Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
Analysis of Profitability, Growth, Leverage & Dividend Payout of
Malaysian Listed Companies
SH Ng & YS Hiew
This paper investigates the correlation of three financial predictors (profitability,
growth and leverage) on dividend payout of Malaysian listed companies. Using 240
observations from 2010 to 2013, the Pearson’s correlation shows no correlation
between profitability and dividend payout. However, there is a significant weak
negative correlation between growth (r = -0.25); leverage (r = -0.21) on dividend
payout. Multiple regression analysis reveals that growth (b = - 0.34) better explain
dividend payout than leverage (b = -0.2). These findings show that there is
dissimilarity of dividend policies around the world.
Keywords: Finance, Dividend Payout, Profitability, Growth, Leverage, Agency Theory, Issue Costs
1. Introduction
In an imperfect world, dividend payment affects firm’s value. So, it is crucial to establish financial
variables that drive listed companies to pay dividend. Henceforth, this paper thrives to answer the
following 4 questions.
i.
What is the correlation between profitability and dividend payout among Malaysian listed
firms?
ii.
What is the correlation between growth and dividend payout among Malaysian listed firms?
iii.
What is the correlation between leverage and dividend payout among Malaysian listed firms?
iv.
What is the relationship between growth and leverage on dividend payout among Malaysian
listed firms?
1.1 Theoretical Background
Dividend payment is governed by Section 365 (1) of the Companies Act 1965. The Act states that
firm may only distribute cash dividends out of profit. Apart from this, bond indentures may also place
restriction on the amount of dividend payment. In other words, leverage puts pressure on dividend
payment as lenders limit dividend in debt covenants (Jiraporn and Ning, 2006). Hence, highly
levered firms are expected to adopt lower payout (Kozul and Orsag, 2012).
Second, the availability of cash also determines dividend payout as dividends are paid in cash.
Hence, firms with sufficient cash would likely to pay dividend, ceteris paribus.
Third, growth needs to be financed by either internal funds or by issuing shares or debt capital.
Pecking order theory suggests that firms adapt their dividend payout depending on their growth
___________________________________________________________________
Dr. Ng Ser Heong, Faculty of Business, Economics & Accountancy, HELP University, 15 Jln Sri Semantan 1, Damansara
Heights, 50490 Kuala Lumpur, Malaysia, Email: ngsh@help.edu.my
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
opportunities. This is supported by the findings of Fama and French (2001). They find that firms with
more investments pay lower dividend to avoid issue costs. Apparently, firms prefer to finance
investments from retained earnings rather than external sources if issue costs are significant.
Fourth, dividend payment plays a role in mitigating conflict between shareholders and managers.
Dividend payment reduces the amount cash within the firm. When there is insufficient cash to
finance investment, the firm has to resort to external financing. Raising external capital will put the
firm under the scrutiny of the Securities Commission and providers of capital.
2.
Literature Review
2.1
Profitability and Dividend Payout
Fama and French (2001) used a sample of 750 firms in the United States from 1963 to 1998 to
reveal that dividend payers are more profitable than non-dividend payers.
Ramli (2010) investigates the determinants of dividend policy of 245 non-financial firms in Malaysia
from 2002 to 2006. He adopts random-effects Tobit regression to explain dividend payout level
against earnings (ratio of total dividends to earnings after interest and tax). The finding shows that
profitability’s coefficient is positive and statistically significant at 1% level in all regressions. It
indicates that firms with higher earnings pay higher dividends.
2.2
Growth Opportunities and Dividend Payout
Fama and French (2001) reveal that non-dividend payers have stronger growth opportunities. For
the whole study period, non-payers show higher asset growth rates than dividend-paying firms
(16.5% versus 8.78%). It also found that growth opportunities have the least explanatory power as
compared to profitability and firm size.
Ramli (2010) findings show no statistical evidence on the relationship between dividend payout and
market capitalization to total assets ratio in random-effects Tobit regression. Thus, firm growth does
not have any influence on dividend payouts of Malaysian companies.
Wei et al. (2004) use asset growth rate as a proxy to investment opportunities. The result in OLS
regressions using pooled cross-sectional time-series shows that investment opportunities have no
significant relationship with the following three dependent variables of dividend payment (DPS,
DPS/Net Sales, and DPS/ EAITBEI) in China.
Jiraporn and Ning (2006) use Tobin’s q as a proxy of growth opportunities. The researchers use
regression analysis and find mixed results. Growth is positively related to dividend/sales (t= 3.88) but
negatively related to dividend yield (t= −5.17) both significant at 1% level. In contrast, growth has no
significant relationship with dividend payout.
2.3
Leverage and Dividend Payout
Wei et al. (2004) found a significant negative relationship at 1% level with DPS/Net Sales and
DPS/EAITBEI but no significant relationship with DPS. The researchers argue the negative
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
relationship may be explained by the probability of debt covenants exerting some control over
Chinese firms on dividends.
Jiraporn and Ning (2006) use long-term debt/total assets ratio (LTD/TA) to represent leverage.
Results from regression analysis show that leverage has no significant relationship with dividend
payment in all three dependent variables.
Kowalewski et al. (2007) used pooled OLS regression, to show that highly levered firms have lower
dividend payouts to avoid default risk. This negative relationship is also confirmed by Ramli (2010).
Therefore, firms with lower debt ratios have higher dividend payout and vice versa.
3.
Research Method
3.1
Sampling Technique
As of March 2015, 923 firms are listed on both the Main and Ace Market (Bursa Malaysia, 2014).
The sampling frame comprises 815 firms that are listed on the Main Market. The ACE market
companies are excluded to eliminate the size effect on dividend payout. The following companies
are also excluded from the sample.
i.
ii.
iii.
iv.
Financial institutions, Real Estate Investment Trusts (REITs) firms, and closed-end funds are
subject to different regulatory framework (Ramli, 2010).
PN 17 firms as they are financially distressed.
Firm not paying paying cash dividend within the sample period.
Foreign owned companies.
Next, the sample is stratified into different sectors according to Bursa Malaysia sector classification.
Thereafter, companies are drawn randomly from each sector in order to obtain the final sample of 60
companies.
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
Table 1: Sample Drawing Procedures
Total Population
Less: Firms from Ace Market
Sample Frame
Less: Firms from financial, REITs, and closed-end fund sectors
Firms classified under PN17
Firms that do not pay cash dividend within sample period
Foreign firms
Sample Drawing Based on Sectors
Construction
Consumer Products
Hotels
Industrial Products
IPC
Mining
Plantation
Properties
Technology
Trading or Services
923
(108)
815
21
53
1
97
3
1
29
31
12
79
327
Final Sample of 60 Firms
Construction
Consumer Products
Hotels
Industrial Products
IPC
Mining
Plantation
Properties
Technology
Trading or Services
4
10
18
1
5
6
2
14
60
Note: In order to obtain a sample of 60 firms, the number of firms from each sector is divided by 327
then multiplied by 60.
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
3.2
Data Collection
The following ratios were calculated from the firms’ audited financial statements from 2010 to 2013.
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑎𝑦𝑜𝑢𝑡 =
𝑅𝑂𝐴 =
𝐺𝑟𝑜𝑠𝑠 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
× 100%
𝐸𝐴𝐼𝑇𝐵𝐸𝐼
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠 𝑎𝑛𝑑 𝑡𝑎𝑥𝑒𝑠
× 100%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐴𝑠𝑠𝑒𝑡 𝐺𝑟𝑜𝑤𝑡ℎ =
∑ 𝐴𝑠𝑠𝑒𝑡𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟 − ∑ 𝐴𝑠𝑠𝑒𝑡𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟
× 100%
∑ 𝐴𝑠𝑠𝑒𝑡𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 𝑡𝑜 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 𝑅𝑎𝑡𝑖𝑜 =
4.
Data Analysis
4.1
Result of Hypothesis One
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡
× 100%
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
Table 2: The Correlation between Profitability and Dividend Payout
Dividend
Payout
Dividend Payout
Pearson Correlation
Sig. (2-tailed)
N
Bootstrapc
Bias
Std. Error
BCa 95% Confidence
Interval
Lower
Upper
Profitability
240
0
0
.
.
.102
.113
240
-.003
.061
-.023
.231
c. Unless otherwise noted, bootstrap results are based on 1000 bootstrap samples
Table 2 shows that the p-value of 0.113 is greater than 0.05. Therefore, fail to reject the null
hypothesis (H0). This implies there is no significant association between profitability and dividend
payout.
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
4.2
Result of Hypothesis 2
Table 3: Correlation between Growth & Dividend Payout
Dividend
Payout
Dividend
Payout
Pearson Correlation
Sig. (2-tailed)
N
Bootstrap Bias
c
Std. Error
BCa 95%
Lower
Confidence Interval Upper
Growth
1
240
0
0
.
.
-.248**
.000
240
.000
.063
-.371
-.111
**. Correlation is significant at the 0.01 level (2-tailed).
c. Unless otherwise noted, bootstrap results are based on 1000 bootstrap samples
Table 3 shows the 2-tailed p-value of 0.001 is less than the 0.01 level. Therefore, the null hypothesis
(H0) is rejected. This implies a significant weak negative correlation between growth and dividend
payout with r = –0.248. The confidence intervals do not cross zero (from –0.371 to –0.111) denoting
that correlation coefficient has a genuine effect on the population. Hence, the result of bootstrapping
reinforces the statistical significant weak negative association between growth and dividend payout.
4.3
Result of Hypothesis 3
Table 4: The Correlation between Leverage and Dividend Payout
Dividend
Payout
Dividend
Payout
Pearson Correlation
Sig. (2-tailed)
N
Bootstrapc
Bias
Std. Error
BCa 95% Confidence Interval
Leverage
1
Lower
Upper
240
0
0
.
.
-.214**
.001
240
.000
.056
-.317
-.095
**. Correlation is significant at the 0.01 level (2-tailed).
c. Unless otherwise noted, bootstrap results are based on 1000 bootstrap samples
Table 4 shows the 2-tailed p-value of 0.001 is less than the 0.01 level. Therefore, the null hypothesis
(H0) is rejected. This implies a significant weak negative correlation between leverage and dividend
payout with r = –0.214. The confidence intervals do not cross zero (from –0.317 to –0.095) denoting
that correlation coefficient has a genuine effect on the population. Hence, the result of bootstrapping
reinforces the statistical significant weak negative association between leverage and dividend payout.
4.4 Normality Test
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
Table 5: Kolmogorov-Smirnov’s Test
Kolmogorov-Smirnova
Statistic
Df
Sig.
.003
.074
240
Dividend
Payout
a. Lilliefors Significance Correction
Based on the K-S test, the degrees of freedom (df) 240 is equals to the number of observations of
the study sample. The Sig. value of 0.003 which is less than 0.05 indicates that the dividend payout
deviates from normality due to small sample size. However, this assumption is ignored as the
confidence intervals are bootstrapped.
4.5
Multi-collinearity Test
Table 6: Multicollinearity Test
Model
Collinearity Statistics
Tolerance
VIF
2
Growth
.958
1.044
Leverage
.958
1.044
a. Dependent Variable: Dividend payout
The VIF values for all variables are less than 5 (Snee 1973). Hence, there is no threat to multicollinearity between independent predictors.
4.6
Result of Multiple Regression Analysis
Table 7: Model Summary
Model
R
R
Square
Adjusted
R Square
Std. Error of
the Estimate
.062
1
.248a
.058
b
2
.089
.082
.299
a. Predictors: (Constant), Growth
b. Predictors: (Constant), Growth, Leverage
c. Dependent Variable: Dividend Payout
21.02918
20.75892
R Square
Change
.062
.028
Change Statistics
F
df1
df2
Change
15.639
1
238
7.237
1
237
Sig. F
Change
.000
.008
Table 8: ANOVAa
1
2
Model
Regression
Residual
Total
Regression
Sum of Squares
6915.852
105249.875
112165.727
10034.712
Df
1
238
239
2
Mean Square
6915.852
442.226
F
15.639
Sig.
.000b
5017.356
11.643
.000c
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
Residual
Total
102131.015
112165.727
237
239
430.933
a. Dependent Variable: Dividend Payout
b. Predictors: (Constant), Growth
c. Predictors: (Constant), Growth, Leverage
Table 9: Bootstrap for Coefficients
Model
Bootstrapa
B
Bias
1
2
Std. Error
Sig. (2tailed)
BCa 95% Confidence
Interval
Lower
Upper
(Constant)
43.151
-.004
1.994
.001
34.405
47.015
Growth
(Constant)
Growth
Leverage
-.391
49.723
-.336
-.198
-.003
-.017
.006
-.004
.098
2.713
.101
.069
.001
.001
.002
.005
-.595
44.301
-.534
-.321
-.202
55.12
-.115
-.074
a. Unless otherwise noted, bootstrap results are based on 1000 bootstrap samples
The relationships between growth and leverage on firm’s dividend payout are examined using stepwise analysis. Based on Table 7, model 1, growth explains 6.2% of variation in dividend payout
while in model 2 – growth and leverage explain 8.9% of the variation in dividend payout. Although,
model 2 has an R2 of 8.9% that explains the variation in dividend payout but it also indicates the
remaining variation of 91.1% cannot be explained by this model.
Based on Table 9, bootstrapping is used to overcome the problem of violating normality assumption.
The b-values reveal the degree of effect of each predictor on the outcome by holding constant the
other predictor.
4.6.1 Result of Testing Hypothesis 4
From Table 9, both growth and leverage have significant negative contribution to the model with
significance values of 0.002 and 0.005 respectively that are below the 0.05 level. Therefore, the null
hypothesis is rejected.
In terms of growth, the negative sign of b = –0.336 indicates a negative relationship between growth
and dividend payout. As firm grows by 1% (in total assets), the firm’s dividend payout decreases by
33.6% when other predictors are held constant. Furthermore, the bootstrapped 95% confidence
interval for b-value does not cross zero (lower bound: –0.534, upper bound: –0.115). This indicates
that the b-value in the sample is close to the true b-value in the population and has a genuine effect
on the model. This reinforces a statistical significant negative relationship between growth and
dividend payout.
As for firms’ leverage, the negative sign of b = –0.198 indicates a negative relationship between
leverage and dividend payout. As leverage (TD/TA ratio) increases by 1%, the firm’s dividend payout
decreases by 19.8% when other predictors are held constant. Furthermore, the 95% confidence
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
interval for b-value does not cross zero (lower bound: –0.321, upper bound: –0.074). This indicates
that the b-value in the sample is close to the true b-value in the population and has a genuine effect
on the model. This reinforces a statistical significant negative relationship between leverage and
dividend payout. This results in the following regression formula.
Dividend Payout = 49.723 – 0.336Growth – 0.198Leverage + ei
Based on the b-values of these two independent variables, growth (33.6%) hold a stronger
explanatory power to dividend payout compared to leverage (19.8%).
5.
Study Implications and Conclusion
5.1
Implications of Hypothesis 1
This is not surprising as dividends are paid in cash, not profit. This is because the firm’s profitability
in the income statement is prepared based on accrual principles. In short, profit is an accounting
concept and not cash. Therefore, a firm with greater profitability does not necessarily mean it has the
money to pay dividend. Hence, it implies that managers look at the firm’s cash availability and not
profitability before making dividend decision.
5.2
Implications of Hypothesis 2
A significant weak negative correlation between growth and dividend payout suggests that firms with
more growth opportunities pay lower dividends in order to save issue costs and control the cost of
capital. Manager that adopts such strategy could create value if the cash savings were used to
invest in positive net present value projects.
However, the weak negative correlation may imply that firms do not necessarily adjust dividend
payout according to growth opportunities. This is supported by Lintner (1956) dividend smoothing
theory whereby firms have strong desire to maintain a consistent dividend payment pattern. So the
dividend to be paid during the current year is also determined by dividend paid during previous years.
Although firms are growing, managers do not necessarily make drastic reduction on dividend
payouts. Such action reflects managers’ greater reluctance to cut dividend payment as it would lead
to negative reactions from shareholders. Dividend smoothing may be costly to firms when managers
have to resort to raising external funds. As a result, the preference for a stable and consistent
dividend policy may explain why growth opportunities and dividend payout is weak negative
correlated.
5.3
Implication of Hypothesis 3
There are three possible implications of the significant but weak negative correlation between
leverage and dividend payout.
First, the weak negative correlation between leverage and dividend payout may be due to difficulties
in assessing an appropriate level of capital structure. This is so as many factors interact to determine
the optimum level of gearing. Furthermore, high or low is relative to the level of sales, assets and
profitability.
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
Moreover, this paper does not classify firms into high, moderate or low gearing. There are also
several possible combinations of dividend payments. A low geared firm may pay high or low
dividend. Likewise, a moderately geared firm can either pay a low or high dividend. Finally, an overgeared firm can only pay less or no dividend.
Second, firms’ ability to service debt is also not examined in this research. For instance, despite
being highly levered, firms that are rated investment-grade have sufficient capacity on meeting its
financial obligations. The fact that high-levered firm is vaguely distinguished may explain why
leverage is weakly associated with dividend payout. This implies that managers also consider firms’
overall capacity to meet its financial obligations before making dividend decision.
Third, both dividend payment (Schooley & Barney Jr, 1994) and borrowing can lower conflicts
between managers and shareholders. Dividend payment reduces the amount of cash within the firm
and thus prevents management from wasting shareholders’ money. Mahmoud, Perry, LG and
Rimbey, JN (1995) investigate the relationship between agency theory and dividend policy and
concluded that “firms do act to minimize the sum of agency costs and transaction costs toward an
optimum level of dividend payout”. Therefore, besides using dividend payment to minimize agency
costs, the terms and conditions within the loan agreement also restrict management freedom and
hence mitigate agency costs. In short, both dividend payment and loan indenture can play a role in
mitigating conflicts.
This partly explains why higher leverage leads to lower dividend payment. Since the loan agreement
is already monitoring managers’ actions, there is less need to use dividend payment to prevent
conflict between managers and shareholders.
5.4
Implication of Hypothesis 4
The R2 of only 8.9% suggests that the regression model is relatively weak on explaining the variation
on dividend payout. This implies that the model does not include other important independent
variables like tax on dividend, issue costs that will also affect dividend payout.
The multiple regression analysis shows a significant negative relationship between growth
opportunities and dividend payout. This result is consistent with Fama and French (2001) that shows
firms with more investment opportunities (growth opportunities) pay lower dividend. This is in line
with the pecking order theory of capital structure which states that management prefers to use
retained earnings to finance its growth opportunities rather than resorting to external financing that
would incur significant transaction costs (Donaldson, 1961).
As such, management should identify all investment prospects and finance them with retained
earnings, and then only decides on the level of payout in accordance with residual theory of dividend.
Since most of the retained earnings are used to finance investments, the level of dividend payout is
expected to be low.
It is not surprising that leverage (19.8%) possesses a weaker explanatory as compared to growth
opportunities (33.6%). It makes business sense to give priority to positive net present value
investment as it adds value. This also implies that legal constraints should not be a problem if the
company can generate net cash flows from the investment. In short, investment should override
legal constraints.
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Proceedings of Annual Tokyo Business Research Conference
9 - 10 November 2015, Shinjuku Washington Hotel, Tokyo, Japan, ISBN: 978-1-922069-88-7
6.
Conclusion
These findings show the similarity as well as dissimilarity of dividend policies between Malaysian and
foreign corporations. In a small way, this paper added to the dividend puzzle (Myers, 1984)
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Proceedings of Annual Tokyo Business Research Conference
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