Effect Of Dividends On Share Price In The Australian Banking Sector

Research Questions

Dividend is a portion of net earnings of an organisation that can be distributed to shareholders. This dividend can be distributed in two forms either in the form of cash or in the form of cash. As opined by Travlos et al. (2015), dividends are generally a part of strategic policy of a company that helps shareholders to earn their profit share. With the help of dividend ratio, it will become easy to gather information about the financial strength of an organisation (Kibet et al., 2016). The effect of dividends on share price needs to be understood so that all the organisational functions can perform easily.

Dividend has become one of the important aspects of the entire financial sector of an economy. As stated by Duke et al. (2015), most of the time investors faced inaccurate information about all the performance of an organisation and dividend policy also helps to get a view about the future performance of a firm. However, increase in dividend payment might lead to rise in the stock price (Daunfeldt et al. 2015). Therefore, it is important to understand how dividend affects the share price, so that an organisation can balance their overall performance.  

The research aim is to understand the effect of dividends plan on share price instability in the Australian banking sector.

Null Hypothesis (H₀):There is no significant relationship between dividends and share price.

Alternative Hypothesis (H₁):There exist a significant relationship between dividends and share price.

This literature review section of the research help to understand all previously published articles, literature, journals and others based on the effect of dividends on share price. Different research helps to get information about the effect of dividends on share price and discussed in this section.

In case of the stock market, share price fluctuates every second, therefore, it is important to understand the right price to buy the share. As stated by Hirota et al. (2016), different types of models have been implemented so that it will become easy to understand the fluctuation in the hare market. Dividends make managers more accountable towards all the shareholders. Shares of companies with high growth can be vulnerable to any price fluctuations. However, dividend encourages managers to participate more in the organisational functions so that they can acquire more profits for their business (Andriosopoulos et al., 2015). Therefore, with the help of dividend it will become easy to maintain strategic business decision for the betterment of the organisation.

Sustainability Reports and Market Performance

However, dividends can affect the share price in different ways and share price has significant popularity in this case (Adesina, 2017). Dividend encourage by creating more recurring investment income by enhancing investors to purchase more and to retain the stock of share. This motivation can lead to huge amount of profit for an organisation.

As opined by Grundy et al. (2016), in case of investors, dividends work as one of the popular source of investment income. They help the issuing company by providing them way to redistribute profits to shareholders. This helps them by providing them additional investment so that they can earn more profits. Dividend also works as an announcement of the success of an organisation as dividends are issued from retained earnings of an organisation. However, some company used dividends so that they can create illusion of profits; this is mainly an expectation rather than any kind of rule (Athari et al., 2016).

As opined by Kajola et al. (2015), the dividend discount model shows the method that values the stock based on the dividends that they pay. The main purpose of this model is to show the stock that is worth the total of all of their future dividends. There are several types of dividends discount model present, however, Gordon Growth Model is one of the most common model. The main function of this Gordon Growth Model is to estimates the next years dividends, the cost of equity capital and the estimated future growth rate so that organisation will be able to calculate the stock value (He et al., 2017).

According to the model, firms those performs better than other firms has higher stock prices and can increase additional funds in more favourable terms. Therefore, it is requiringto identify all the factors that determine market price of equity share of an organisation. As stated by Elmagrhi et al. (2017), financial organisations are the main institutions that engage in mobilization of monetary resource in the entire society. Commercial banks merged as one of the most profitable business and thus the share price of commercial banks is continuously increasing (Arthur, 2018). Moreover, dividends that are paid to some shareholders are one of the best profitability indicators, therefore, dividends play an important part in obtaining the market price for corporate shares (Cheung et al., 2018). Generally, an organisation pays stock dividends if they plan to enhance the capital so that they can expand their business more firmly.

Dividend Impact on Share Price

As stated by Khan et al. (2016), the primary objective of dividend policy is to increase the return of shareholders so that their investment value can be maximized. However, dividend decisions are one of the major decisions of an organisation. The dividend amount that has been declared by an organisation is actually the position based on the earnings of that organisation (Chiappero-Martinetti et al., 2018). However, organisation issues their equity shares so that they can increase their ownership capital and investors can buy them with an ultimate expectation that they can earn profit (Taufik& Bastian, 2018). Therefore, the value of an organisation will be higher if the market price of that organisation is higher.

2.3.1 Issues faced by the investors and companies for dividend policies: 200

Different types of problems may be encountered by the companies while they have come in to the dividend payment. In the small company there is the lack of possibility in dividend.  The funds mainly generated for the organisational growth.  The dividend is typically irregular in amount so that  the profit after the tax in to the payment can be measured by the investors.  After the dividend is older then the interest of the shareholder can be reduced  very generally. These practices can create odd payout percentages for a company with volatile earnings. In the case of banking sector for the inflation and deflation of stock price  financial issue can be crated, Example can be given while a customer has purchased a stock in the price that has been changed due to some issue of the organizational share price. The bank has to pay the debt of the price that can be measured as per the assessment of the current market condition.

Most of the time investors faced inaccurate information about all the performance of an organisation and dividend policy. Most of the companies are unable to provide  information about the dividend policy of the company to the customers.  The profit and the loss percentages can and the opportunity of better earning can not be measured very properly by the customers (Taufik& Bastian, 2018).

According to Majanga (2015), this is one of the most significant concerns for the firms that if dividends are to pay to the investors out of earnings or it is better to retain earnings for reinvesting in profitable ventures with a view of shoring up values of shareholders. It is argued by some of the researchers that regular payments of dividends to the investors considerably enhance overall market value of the shares. Belousova et al., (2016) has commented that payment of dividends leads towards reduction of shareholder wealth.  Berkman& Koch (2017) finds that market price of stocks naturally responds to unexpected announcement of the change in dividend. In the opinion of Sulaiman&Migiro (2015), if an organization has inadequate funds for investing, or if it tries to raise additional funds with help for the external sources for making profitable investments, claim on future cash flow by shareholders would reduce share price of the organization. This is specific finding that provides rational concepts regarding valuation in share price and dividend policy in the firms. However, Hooi et al., (2015) has argued that dividends will not have any impacts on share price if there is the existence of perfect market condition.

Dividend Policy

 Dividend policy is one of the vital aspects of finance. According to Majanga (2015), in case of announcing share performance, there are greater role of dividend policy and this is the reason why most of the modern finance firms and banks in global level take into effect consideration the aspects of size of dividends, firm size and dividend yields for better representing predictor variables. As asserted by Hooi et al., (2015), in the countries like USA, India, both announcement of dividend and dividend omission carry different new values oriented information regarding the share price and associated policies to the investors.

However, in the thoughts of Berkman& Koch (2017), the financial analysts tend to make application of the divided policies for making informed decisions regarding investment in share gaining. Apart from this, it has been supported by the relevant literature sources that maximization of shareholder’s wealth depends on divided policy pf the organizations, where dividend payment becomes a highly important factor determining the performance of financial share in the firms. Scholarly works by Hooi et al., (2015), analyzed impacts of distributed signs and earnings of firms to the dividend policy of those firms, where it was observed that firms’ dividend policy acted as the signal of the dividend decision of the firms and this triggers change in share price mainly. Majanga (2015) has stated that there are strong positive association between firm’s profitability and dividends paid and it has been further argued that dividends pay-out is strong indicator of share price in different firms.

This section includes all the strategies that have been used in this analysis so that appropriate result can be obtained. With the help of appropriate research method, it will become easy to investigate all available data for better findings of the research.

The main motivation of the research is to understand the effect of dividend on share price. In order to fulfil all the objectives of the research a quantitative primary research has been conducted (Johnston, 2017). The method of data collection is quantitative; it helps to analyse the effect of dividends on share price. For implementing quantitative data analysis, a data of 5 years of different four banks has been selected. The four banks that have been selected are, Commonwealth Bank of Australia, NAB, ANZ, and Westpac.

The aim of the research is to understand the effect of dividends on share price. Therefore, in this research there are mainly two variables, one is dependent variable, and another is independent variable.

Theoretical Framework

Dependent Variable: Share Price

Independent Variable: Dividends

The research tries to find the relationship between both the variables that is dependent variable the share price and the independent variable that is dividends.

To understand the research more broadly, researcher used share price data and dividend data for of four different commercial banks that is Commonwealth Bank of Australia, NAB, ANZ, and Westpac. All the data has been collected from different financial report of the banks, all the financial report belongs to the year 2013 to 2017. All the relevant data analysis has been conducted with the help of statistical software SPSS (Clarke & Cossette, 2016). With the help of different statistical methods, the effect of dividend on share price can be understood. Different statistical technique helps to understand the research more broadly. Moreover, descriptive statistics, correlation, and regression have been used for identifying the effect of dividends on share price.

In this research, the secondary data collection method has been adopted in order to get proper information. The sample is taken in this research is the financial assessment of four major banks of Australia such as Commonwealth Bank of Australia, NAB, ANZ, and Westpac. SPSS method is adopted by the researcher to have  descriptive and correlation analysis. Sample size is 100 percent of the total income of the banks. The random sampling method is adopted to have the financial assessment of total capital. In the ratio calculation total data has been assessed that is taken the round figure of 100.

This section of the research shows all findings and analysis that has been obtained from the financial report of different banks from different years. For understanding the business growth of the Commonwealth Bank of Australia, NAB, ANZ, and Westpac two variable has been adopted and these are dividend and share price.

In order to understand the business growth of Commonwealth Bank of Australia, NAB, ANZ, and Westpac a descriptive statistic has been made. With the help of descriptive statistics, it will become easy to understand the mean, standard deviation, maximum, and minimum value of share price and dividends. It also helps to get idea about the range that is the difference between maximum and minimum value and variance of both the variables.

Comparative analysis of different banks has been made with the help of descriptive statistics The first table shows the descriptive statistics of Commonwealth Bank of Australia.

Descriptive Statistics
	N	Range	Minimum	Maximum	Mean	Std. Deviation	Variance
Share Price (CBA)	5	15.95	69.18	85.13	78.4740	6.55960	43.028
Dividend (CBA)	5	.65	3.64	4.29	4.0680	.26013	.068
Valid N (listwise)	5

Table 1: Descriptive Statistics for Commonwealth Bank of Australia

Dividend Payment and Stock Price

The table shows that, range of share price is 15.95, which is greater than the range of dividend that is 0.65, whereas, the mean, standard deviation and variance of share price is 78.47, 6.56, and 43.028 respectively.

The second table shows the descriptive statistics of NAB. This table also tries to find out the different statistical variables.

Descriptive Statistics
	N	Range	Minimum	Maximum	Mean	Std. Deviation	Variance
Share Price (NAB)	5	6.45	27.87	34.32	31.2420	2.45909	6.047
Dividend (NAB)	5	.15	1.83	1.98	1.9460	.06542	.004
Valid N (listwise)	5

Table 2: Descriptive Statistics for NAB

This table shows that, the range of share price is 6.45 and the range of dividend is 0.05. Therefore, the range of share price is higher than the range of dividend. However, not only the range but also mean, standard deviation and variance are higher for share price than dividend.

This table shows the descriptive analysis of ANZ bank and help to find out the statistical description of share price and dividend from the year 2013 to 2017.

Descriptive Statistics
	N	Range	Minimum	Maximum	Mean	Std. Deviation	Variance
Share Price (ANZ)	5	3.84	27.08	30.92	29.2020	1.77300	3.144
Dividend (ANZ)	5	.21	1.60	1.81	1.6860	.10139	.010
Valid N (listwise)	5

Table 3: Descriptive Statistics of ANZ Bank

The data shows that the range of share price is 3.84 and range of dividend is 0.21, along with this different statistical measure has been analysed for example mean, standard deviation and variance (Pyrczak, 2016).

This table shows the descriptive analysis of Westpac bank. This descriptive statistic includes range, mean, standard deviation and variance of both the variables (Bonner, 2018).

Descriptive Statistics
	N	Range	Minimum	Maximum	Mean	Std. Deviation	Variance
Share Price (WP)	5	3.22	29.51	32.73	31.2000	1.48736	2.212
Dividend (WP)	5	.14	1.74	1.88	1.8380	.06017	.004
Valid N (listwise)	5

Table 4: Descriptive Statistics of Westpac Bank

This table shows that range of share price is 3.22, which is greater than the range of dividend that is 0.14. The table also shows that mean, standard deviation and variance of share price and dividend are 31.200, 1.48, 2.12, 1.85, 0.06, and 0.004 respectively.

The main purpose of the research is to find the effect of dividends on share price. In order to find the effect of dividend on share price different statistical analysis has been used. Moreover, with the help of share price and dividends of Commonwealth Bank of Australia from the years 2013 to 2017 the research can be established.

Correlations
	Share Price (CBA)	Dividend (CBA)
Pearson Correlation	Share Price (CBA)	1.000	.753
Dividend (CBA)	.753	1.000
Sig. (1-tailed)	Share Price (CBA)	.	.071
Dividend (CBA)	.071	.
N	Share Price (CBA)	5	5
Dividend (CBA)	5	5

Table 5: Correlation

This data shows that, the number of observation is 5 as the data includes the values of share price and dividends from the five years that is 2013 to 2017. Pearson’s correlation shows that the correlation coefficient (r) = 1. The data also shows that sig (1 tailed) or the p value is 0.071. The value of Pearson’s correlation coefficient it 1, which indicates that there is a positive relation between both the variables (Halsey et al., 2015).  However, this value also indicates that there exists a strong relation between both the dependent and independent variables. Moreover, the p value indicates that there is no statistical significance in the association between share price and dividends as 0.07 is greater than 0.05.

Model Summary
Model	R	R Square	Adjusted R Square	Std. Error of the Estimate
1	.753a	.567	.422	4.98647
a. Predictors: (Constant), Dividend (CBA)

Dividend Discount Model

Table 6: Summary of the Model

The above table shows that the value of R and R Square. It is observed that the value of R is 0.753, which indicates that there is a strong positive relation between both the variables. Moreover, the value of R Square measures the variation in dependent variable that can be explained with the help of independent variable (Khachatryan et al., 2016). Here, the value of R Square is 56.7%, which shows that dependent variable can 56.7% explains the independent variable.

ANOVAa
Model	Sum of Squares	df	Mean Square	F	Sig.
1	Regression	97.519	1	97.519	3.922	.142b
Residual	74.595	3	24.865
Total	172.113	4
a. Dependent Variable: Share Price (CBA)
b. Predictors: (Constant), Dividend (CBA)

Table 7: ANOVA Table

With the help of ANOVA table, it will become easy to understand how much regression equation fits in the dataset and this can be done with the help of p value (Ioannidis, 2018). In this analysis sig or p value is 0.142, which is greater than 0.05, therefore, the regression analysis is not able to show that the variable is not statistically significant and the model is not a good fit.  

Coefficientsa
Model	Unstandardized Coefficients	Standardized Coefficients	t	Sig.	95.0% Confidence Interval for B
B	Std. Error	Beta	Lower Bound	Upper Bound
1	(Constant)	1.260	39.053		.032	.976	-123.024	125.544
Dividend (CBA)	18.981	9.584	.753	1.980	.142	-11.521	49.483
a. Dependent Variable: Share Price (CBA)

Table 8: Coefficient

This coefficient analysis helps to get idea about the effect of dividends on share price in case of Commonwealth Bank of Australia. Here, the p value obtained is 0.976, which is greater than 0.05, thus, there is no significant relation between both the dependent and independent variables. Therefore, the regression equation will be,

Share Price= 1.260+ 18.981 (Dividend)

Thus, it can be said that exit a positive relation between both the variables, therefore, there is a significant effect of dividends on share price.

This section tries to find the all the research findings that has been obtained from the available data and identify the effect of dividends on share price in an organisation.

Null Hypothesis (H₀): There is no significant relationship between dividends and share price.

Alternative Hypothesis (H₁): There exist a significant relationship between dividends and share price.

After obtaining all the findings it is obtained that, the p value is greater than the significance level that is 0.05. This shows that, researcher will reject the null hypothesis and accept the alternative hypothesis. Therefore, there exist a significant relationship between dividends and share price.

Conclusion

It can be concluded that, dividend has a significant effect on the share price of an organisation. With the help of appropriate dividend, it is possible for an organisation to increase the share price. Thus, organisation can enhance their dividend so that they can improve their share price.

Main limitation of this research is the lack of  data that has been gathered from the secondary analysis. In this research, it is necessary to collect first hand data from the interview and survey in order to collect information about the issue that the customers are facing due to the lack of proper information on the organisational dividend. Another limitation of this research is the organisational performance to  implement proper financial strategy to maintain share price in stock market.

Factors Determining Market Price of Equity

The main purpose of this study is to find the effect of dividends on share price on an organisation. It is observed that by increasing the amount of dividend organisational will be able to increase the share price. Higher share price help organisation to attract more customers for their organisation, this encourage an organisation to increase their profitability. Therefore, by utilizing appropriate technique organisation will be able to enhance their dividend that help them to achieve high organisational performance.  The first hand data can be gathered throughout this procedure. Apart from this, it can be said that the procedure is helpful to gathered  real data. Another recommendation is that the banking sector has to observed financial stability of the customers before giving loan.  The documentation is needed in order to get rid off from the issue.

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