 2011, SEM has also been designated by the United Kingdom’s Her Majesty’s Revenue and Customs (HMRC), as a “recognised Stock Exchange” under section 1005 (1) (b) Income Tax Act 2007. In the Board of the SEM, it shall not consist of not more than ten directors and also at least two shall be members of the Industry; and
at least one shall be an Executive Director;
No person can be appointed as a Director without approval of the FSC accrording to section 24 of the Financial Services Act 2007
We have two Types of Market indices used, they are the following namely the Official Market Indices and Development and Enterprise Market Indices.
3.1 Official Market Indices includes the following:
Figure 3.1.1(a) give you a clear idea how Semdex has evolves for the period 2010.
Development and Enterprise Market Indices include the following DEMEX DEMTRI. The Official List-This is normally for the listed shares. There are around 40 Companies in this Market. The Over-The Counter Market –This is for the unlisted shares. This Market has nearly 80 Companies that are unlisted. Also, there are nearly 10 more companies which are cited for their debentures in Mauritius Stock Exchange .Mauritius Stock Exchange has two dual listed funds which can be cited both in London stock exchange and the stock Exchange of Mauritius.
Types of Companies enlisted in the Mauritius Stock Exchange and Turnover for year 2010:
Insurance and Banks
Hotels and Leisure
Nature of Trading
Single Price Auction System
Also some major developments which have taken place in Mauritius Stock Exchange:
A new Electronic Clearing and settlement system is being established
A daily trading system is introduced
The SEM is committed to becoming a World Class Stock Exchange. They will strive hard to position the Exchange as a service-driven and operationally excellent organisation with world-class trading and settlement capabilities, which incorporate and maintain the fundamental principles of market integrity, investor protection and efficient price discovery.
3.3-General Listing Requirements
A company seeking a listing on the Official List of the Stock Exchange of Mauritius (SEM) should:
Demonstrate an adequate trading record with published or filed accounts for the three years preceding the application for listing;
Have an expected market capitalisation of not less than Rs 20 million; and
Issue at least 25% of the shares to the public, with a minimum of 200 shareholders, though this threshold may be phased in, with companies issuing 15% of their shares initially, increasing this proportion to 20% within three years and 25% by the end of five years.
Other listing requirements such as submission of various documentation, which provide detailed information on the company, how they must conform to the Rules and Regulations of the SEM, and Listing Particulars to be issued to the public prior to the listing. The Listing Particulars must contain all documents provided for in the Listing Rules for the investors to be reasonably well informed about the securities quoted and the issuer, including the following:
The assets and liabilities of the issuer
The financial position of the issuer
The stated capital of the issuer
The profits and losses of the issuer
The directorship of the issuer
The rights attaching to the securities
The prospects of the issuer
3.4-History of FSC
It was established as the regulator for the non-Bank financial Services Sector under the Financial Services Development Act 2001. Examples of these sector are : Stock Exchange Commission ,Insurance (Insurance Division of the Ministry of Economic Development .Financial Services and Corporate Affairs and Global Business (MOBAA)
MOBAA stands for Mauritius Offshore Business Activities Authority’s regulates all these sectors and supervises all their activities. Their non-Bank Financial Sector includes those companies that are involve in Insurance &Pensions, Capital Markets Operations ,Leasing &Credit Finance as well as Global Business activities .FSC strive to bring a sound ,stable and competitive international financial services centre . FSC also ensures that there is transparency, fairness and equity in the non-bank Financial Institutions and capital Markets ,while at the same time they ensure the protection of investors that are involved.
Entities falling under non-bank financial institutions category are:
Insurance & re-insurance companies
Credit finance companies
Market intermediaries: fund managers, portfolio managers, investment managers / asset managers, custodians, brokers, investment advisers
Cooperative credit unions
The objective of this study is to find out the impact of dividend policy of the seven top companies on the Stock Market of Mauritius and to find out how dividend price changes 15 days before the final dividend date and 15 days after the final dividend were paid .The stock exchange of Mauritius sets the background for this chapter which describes the data anaylsis and interpretation of dividend, share prices of the seven listed companies and the market capitalisation of the listed companies.
The data used in this study comprises of the seven top companies listed on the stock exchange of Mauritius for the year 2010 in terms of their market capitalisation.
COMPANIES’ PERFORMANCE IN 2010
TOP 10 COMPANIES YEAR 2010 : MARKET CAPITALISATION (Rs) YEAR END
%of Total Market Capitalisation
The Mauritius Commercial Bank Ltd
2 State Bank of Mauritius Ltd
3 New Mauritius Hotels Ltd
4 ENL Land Ltd
5 Harel Freres Ltd
6 Rogers & Co. Ltd
7 Sun Resorts Ltd
8 Ireland Blyth Ltd
9 Omnicane Ltd
10 Promotion and Development
Source: Fact book 2010 (Sem)
Savannah Sugar Estates became ENL Land Ltd on 30th November 2010 as such data was not available for this company thus it was disregard from the data.
Mon Tresor Mon Desert became Omnicane on 13th July 2009,thus some discrepancies about the data,it was removed form the study .
The date needed were extracted from many sources namely Fact book 2010 of SEM,as well as database of one of the eleven stock broking companies namely State bank securities . Data for foreign companies have been ignored in this study.
TOP 7 COMPANIES YEAR 2010 : TURNOVER (Rs)
% of Total Market Turnover
The Mauritius Commercial Bank Ltd
State Bank of Mauritius Ltd
New Mauritius Hotels Ltd
Harel Freres Ltd
Rogers & Co. Ltd
Sun Resorts Ltd
Ireland Blyth Ltd
4.3 -The data collected on listed companies has been based upon :
Market capitalisation of the top seven companies on Stock Exchange.
Dividend paid on the official market for the period 2010 of the seven listed companies
The Mauritius Commercial Bank Ltd
State Bank of Mauritius Ltd
New Mauritius Hotels Ltd
Harel Freres Ltd
Rogers & Co. Ltd
Sun Resorts Ltd
Ireland Blyth Ltd
Data been taken date for 15 days before and after the dividend date ,unfortunately for some companies there are some discrepancies as data are only for 12 days or 14 or some even for 11 day .The DPS also knows as the dividend per share is the amount of cash paid to shareholders. EPS also knows as Earnings per Shares is the portion of a company’s profit allocated to each outstanding share of common stock and included in Appendix… It is normally serves as an indicator of a company‘s profitability .Dividend Yield normally is the financial ratio.
4.4.1 History about the Seven Companies
Mauritius Commercial Bank
For Mauritius Commercial Bank the final dividend date on Stock Market of Mauritius was on 06 July 2010.
Mcb is known as the Mauritian bank, it is relatively well behaved with dividends earnings and assets growth and without reserve accounting and extraordinary items adjustments. According to the annual report of Mcb exchange rates around the world have grayed a lot in 2009 and various periods of 2010 on account of heightened uncertainty levels and ever-changing signals about the healthiness of the economic climate which led to a shift in the prices .
State Bank of Mauritius Ltd
State bank of Mauritius (Sbm) is the second largest bank in Mauritius with a market share of about 25% of domestic banking assets. It has 42 domestic branches, and three branches in India. As per annual reports of Sbm total dividends payable for the year thus amounting to Rs710 M. Total equity attributable to shareholders rose by 13.2 % to reach Rs14.7.The sbm share price which was opened at Rs70 having already recovered 85.2% from the low of Rs37.80 amidst high degree of risk aversion and uncharacteristic volatility in Financial Markets worldwide.Rise and Fall in economic life have also impacted the share price.
Rogers & Co. Ltd
Rogers and Co Ltd operates in the financial services, Hotels, Leisure, Logistics, Property, Real Estate, agricultural and travel and aviation sectors primarily in Mauritius. The company also offers a range of financial services such as insurance ,Stockbroking,Factoring ,Consumer Credit ,leasing .Rogers have a payout ratio that moved from 11.59 to 11.91 and their dividend per share fell from 12.00 in 2009 to 9.00 in 2010 while their earnings per share 25.88 in 2009 to 24.61 in 2010.
Sun Resorts Ltd
Sun Resorts Mauritius is a major Mauritian hotel group that currently owns and manages five resorts in Mauritius and in the Maldives – Le Touessrok, Long Beach, Sugar Beach Resort, La Pirogue and Kanuhura in the Maldives. As we know last year in Sun Resorts’ financial statements the profit before tax was Rs15, 102(Million), where they invest in many of their companies abroad.
Ireland Blyth Ltd
Ireland Blyth Limited was incorporated as a private company on 14th July 1972 following the merger of Blyth Brothers & Co. Ltd and Ireland Fraser & Co. Ltd, both of which had been trading in Mauritius since the early nineteenth century.
Ireland Blyth Limited remain
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