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 TIEU LUAN MOI download : skknchat@gmail.com 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: 60.05 MASTER’S THESIS Supervisor: Dr. Vo Xuan Vinh TIEU LUAN MOI download : skknchat@gmail.com 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. TIEU LUAN MOI download : skknchat@gmail.com 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. TIEU LUAN MOI download : skknchat@gmail.com iii Table of content Acknowledgement. ii List of tables. vi List of figures.
viii Chapter 1: Introduction .1 The context of the Research .2 Structure of this paper. 2 Chapter 2: Current state of literature & Hypotheses Development .1 Reason to Pay Dividends .3 Dividend Life Cycle Theory .4 The Dividend Decision Model by Lintner (1956) .5 Types of Dividend Payments .7 Preference for Dividends .8 Relationship between Dividend and Profitability .9 The payout ratio predicts future earnings growth .1 Gordon’s Constant-Growth Valuation Model .2 Main conclusions by Arnott and Asness (2003) .3 Some Explanations for the Positive Relationship by Arnott & Asness .10 An extension of Arnott’s and Asness’s Research. 18 TIEU LUAN MOI download : skknchat@gmail. 18 Chapter 3: Data & Methodology .2 Panel data analyses .2 Variable description and model building .3 Methodology for panel data analyses .4 Advantages of Panel Data .1 The regression results of the payout ratio and expected earnings growth analyses .2 Panel data regressions .2 Large- cap firms in HOSE versus small-cap firms in HNX .3 Dividend yield and future profitability .4 An expanded model to forecast future earnings growth .1 Variable description and model building when add DY .2 Variable description and model building when adding DY, EIBT, TA, ROE and ROA.
36 Chapter 5: Conclusions and Recommendations .1 Conclusions with respects to the first hypothesis .2 Conclusions with respect to the second hypothesis. 43 TIEU LUAN MOI download : skknchat@gmail. 51 TIEU LUAN MOI download : skknchat@gmail.com vi List of tables Table 4.2 Panel data analyses between EEG and PR .3 Panel data analyses subsamples .4 Panel data analyses between EEG and DY .5 Pearson’s correlations Matrix .6 Panel data analyses when adding DY .7 Panel data analyses when adding DY, EIBT, TA and ROE. 37 TIEU LUAN MOI download : skknchat@gmail.com vii List of figures Figure 2.1: Firm’s Life Cycle Stages .2: Dividend Growth to follow Earnings Growth .1: Scatter plot of the average PR (X-axis) versus EEG1YR (Y-axis) for firms on HOSE .2: Scatter plot of the average PR (X-axis) versus EEG2YR (Y-axis) for firms on HOSE .3: Scatter plot of the average PR (X-axis) versus EEG4YR (Y-axis) for firms on HOSE .4: Scatter plot of the average PR (X-axis) versus EEG1YR (Y-axis) for firms on HNX .5: Scatter plot of the average PR (X-axis) versus EEG2YR (Y-axis) for firms on HNX .6: Scatter plot of the average PR (X-axis) versus EEG4YR (Y-axis) for firms on HNX.
30 TIEU LUAN MOI download : skknchat@gmail.com 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 TIEU LUAN MOI download : skknchat@gmail.com ix HRC Hoa Binh Rubber Joint Stock Company HTP Hoaphat Textbook Printing JSC HTV Ha Tien Transport Joint Stock Company IMP Imexpharm Corporation KDC Kinh Do Corporation KHA Khanh Hoi Export - Import Joint Stock Company KHP Khanh Hoa Power Joint Stock Company MCP My Chau Printing & Packaging Holdings Company MEC Song Da Someco Joint Stock Company NAV Nam Viet Joint Stock Company NBC Vinacomin - Nui Beo Coal JSC NTP Tien Phong Plastic Joint Stock Company PAC Dry Cell And Storage Battery Joint Stock Company PAN Pan Pacific Coporation PJC Petrolimex Hanoi Transportation & Trading JSC PJT Petrolimex Joint Stock Tanker Company PLC Petrolimex Petrochemical JSC PNC Phuong Nam Cultural Joint Stock Corporation POT Post And Telecommunication Equipment Factory JSC PPC Pha Lai Thermal Power Joint Stock Company PPG Phu Phong Corporation PTS Hai Phong Petrolimex Transportation & Services JSC PR Payout Ratio PVD PetroVietnam Drilling & Well Services Corporation RAL Rangdong Light Source And Vacuum Flask JSC REE Refrigeration Electrical Engineering Corporation RHC Ry Ninh II Hydroelectric Joint Stock Company TIEU LUAN MOI download : skknchat@gmail.com x ROE Return on Equity S55 Song Da 505 Joint Stock Company S64 Song Da 6.04 Joint Stock Company SAF Safoco Foodstuff Joint Stock Company SAP Ho Chi Minh City Textbook Printing JSC SAV Savimex Corporation SCD Chuong Duong Beverages Joint Stock Company SD5 Song Da No 5 JSC SD6 Song Da No 6 JSC SD9 Song Da No 9 JSC SDT Song Da No 10 JSC SFC SaiGon Fuel Joint Stock Company SFI Sea & Air Freight International SGD Educational Book JSC In Ho Chi Minh City SJS Song Da Urban & Industrial Zone Investment & Development SNG Song Da 10.1 JSC JSC Ha Noi Civil Construction & Investment JSC SSC Southern Seed Corporation STP Song Da Industry Trade JSC TA Total Asset TAC Tuong An Vegetable Oil Joint Stock Company TCT Tay Ninh Cable Car Tour Company TMC Thu Duc Trading & Import Export JSC TDH Thu Duc Housing Development Corporation TMS Transimex-SaiGon Corporation TNA Thien Nam Trading Import Export JSC TS4 Seafood Joint Stock Company No4 TIEU LUAN MOI download : skknchat@gmail.com xi VC2 Viet Nam Construction Joint Stock Company No2 VNC Vinacontrol Group Corporation VIP Vietnam Petroleum Transport Joint Stock Company VIS Vietnam – Italy Steel Joint Stock Company VSH Vinh Son - Song Hinh Hydropower Joint Stock Company VN Vietnam TIEU LUAN MOI download : skknchat@gmail.com 1 Chapter 1: Introduction Generally, the dividend signaling theory suggests that paying more dividends act as a signal to the market that a given firm’s manager is confident about the future prospects of the firm. Chapter 2 discusses the signaling theory in more detail. First of all, Chapter 1 shortly explains the context of the research. At the end of Chapter 1 the structure of this research is given.1 The context of the Research It is useful for investors to understand the influence of a firm’s dividend policy on future growth.
The more specific question that arises is the degree to which the future earnings growth for a firm change, if the dividend payout ratio changes. Does a change in the dividend payout ratio change the outlook for future earnings growth or is it the other way around? In earlier literature two main ideas were recognized. On the one hand, people who believe a negative relation between dividends and future earnings growth exists. In other words, lower dividends result in higher expected earnings growth.
On the other hand, some researchers believe a positive relation between dividends and earnings growth exists. These researchers think that a high payout ratio demands capital discipline and results in a more efficiently run company. At first sight, the negative relation seems a logical relationship. Indeed, if the firm retains high percentage of their earnings (low payout ratio) investors expect the managers use the retained earnings to finance profitable new projects which results in future earnings growth.
In the past, many researchers had found results which were in accordance with a negative relationship between dividends and expected earnings growth. Most of the researches focused on American firms, like researches by Grullon et al. TIEU LUAN MOI download : skknchat@gmail.com 2 Nevertheless, the validity of this negative relationship was doubted. Perhaps positive relationship between payout ratios and expected future earnings growth exists? One important explanation could be that a high payout ratio encourages managers to use the limited capital available in the best way and limits the likelihood of empire building and improves efficiency of the current business.
If firms have too many cash within the company, the so called free cash flow problem arises. It should be pointed out that most of the earlier research about dividend policy focused on U. firms, as mentioned above. For example, Nissim and Ziv (2001) and Arnott and Asness (2003), who found a positive relationship between dividend payouts and future earnings growth.
Therefore it is less interesting to include the United States of America as investigation region and so the research focuses on Vietnamese stock exchanges, in particular HOSE and HNX-listed firms. This region is not yet investigated comprehensively. The study provided investors and equity markets some extra understanding of the relationship between dividends and expected earnings growth for HOSE and HNX- listed firms. Besides, the historical relationship between earnings growth and payout ratios could be used to forecast the future impact of the dividend payout on the earnings growth.
This analysis provides another approach of looking at the Vietnamese companies, their valuation and their earnings growth profile.2 Structure of this Paper This study begins with a theoretical framework, composes of a theoretical chapter with some definitions and facts about dividend policy (Chapter 2). Chapter 2 also presents a literature review of research done in the past. This section compares various papers and discusses the empirical methods, the main conclusions, and interesting findings of TIEU LUAN MOI download : skknchat@gmail.com 3 earlier research. And chapter 2 presents the hypotheses of this research.
It is in Chapter 3 that method of analyzing the sample and the type of database is presented and explained. To test the developed hypotheses, this research makes use of time-series. More detailed information about how the statistics were calculated is provided in Chapter 3. Chapter 3 also discusses the limitations and assumptions of this research.
Using the empirical method of research, the hypotheses are tested in Chapter 4. Conclusions and recommendations are drawn in Chapter 5. TIEU LUAN MOI download : skknchat@gmail.