CHAPTER 1: INTRODUCTION

1.1 AN OVERVIEW OF DIVIDEND

A dividend is a distribution of a portion of a company's earnings, decided by the board of

directors, paid to a class of its shareholders. Dividends can be issued as cash payments, as shares
of stock, or other property.

The board of directors can choose to issue dividends over various time frames and payout rates.
Dividends are typically monthly or quarterly. It is also common for a company to issue special
dividends either individually or simultaneously with a scheduled dividend.The dividend rate
canbe quoted in terms of the Taka/Dollar amount each share receives (Dividends Per Share, or
DPS).

A company's net profits are an important factor in determining a dividend. Net profits can be
allocated to shareholders via a dividend, or kept within the company as retained earnings.
Dividend payments must be approved by the shareholders and are managed by the board of
directors.

1.1.1 TYPES OF DIVIDENDS

Based on its paying method, commonly two types of dividends are there:

i. Cash Dividends: Shareholders of record receive payment in the form of cash based on
how many shares of stock they own. However, to pay cash dividends, a company must
meet two conditions: It can’t pay cash dividends unless there are positive retained
earnings, and it must have enough ready cash to pay the dividends.
ii. Stock Dividend:A stock dividend is a dividend payment made in the form of additional
shares rather than a cash payout, also known as a "scrip dividend." Companies may
decide to distribute this type of dividend to shareholders of record if the company's
availability of liquid cash is in short supply.

1.1.2 DIVIDEND THEORIES

i. The Residual Theory of Dividend Policy:A residual dividend is a dividend policy

company management uses to fund capital expenditures with available earnings before
 paying dividends to shareholders, and this policy creates more volatility in the dollar
amount of dividends paid to investors each year.
ii. Dividend Irrelevancy Theory, (Miller & Modigliani, M-M, 1961): Modigliani and
Miller suggested that in a perfect world with no taxes or bankruptcy cost, the dividend
policy is irrelevant. They proposed that the dividend policy of a company has no effect on
the stock price of a company or the company’s capital structure.
MM say that if an investor gets a dividend that’s more than he expected then he can re-
invest in the company’s stock with the surplus cash flow. If the expected dividend is too
small, then he can sell a part of his shares and replicate the same cash flow he would get
if the dividend was what he expected. In both cases, investors are irrelevant to what the
company’s dividend policy is because they can create their own cash flows.
Higher returns are what investors care about. They can have that return through re-
investing or selling a part of their shares. If the market conditions are perfect, then they
don’t care if the return is from dividends or from stock price appreciation.

Dividend Irrelevance Arguments

Dividend policy does not affect share price because the value of the firm is a function of
its earning power and the risk of its assets. If dividends do affect value, it is only due to:

a) Information Effect: The informational content of dividends relative to management's

earnings expectations. So, when the dividend is high, investors take it as a positive signal
and they bid up their share price. But, if the dividend is lower, investors take it as
negative signal and bid down or sell their shares.

b) Clientele Effect: A clientele effect exists which allows firms to attract shareholders
whose dividend preferences match the firm's historical dividend payout patterns. For
example: Hence, firms with older investors pay higher dividends and firms with wealthier
investors pay lower dividends.

iii. The Bird in the Hand Theory (John Lintner 1962 and Myron Gordon, 1963): The
essence of this theory is not stockholders are risk averse and prefer current dividends due
to their lower level of risk as compared to future dividends. Dividend payments reduce
 investor uncertainty and thereby increase stock value. This theory is based on the logic
thatwhat is available at present is more preferable to what may be available in the future.
Investors would prefer to have a sure dividend now rather than a promised dividend in
the future (even if the promised dividend is larger). Hence dividend policy is relevant and
does affect the share price of a firm.

1.1.3 FACTORS AFFECTING DIVIDEND POLICY

There are several factors affecting dividend policy which are Legal Constraints, Contractual
Constraints, Internal Constraints, Growth Prospects, Owner Considerations and Market
Considerations.

i. Legal Constraints: There is no such obligations on the distribution of firm’s

dividends. However, the certain conditions imposed by law regarding dividend
distributions. They are net profit, capital impairment rule and insolvency rule.
ii. Contractual Constraints: There many certain legal conditions on the
company’scash dividend payouts in a loan agreement. These rules are in place to
protect creditor’s interest during the company’s insolvency.
iii. Internal Constraints: In spite of sufficient retained earnings, the firm may not be
able to pay cash dividend if the earnings are not held in cash. In this case, a firm
or company declares stock dividend instead of cash dividend.
iv. Growth: Firm has more expansion opportunities in the growth stage. But, at this
stage the firm would have to depend more on its internal financing. Thus, retained
earnings will go up as well as reinvestment will increase. So, dividend payouts for
firm will decreased.
On the other hand, firm’s expansion opportunities are moderate here and its
external funding are increasing. That’s whyit’ll less depend on its own funding.
So, at this stage, retained earnings goes down as well as reinvestment is on
moderate rate. Thus, dividend payments are increasing at this stage.
v. Owner’s Consideration:Owner’s of a firm may consider 3 things:
a. Tax Status: If majority of stockholders are in high tax bracket then
reinvestment will increase, dividend will decrease as well as company’s future
capital will increase.
 b. Investment Opportunities: A firm should not retain funds for investments
which are not projecting high return.
c. Potential Dilution of Ownership: If a firm pays most of t’s retained
earnings, it may have to issue new common stocks. New common stock may
create dilution of both control and earnings for the existing owners.,
vi. Market Consideration: Wealth of a firm’s owners reflected by the market price
of share. Market price is influenced by its dividend policy.
Stockholders prefer fixed or increasing dividend policy rather than fluctuating
pattern of dividend payments. They want to eliminates the uncertainty about the
frequency and magnitude of dividends. They consider informational content. If
the dividend policy is continuous then it is a positive signal of their good financial
health.

1.1.4 TYPES OF DIVIDEND POLICY

i. Constant Payout Ratio: Constant pay-out ratio means payment of a fixed percentage of
net earnings as dividends every year. The amount of dividend in such a policy fluctuates
in direct proportion to the earnings of the company. The policy of constant pay-out is
preferred by the firms because it is related to their ability to pay dividends. By this
process, company don’t have to pay dividend in those years in which it incurred loss.
ii. Regular Payout Ratio:In this type of dividend policy the investors get dividend at
usualrate. Here the investors are generally retired persons or weaker section of the society
who want to get regular income. This type of dividend payment can be maintained only if
the company has regular earning. If retained earnings are available certain percentage of
face value will be distributed as dividend. Even if net loss incurs dividend will be paid by
corporation.It is considered as a positive signal among shareholders. It stabilizes the
market value ofshares. It helps in giving regular income to the shareholders.
iii. Low Regular and Extra Dividend Payout: In a low regular and extra policy, the firm
maintains a low regular dividend, supplemented with an extra cash dividend when
justified by higher earnings. This policy is used by companies that have large but
temporary increases in earnings.
1.2 ORIGIN OF THE STUDY

Professor Dr. Tanbir Ahmed Chowdhury gave us the responsibility of preparing a report on
"Appraisal of Dividend Policy of Premier Cement Mills" by assigning it during the course
“Managerial Finance (Fin435)” of BBA program. This report is required as a part of fulfilling the
course Fin435. program. We have given our best effort to appropriately apply our potentiality
and theoretical knowledge to make this report reliable and information worthy.

Objective of The Report: The objective of this report is to pin point several factors:

 To present the principal activities of Premier Cement Mills Ltd.

 To appraise the dividend policy of Premier Cement Ltd.
 To identify the problems of its dividend policy.
 To suggest remedial action for improvement of the dividend policy.

1.3SCOPE AND METHODOLOGY OF THE STUDY

To conduct this report the information collects from various sources. Five year’s data used to
conduct this report (2012 July to June 2017) and mostly collected from annual report of Premier
Cement Ltd.

We’ve done this report based on some secondary sources of data such as company’s annual
reports, through web browsing, go through some journals, from firm’s website and Dhaka Stock
Exchange website. We could not use questionnaire and direct consultation with company as
sources of primary information because of some constraints that is why this project is totally
based on secondary information.
1.4LIMITATIONS OF THE STUDY
To make this report widely acceptable and lucrative we faced quite a lot of barriers. Those
barriers or limitations are given below:

 Some information was withheld to retain the confidentiality of the

organization.
 The time span was not sufficient enough to learn all the activities of the
organizationproperly.
 Lack of co-operation from the data source.
 Project is for academic purpose that is why time period is short.
CHAPTER 2: APPRAISAL OF DIVIDEND POLICY OF PREMIER CEMENT LTD.

2.1 AN OVERVIEW OF PREMIER CEMENT LIMITED

Premier Cement Limited is one of the leading innovative cement manufacturers in Bangladesh.
They manufacture European standard product using the best raw materials and technical
excellence for ensuring dependability and superiority of its outputs.Premier Cement
manufactures superior quality cement for the customers using fully automated manufacturing
facilities, well equipped laboratory and computerized individual raw material feeding system.The
products providestrength and durability to buildings ofhigh dimensions, roads, bridges,
andinfrastructure that speeds up the lineof commerce, and to houses providingcomfort and
security to families acrossBangladesh, India, Myanmar, etc.

Premier Cement was incorporated on 14 October 2001 and started commercial production on
12th March 2004 with it's Unit-1 having a production capacity of 0.6 million tons per annum. In
January 2011 Production Unit-2 was installed with another 0.6 million ton capacity per annum.

To meet the additional market demand, Premier Cement started Production with Unit-3 and Unit-
4, having an annual capacity of 1.2 million tons, from November 2012. At present, the company
runs with an annual production capacity of 2.4 million tons (8,000 tons per day) and employs
around 700 people at home and abroad.
The company uses the most sophisticated cement plant namely FLS SMIDTH of Denmark,
Packer from HAVER & BOECKER GmbH Germany and machineries maintaining EUROPEAN
standards and qualities. The factory is located at West Muktarpur, Munshiganj
They started exporting cement from 26th April 2008. And Converted to Public Limited
Company on 16th April 2010

Premier Cement is known as one of the top cement brands in Bangladesh.Associated companies
adhere to the same demanding standards as they provide construction materials such as Ready
Mix Concrete, Block, Pipe, andother pre-stressed concrete units to the Government, Builders,
and Manufacturers.They enjoy a good history as well as a sustaining reputation in Bangladesh
2.2 PRINCIPLE ACTIVITIES
Premier Cement consistently delivers quality products to its customers. Their automated
manufacturing facilities and fully equipped laboratory with dedicated team ensures quality for
each batch of production.

Currently Premier Cement is manufacturing the following types of cement:

1. Ordinary Portland cement: Ordinary Portland cement Type-II is the most

common type of cement in general used around the world as it is a basic
ingredient of concrete, mortar, stucco and most non-specialty grout. It is a fine
powder produced by grinding Portland cement clinker (95%) and a limited amount
of Gypsum which controls the setting time.

2. Portland Composite cement:” Premier Cement” standard: BDS EN 197-1:2003

CEM II/AM or BM 42.5N which is Portland composite cement. It is the most
common type of cement used in Bangladesh which consists of Clinker, Slag, PFA,
Gypsum, and Limestone.Portland composite cement plays a vital role in European market

They have very basic, well specified goals and objectives. These include:

• To improve comprehensively on our current success areas.

• To improve our brand image
• To satisfy our customers.
• To be among the top 5 cement manufacturers in Bangladesh,
• To earn reasonable profits.
• To capture the target market share.
2.3 AUTHORIZED CAPITAL

Authorized share capital is the number of stock units that a company can issue as stated in its
memorandum of association or its articles of incorporation. Authorized share capital is often not
fully used by management in order to leave room for future issuance of additional stock in case
the company needs to raise capital quickly. Another reason to keep shares in the company
treasury is to retain a controlling interest in the company.Yearly Authorized Capitals for Premier
Cement from 2012-2013 to 2016-2017 are given below:

Year Authorized Capital (BDT)

2012-2013 200000000
2013-2014 200000000
2014-2015 200000000
2015-2016 200000000
2016-June 2017 200000000

2.4PAID-UP CAPITAL

Paid-up capital is the amount of money a company has received from shareholders in exchange
for shares of stock. Paid-up capital is only created when a company sells its shares on the
primary market directly to investors.Yearly Paid-up Capitals for Premier Cement from July 2013
to June 2017 are given below:

Year Paid-up Capital (BDT)

2012-2013 -
2013-2014 50000000
2014-2015 -
2015-2016 -
2016-June 2017 -

2.5 REVENUE

Revenue is the amount of money that a company actually receives during a specific period,
including discounts and deductions for returned merchandise.Revenue is calculated by
multiplying the price at which goods or services are sold by the number of units or amount sold.

Year Revenue (BDT) Growth (%)

2012-13 6416662323 -
 2013-14 7539574982 17.5%
2014-15 8098701152 7.4%
2015-16 9361935844 15.6%
2016-June 2017 10332898832 1.04%

Revenue (BDT)
12000000000
10000000000
8000000000
6000000000
4000000000 Revenue (BDT)
2000000000
0
3 4 5 6 17
2 -1 3 -1 4 -1 5 -1 0
20
1
20
1
20
1
20
1
n e2
6 -Ju
1
20

Here Revenue is increasing constantly from 2013 to 2017.

2.6 RETAINED EARNINGS

Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained
by the company to be reinvested in its core business, or to pay debt. It is recorded under
shareholders' equity on the balance sheet.

Yearly Retained earnings for Premier Cement from 2013 to June 2017 are given below:

Year Retained Earnings (BDT) Growth (%)

2012-13 1154388895 -
2013-14 1236291569 7.09%
2014-15 1299131032 5.08%
 2015-16 1732954107 33.4%
2016-June 2017 2132558080 23.06%
Note: Growth of Retained Earnings 2014 = (RE 2014 – RE 2013)/RE 2013 * 100

Retained Earnings (BDT)

2500000000

2000000000

1500000000

1000000000 Retained Earnings (BDT)

500000000

0
3 4 5 6 17
2 -1 3 -1 4 -1 5 -1 0
20
1
20
1
20
1
20
1
n e2
6 -Ju
1
20

Figure 1: Annual Retained Earnings for Premier Cement Ltd. (2013-2017)

The "retained" refers to the earnings after paying out dividends.Companies with increasing
retained earnings is good, because it means the company is staying consistently profitable.
Premier Cement had higher retained earnings through 2013-June 2017. the growth of RE was
almost always positive. It had a huge growth in 2015-16, 33.4%.

2.7 NET INCOME

Net income (NI) is a company's total earnings (or profit); net income is calculated by taking
revenues and subtracting the costs of doing business such as depreciation, interest, taxes and
other expenses. This number appears on a company's income statement and is an important
measure of how profitable the company is over a period of time.Net income also refers to an
individual's income after taking taxes and deductions into account.

Yearly Net income (NI) for Premier Cement from 2013 to June 2017 are given below:

Year Net Income (BDT)

2012-13 507079591
2013-14 498258575
2014-15 374214171
 2015-16 1287986241
2016-June 2017 562009311

Net Income (BDT)

1400000000
1200000000
1000000000
800000000
600000000
Net Income (BDT)
400000000
200000000
0
3 4 5 6 17
2 -1 3 -1 4 -1 5 -1 0
2 01 2 01 2 01 2 01 n e2
6 -Ju
1
20

Figure 2: Annual Net Income for Premier Cement Ltd. (2013-2017)

The company's overall net income performance is not so nice with almost always negative
growth. But increased from 2015-16 then again decreases.

2.8 EARNING PER SHARE (EPS)

Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share
of common stock. Earnings per share serves as an indicator of a company's profitability.

Yearly Earnings per share (EPS) from 2013 to June 2017 are given below:

Year EPS Growth (%)

2012-13 5.00 -
2013-14 4.78 -4.4%
2014-15 3.83 -19-9%
2015-16 6.48 69.2%
2016-June 2017 5.17 -20.2%
 EPS
7 6.48
6
5 5.17
5 4.78

4 3.83 EPS

0
2012-13 2013-14 2014-15 2015-16 2016-June 2017

From the above graph we can say, EPS trend was in decreasing mode in 2013-2015. It was a
negative signal for both the company and its investors. A declining trend is a signal to investors
that the company is in trouble, which can lead to a decline in the dividend and thus the stock
price would fall too. But in 2016 its EPS was higher than previous years.

Many investors watch these numbers carefully as better EPS means higher dividend payout ratio
and overall better stock performance.