Synopsis of Article

"Dividend Payment Practices in the Non-Financial Sector of Pakistan: Empirical Evidence

from the Karachi Stock Exchange"

Submitted By: Vijay Malya

Roll No: 10
Introduction

This article was written by Muhammad Azam Roomi and Naveed Iqbal Chaudhary. It was
published in World Academy of Science, Engineering and Technology Journal, 2011. This
study tends to investigate the dividend payment practices of the non-financial sectors of the
Karachi Stock Exchange. Dividends are the compensation paid to shareholders for bearing
risk on their investments. When defining dividend policy, managers are confronted with the
challenge of how much should be distributed or retained for future needs. Dividend policy is
governed by various factors such as profitability, retained earnings, size of company,
investment opportunities, the dividend history and the cash balance. The dividend payout
ratios of developing countries are just about two thirds of developed ones. Pakistan is an
emerging and developing nation. In Pakistan, companies are reluctant to pay dividends. The
amount of dividend paid by these companies is as low as Rs.0.25 per share. The highly
capitalized sectors in Pakistan pay less dividends where as less capitalized sectors are
distributing more.

Objectives

The objectives of this study are:-

i. To portray the dividend payment practices in the non financial sectors of Karachi
Stock Exchange
ii. To investigate the compliance between dividend policy and market capitalization of
the companies listed in Karachi Stock Exchange.
iii. To investigate how companies utilize their earnings.

Methodology

The entire dividend paying non financial sector were selected for the study. Five independent
variables: profitability, market to book value ratio, retained earnings, total asset growth and
market capitalization were used in this study along with one dependent variable, dividend
yield ratio. The variables were compared with each other to project the dividend policy of
each non financial sector. Descriptive statistics was used as a major test for this study.

Findings

In this study, 11 non-financial sectors of Karachi Stock Exchange were studied.

1. Engineering Sector: Out of 13 companies, only 7 were regular dividend payers. In this
sector, majority of the funds were retained instead of being given out as dividend.
2. Cement Sector: Out of 21 listed companies, % companies paid dividend regularly. In
this sector, companies preferred to invest in growth opportunities via retained
earnings when they had sufficient earnings.
 3. Sugar and allied sector: In this sector, out of 37 companies, 11 were regular dividend
payers. Companies preferred to pay dividends at nominal rate, but when they had
earnings they preferred to finance for growth opportunities.
4. Paper Board sector: Out of 10 listed companies, 4 companies were regularly paying
dividends in this sector. The frequency of dividend payments was good at beginning
years but it declined in later years. In this sector, internal sources of financing was
attempted to finance growth opportunities.
5. Textile Sector: This sector lists 208 companies, but only 37 of them distribute
dividends. In this sector, most of the funds were retained instead of distributing them
as dividends.
6. Chemical and Pharmaceutical Sector: In this sector, 20 out of 32 companies paid
dividends. Here, the potential for earnings is attractive throughout the period and
company management distributed some portion of earnings to shareholders as
dividends.
7. Transportation and Communication Sector: It includes 14 companies, out of which 4
are dividend distributors. This sector showed a trend of balanced dividends. The
companies maintained pace with dividend payment as well as they also accumulated
funds to finance for growth opportunities.
8. Fuel and Energy Sector: This is an important and very large sector of Karachi Stock
Exchange, which includes most of the blue chip companies. The companies
maintained nominal pace of dividends but also invested for growth opportunities.
9. Auto and Allied Sector: Out of 25 listed companies,11 paid dividends. In this sector,
dividend distribution was not prioritized. The company focused mainly on investing
for growth opportunities.
10. Cables and Electronic Goods Sector: The number of listed companies was 9 and 4 of
which were dividend distributors. The dividend paying behavior of this sector
remained unpredictable during the entire period, while the market capitalization was
always positive.
11. Miscellaneous Sector: In this Sector, out of 87 companies, 37 were dividend payers.
From this study it is known that companies preferred to distribute dividends, but only
after achieving a certain level of growth.

Conclusion

Dividend policies usually respond positively to market capitalization. More dividends are
paid when capitalization is high. But in Karachi Stock Exchange, a different relationship
between dividend and market capitalization is observed. Market capitalization continually
acts in contradiction to dividends. In most of the sectors, dividends and market capitalization
link negatively. All of the sectors under the study are reluctant to pay dividends. Even the
most profitable sectors distribute very small portion of their profit as dividends and the
dividends begin to reduce with the increasing rate of growth options.