The relationship between firms payout ratio, dividend yield and expected earnings growth luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS - HOCHIMINH CITY LE ANH TU The Relationship between Firm’s Payout Ratio, Dividend Yield and Expected Earnings Growth -A Case Study for Listed Firms in HOSE and HNX- MASTER’S THESIS Ho Chi Minh City -2012 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS - HOCHIMINH CITY LE ANH TU The Relationship between Firm’s Payout Ratio, Dividend Yield and Expected Earnings Growth -A Case Study for Listed Firms in HOSE and HNX- Major: Master of Business Administration Code: 60.34.05 MASTER’S THESIS Supervisor: Dr Vo Xuan Vinh i Master thesis by Le Anh Tu Supervised by Dr Vo Xuan Vinh University of Economics, Ho Chi Minh city- December 2012 I am grateful to Dr Vo Xuan Vinh for his good insights and useful comments His experience and professionalism have certainly improved my research ii Abstract The relationship between the payout ratio, dividend yield and the expected earnings growth was investigated for listed firms in Vietnam stock market, specifically firms listed on the HOSE and HNX stock exchanges This research is based on the model developed by Arnott and Asness (2003).The research outcomes are as follows Firstly, there is a positive relation between the dividend payout ratio and future earnings growth Secondly, this research is an extension of the research done by Arnott and Asness (2003) It was shown in this research that the payout ratio is positively related to the expected future earnings growth for the individual listed firms in the Vietnam stock market Afterwards, an expanded model with some other variables was constructed to forecast the expected earnings growth As a result, only two variables, payout ratio and dividend yield, were found to be significant within the expanded model Overall, this research is unique because we have focused on Vietnam stock market -listed firms iii Table of content Acknowledgement i Abstract ii List of tables vi List of figures vii Abbreviations viii Chapter 1: Introduction 1.1 The context of the Research 1.2 Structure of this paper Chapter 2: Current state of literature & Hypotheses Development 2.1 Reason to Pay Dividends 2.2 Dividend Returns 2.3 Dividend Life Cycle Theory 2.4 The Dividend Decision Model by Lintner (1956) 2.5 Types of Dividend Payments 2.6 Stock Repurchases 2.7 Preference for Dividends 2.8 Relationship between Dividend and Profitability 11 2.9 The payout ratio predicts future earnings growth 13 2.9.1 Gordon’s Constant-Growth Valuation Model 13 2.9.2 Main conclusions by Arnott and Asness (2003) 14 2.9.3 Some Explanations for the Positive Relationship by Arnott & Asness 15 2.10 An extension of Arnott’s and Asness’s Research 16 2.11 Hypotheses Development 17 2.11.1 Hypothesis 18 iv 2.11.2 Hypothesis 18 Chapter 3: Data & Methodology 20 3.1 Introduction 20 3.2 Panel data analyses 20 3.2.1 Sample construction 21 3.2.2 Variable description and model building 21 3.2.3 Methodology for panel data analyses 21 3.2.4 Advantages of Panel Data 23 Chapter 4: Results 24 4.1 The regression results of the payout ratio and expected earnings growth analyses 24 4.1.1 Descriptive statistics 24 4.1.2 Panel data regressions 26 4.2 Large- cap firms in HOSE versus small-cap firms in HNX 30 4.3 Dividend yield and future profitability 32 4.4 An expanded model to forecast future earnings growth 34 4.4.1 Variable description and model building when add DY 34 4.4.2 Variable description and model building when adding DY, EIBT, TA, ROE and ROA 36 Chapter 5: Conclusions and Recommendations 40 5.1 Conclusions with respects to the first hypothesis 40 5.2 Conclusions with respect to the second hypothesis 41 5.3 Recommendations 41 References 43 v Appendices 45 Appendix I 45 Appendix II 47 Appendix III 51 vi List of tables Table 4.1 Descriptive Statistics 25 Table 4.2 Panel data analyses between EEG and PR 27 Table 4.3 Panel data analyses subsamples 31 Table 4.4 Panel data analyses between EEG and DY 32 Table 4.5 Pearson’s correlations Matrix 34 Table 4.6 Panel data analyses when adding DY 35 Table 4.7 Panel data analyses when adding DY, EIBT, TA and ROE 37 vii List of figures Figure 2.1: Firm’s Life Cycle Stages Figure 2.2: Dividend Growth to follow Earnings Growth 14 Figure 4.1: Scatter plot of the average PR (X-axis) versus EEG1YR (Y-axis) for firms on HOSE 27 Figure 4.2: Scatter plot of the average PR (X-axis) versus EEG2YR (Y-axis) for firms on HOSE 28 Figure 4.3: Scatter plot of the average PR (X-axis) versus EEG4YR (Y-axis) for firms on HOSE 28 Figure 4.4: Scatter plot of the average PR (X-axis) versus EEG1YR (Y-axis) for firms on HNX 29 Figure 4.5: Scatter plot of the average PR (X-axis) versus EEG2YR (Y-axis) for firms on HNX 29 Figure 4.6: Scatter plot of the average PR (X-axis) versus EEG4YR (Y-axis) for firms on HNX 30 viii Abbreviations ABT Bentre Aquaproduct Import And Export JSC AGF Angiang Fisheries Import Export JSC BBC Bibica Corporation BBS VICEM Packaging But Son JSC BHS Bien Hoa Sugar Joint Stock Company BHV Viglacera Ba Hien Joint Stock Company BPC Vicem Packaging Bim Son JSC BMC Binh Dinh Minerals Joint Stock Company BMP Binh Minh Plastic Joint-Stock Company CAN Ha Long Canned Food Joint Stock Corporation CIC Cotec Investment And Construction JSC CII Ho Chi Minh City Infrastructure Investment JSC CJC Central Area Electrical Mechanical JSC CTN Underground Works Construction JSC DHA Hoa An Joint Stock Company DNP Dongnai Plastic Joint – Stock Company DTC Viglacera Dong Trieu Joint Stock Company DXP Doan Xa Port Joint Stock Company DY Dividend Yield EBS Educational Book JSC In Hanoi City EEG Expected Earnings Growth GMD Gemadept Corporation HLY Viglacera Ha Long I Joint Stock Company HNX Ha Noi Stock HOSE Ho Chi Minh Stock HPS Hoa Phat Construction Stone JSC 39 expected earnings growth are calculated by the change in EPS for t years, dividing by t years For example, EEG4YRt= (EPSt+4/EPSt -1)/4 The same method is used to calculate EEG1YR and EEG4YR From Tables 4.7 and 4.8 that the relationship remains positive and only the PR and DY are most of the time significant variables within the models For that reason, this research additionally tests the expected earnings growth as a function of only payout ratio and dividend yield The R2 of Model I^ - Model VI^ are in the range [0.099; 0.238] All coefficients of the variable ‘payout ratio’ remain positive and all coefficients of variable ‘dividend yield’ remain negative These support two hypotheses- the payout ratio is positively correlated to the expected future earnings growth and the dividend yield is negatively correlated to the expected future earnings growth Model I^ and Model IV^ explain the influence of the payout ratio and dividend yield of listed HOSE firms and listed HNX firms on the year expected earnings growth Models II^, III^, V^ and VI^ explain the relationship between the payout ratio, dividend yield and respectively the years annualized EEG and years annualized EEG for the listed firms in HOSE or HNX These models create a more detailed insight in the relationship For example, the coefficient of 1.512 in Model II^ implies that if the payout ratio increase 10% the annualized years expected earnings growth is 15.12% This research focuses on the average t-test to conclude whether the payout ratio variable and dividend yield are significant within these average models The average t-statistics, measured over a period of six years, are above the minimum threshold of 1.96 For all the average models it is assumed that the average t-statistic can be used to analyze the significance of the variable within the model 40 Chapter 5: Conclusions and Recommendations This research has focused on the influence of the payout ratio and dividend yield on expected future earnings growth for listed firms on HOSE and HNX The model developed by Arnott and Asness (2003) was used this research Some new interesting results about the influence of dividend policy and dividend yield on the future profitability of listed firms on HOSE and HNX 5.1 Conclusions with respects to the first hypothesis After researched, it showed a positive relation on the indices level between dividend distribution and future earnings growth of listed firm on HOSE and HNX This relationship on the indices level is in accordance with the results found by Arnott and Asness (2003) for the United States Therefore, the first hypothesis- The payout ratio is positively correlated to the expected future earnings growth for listed firms on HOSE and HNX- is confirmed Another important result of the panel data analyses is that the small-cap index (HNX) exhibited smaller PR coefficients compared to the coefficients of the large-cap index (HOSE) One possible explanation is that the HNX includes smaller firms which tend to grow faster For this reason, the listed firms on HXN have a higher retention rate and a pay less dividend These firms need their money to finance future growth It should note that this supports the life cycle theory If the firm ends up in a more mature stage of the life cycle, the firm pays more dividends Indeed, the firms on HOSE are in a more mature stage of their life cycle compared to the firms on HNX 41 Besides, the R2 for the large-cap firms on HOSE is higher compared to the R2 of the HNX listed small-cap firms This could mean that the impact of dividend policy on future earnings growth is larger for listed firms on the HOSE compared to listed firms on the HNX The last, to find the differences of adding DY to the models, we compare table 4.6 with table 4.1 By adding the independent variable dividend yield, the variable payout remains positive Notice, the beta’s of payout ratio increase by adding this variable Furthermore, R2 increases, too This means the variable DY helps to explain more of the variable in the dependent variable ‘future profitability’ When we add DY, EIBT, TA and ROE that the relationship remains positive and only the PR and DY are most of the time significant variables within the models 5.2 Conclusions with respect to the second hypothesis The second part of this research focuses on relationship between dividend yield and future profitability of listed firms on HOSE and HNX However, in all yearly regressions which were run for the period 2006 – 2011, DY was negatively related to the future profitability In the end, an average expanded model with the variables payout ratio, dividend yield were used to conduct an analysis With this expanded model one can analyze whether the payout is still significant after adding dividend yield 5.3 Recommendations During this research the positive relationship between payout ratio and expected earnings growth was proved for listed firms on HOSE and HNX, during the period 2006-2011 It would be interesting for further research to analyze the possible 42 explanation for this positive relationship Further research could likewise analyze which theories apply best to the relationship between the payout ratio and future profitability This could extent on my research and provides better understanding In addition, an interesting topic for further research could be a sector specific empirical study In other words, the impact of dividend policy on the future for profitability for different industries in HOSE and HNX could be investigated It is expected that, for example, the variable ‘capital expenditures’ is more important for capital – intensive firms than for labor – intensive firms Such further detailed research could provide additional insights 43 References Aharony, Joseph, and Itzhak Swary, 1980, Quarterly dividend and earnings announcements and stockholders’ returns: An empirical analysis, Journal of Finance 35, 1–12 Arnott, R.D and Asness, C.S (2003), Surprise! Higher dividends = Higher Earnings Growth Financial Analysts Journal Jan/Febr 2003, pp 70-87 Arnott, Robert D., and Peter L Bernstein 2002 “What Risk Premium Is ‘Normal’?” Financial Analysts Journal, vol 58 no (March/April):64–85 Bagwell, L.S and Shoven, J.B (1989), Cash Distributions to Shareholders The Journal of Economic Perspectives, Vol 3, No 3, pp 129-140 Benartzi, S., Michaely, R and Thaler, R (1997), Do Changes in Dividends Signal the Future or the Past? The Journal of Finance, pp 1007-1034 Bhattacharya, S (1979) Imperfect Information, Dividend Policy, and the Bird-in-Hand Fallacy Bell Journal of Economics,pp 259-270 Brennan, M.T and Thakor, A.V (1990), Shareholder preferences and Dividend Policy The Journal of Finance, pp 993-1018 Brüderl, J (May 2005), Panel Data Analysis University of Mannheim DeAngelo, H., DeAngelo, L and Stulz, R.M (2006), Dividend policy and the earned/ contributed capital mix: a test of the life-cycle theory Journal of Financial Economics 81, pp 227-254 DeAngelo, Harry, and Linda DeAngelo, 1990, Dividend policy and financial distress: An empirical investigation of troubled NYSE firms, Journal of Finance 45, 1415–1431 Easterbrook, Frank H (1984) “Two Agency-Cost Explanations of Dividends.” American Economic Review 74 : 650-59 Fama, E and French, K (2001), Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics 60, pp 3-43 44 Fama, Eugene F., and Kenneth R French, 2000, Forecasting profitability and earnings, Journal of Business 73, 161–175 Frankfurter, G.M and Wood, B.G (2003), Dividend Policy Therory & Practice Academic Press, Elsevier Science (USA) Gordon, M.J (1962), The investment, financing, and valuation of the corporation Homewood, IL: Richard D Irwin Grullon, G., Michaely, R and Swaminathan, B (2002), Are Dividend Changes a Sign of Firm Maturity?The Journal of Business, pp 387-424 Gwilym, O., Seaton, J., Suddason, K and Thomas, S (2006), International Evidence on the Payout Ratio, Earnings, Dividends, and Returns Financial Analysts Journal, Vol 62, No 1, CFA Institute, pp 36-53 Henri Servaes, (2006), The Theory and Practice of Corporate Dividend and Share Repurchase Policy Harvard Business School Press, United States of America Hsiao, C (1986), Analysis of panel data Cambridge University Press, Chapter Jensen, M.C (1986), Agency costs of free cash flow, Corporate Finance and Takeovers American Economic Review, vol 76, no 2, pp 323-329 Lease, R.C et al (2000), Dividend policy – Its impact on firm value Harvard Business School Press, United States of America Lintner, J., 1956 Distribution of incomes of corporations among dividends, retained earnings, and taxes American Economic Review 46, 97–113 Myers, S.C and Majluf, N.S (1984), Corporate financing and investment decisions when firms have information the investors not have Journal of Financial Economics 13, 187-221 Miller, M.H and Modigliani, F (1961), Dividend Policy, Growth, and Valuation of Shares The Journal of Business, Vol 34, No 4, pp 411-433 Nissim, D and Ziv, A (2001), Dividend Changes and Future Profitability The Journal of Finance, Vol 56, No 6, pp 2111-2133 45 Zhou, P., CFA and Ruland, W (2006), Dividend Payout and Future Earnings Growth Financial Analysts Journal, Vol 62, No 3, CFA Institute, pp 58-69 Smith, Clifford W (1986) “Investment Banking and the Capital Acquisition Process.” Journal of Financial Economics 15 (Nos 1-2) Watts, Ross, 1973, The information content of dividends, Journal of Business 46, 191– 211 46 Appendices Appendix I: Variable description Name Description Variable Dividend For sectors, dividend yield is derived by calculating the total dividend yield (mean) amount for a sector and expressing it as a percentage of the total market value for the constituents of that sector This provides an average of the individual yields of the constituents weighted by market value It is calculated as follows: DYt= ∑ ( ∑ ( ) ∗ ) ∗ Where: DYt = aggregate dividend yield in year t Dt = dividend per share in year t Nt= number of shares in issue in year t Pt = unadjusted share price in year t n = number of firms in sample Payout ratio (mean) ∑ ( ∗ ) ( ∗ ) PRt = ∑ 47 Where: Dt = dividend of a firm in year t Nt = number of shares of one firm in year t Et = Earnings per share in year i N= number of firms in sample Return of Equity ROE = ( ) 48 Appendix II: All firms were sampled on HOSE and HNX Firm Firm name Index Sector ABT HOSE Food AGF HOSE Food BBC HOSE Food BHS HOSE Food BMC HOSE Industry BMP HOSE Industry CII HOSE Real estate and Building DHA HOSE Building GMD HOSE Transport 10 HRC HOSE Industry 11 HTV HOSE Transport 12 IMP HOSE Pharmaceutics 13 KDC HOSE Food 14 KHA HOSE Real Estate 15 KHP HOSE Energy 16 MCP HOSE Food 17 NAV HOSE Steel and Metal 18 PAC HOSE Energy 19 PAN HOSE Environment 20 PJT HOSE Transport 21 PNC HOSE Media 22 PPC HOSE Energy 23 PVD HOSE Energy Code 49 24 RAL HOSE Electronics 25 REE HOSE Industry 26 SAV HOSE Real Estate 27 SCD HOSE Drinks 28 SFC HOSE Energy 29 SFI HOSE Transport and Storage 30 SJS HOSE Real estate 31 SSC HOSE Agricultural products 32 TAC HOSE Food 33 TDH HOSE Real estate 34 TMS HOSE Transport and storage 35 TNA HOSE Commerce 36 TS4 HOSE Food 37 VIP HOSE Transport 38 VIS HOSE Steel and Metal 39 VSH HOSE Energy 40 BBS HNX Industry 41 BBC HNX Food 42 BHV HNX Support building 43 BPC HNX Industry 44 CAN HNX Food 45 CIC HNX Real estate 46 CJC HNX Energy 47 CTN HNX Real estate 48 DNP HNX Industry 49 DTC HNX Building 50 50 DXP HNX Transport 51 EBS HNX Education 52 HLY HNX Building 53 HPS HNX Building support 54 HTP HNX Education 55 MEC HNX Industry 56 NBC HNX Coal 57 NTP HNX Rubber 58 PJC HNX Transport 59 PLC HNX Chemically 60 POT HNX Electronics and Telecommunication 61 PPG HNX Building support 62 PTS HNX Transport 63 RHC HNX Energy 64 S55 HNX Building 65 S64 HNX Building 66 SAF HNX Food 67 SAP HNX Education 68 SD5 HNX Building 69 SD6 HNX Building 70 SD9 HNX Building 71 SDT HNX Building 72 SGD HNX Education 73 SNG HNX Building 74 STP HNX Industry 51 75 TCT HNX Travel 76 TMC HNX Commerce 77 VC2 HNX Building 78 VNC HNX Service 51 Appendix III: Pearson’s correlations Matrix of firms in HOSE Correlations PR1YRVN PR1YRVN Pearson Correlation DYHOSE DYHOSE EIBTVN TAVN ROEVN Pearson Correlation TAVN ROEVN 444** -.143* 012 -.517** 000 040 859 000 206 206 206 206 206 444** -.031 -.028 -.120 637 673 068 Sig (2-tailed) N EIBTVN Sig (2-tailed) 000 N 206 231 231 231 231 -.143* -.031 686** 283** Sig (2-tailed) 040 637 000 000 N 206 231 234 234 234 Pearson Correlation 012 -.028 686** -.101 Sig (2-tailed) 859 673 000 N 206 231 234 234 234 -.517** -.120 283** -.101 Sig (2-tailed) 000 068 000 123 N 206 231 234 234 Pearson Correlation Pearson Correlation ** Correlation is significant at the 0.01 level (2-tailed) * Correlation is significant at the 0.05 level (2-tailed) .123 234 52 III: Pearson’s correlations Matrix of firms in HNX Correlations PR1YRHNX PR1YRHNX Pearson Correlation DYHNX Sig (2-tailed) N DYHNX EIBTHNX TAHNX ROEHNX Pearson Correlation EIBTHNX 504 ** TAHNX -.243 ** ROEHNX -.234 ** -.263** 000 000 000 000 228 228 228 228 228 504** -.050 -.104 -.050 447 112 444 Sig (2-tailed) 000 N 228 234 234 234 234 -.243** -.050 565** 323** Sig (2-tailed) 000 447 000 000 N 228 234 234 234 234 -.234** -.104 565** 048 Sig (2-tailed) 000 112 000 N 228 234 234 234 234 -.263** -.050 323** 048 000 444 000 462 228 234 234 234 Pearson Correlation Pearson Correlation Pearson Correlation Sig (2-tailed) N ** Correlation is significant at the 0.01 level (2-tailed) .462 234 ... = the constant -growth term r = expected return (D/P) = dividend yield (D/E) = the payout ratio (dividend to earnings ratio) (E/P) = the earnings yield If the dividend yield has declined on the. .. expected earnings growth for HOSE and HNXlisted firms Besides, the historical relationship between earnings growth and payout ratios could be used to forecast the future impact of the dividend payout. .. insights and useful comments His experience and professionalism have certainly improved my research ii Abstract The relationship between the payout ratio, dividend yield and the expected earnings growth