Assignment on dividend policy on Bata Shoe, Bangladesh

An Overview of Bata Shoe, Bangladesh

The Bata Shoe Organization was founded in 1894 by Czech businessman Tomas Bata in

the city of Zlin, what was then Czechoslovakia. Coming from a family of shoemakers

with a long heritage of eight generations and over three hundred years, Tomas Bata

capitalized on knowledge, expertise and skills to propel his newly founded company

forward. The introduction of factory automation, long distance retailing and modernized

shoe making ensured the profitability of the company from the very beginning. It is now

the world’s largest manufacturer and marketer of footwear operating across the globe.

Today the Bata Shoe Organization is a sprawling geo-centric company encompassing

operations in more than 70 countries around the world and is managed by 3 Meaningful

Business Units (MBU) across five continents. It serves over 1 million customers per day,

employs more than 50,000 people, operates more than 5,000 retail outlets, manages retail

presence in over 70 countries and runs 27 production facilities across 20 countries.

In Bangladesh, Bata started its operation in 1962. The company is one of the largest tax–

paying corporate bodies contributing Tk. 1.2 billion (year 2009) which represents

approximately 70% of tax paid by the entire footwear sector of Bangladesh. Currently

Bata Shoe Company (Bangladesh) Limited operates two manufacturing facilities– one in

Tongi and the other in Dhamrai. With a production capacity of 110,000 pairs of shoes

daily, the company also has a modern tannery facility with an output of 5 million square

feet of leather annually. Annual shoe sales currently stand at slightly more than 30

million pairs with a turnover for the year 2009 of Tk 5 billion.

Bata is playing a pivotal role in developing the leather industry of the country. Bata has a

firm commitment to eco-friendly business and a state of the art Effluent Treatment Plant

(ETP) has been set up to provide a pollution free environment for both workers and the

locality.

Fashion would never be complete without a well-designed pair of shoes. This marketing

insight has prompted Bata to introduce a number of designers’ collections for men,

women and children. Internationally renowned brands such as Bata Comfit, Marie Claire,

Hush Puppies, Scholl, Nike, Bubblegummers, Sandak, Weinbrenner and B’first are a few

names that testify to the momentous change towards branded shoe marketing in

Bangladesh. Specialized shoe categories such as athletic shoes have been targeted

through development of the Power brand. Uncompromising quality with striking designs

have put Bata shoes in a key position to appeal to different segments of consumers.

Another major change in the Bata business policy is the segmentation of retail outlets

according to profiles of different market segments and the introduction of novel concepts

such as Bata City Stores. These selective outlets, in conjunction with other types of

outlets such as Bata Bazar and Bata Family Stores, are adding a new level of consumer

satisfaction. The City Stores incorporate spacious floor space allowing a comfortable

shopping experience, modern interior décor enriched with novel shelving systems,

fittings, fixtures and lighting that can be found in the large retail shops in the Far Eastand

Europe. Bata has a network of 242 retail outlets located strategically in different parts of

the country. These retail outlets are an integral part of our brand marketing. This

extensive retail network is supplemented by an equally extensive network of depots and

dealers. Bata has 13 Wholesale depots covering Bangladesh. Under these depots 390

RWD (Registered Wholesale Dealers) and 553 DSP (Dealer Support Program) stores are

operating. Bata Bangladesh has already developed its vision up to 2013 showing

significant business growth as well as increased market share. One of the critical areas

associated with external shareholders and the community at large is the Corporate Social

Responsibility Program of the company. From supporting nationwide sports sponsorships

and disabled persons to addressing environmental concerns, scholarship programs,

charity contributions etc – Bata has always supported individuals and communities in

need. Partnerships with other voluntary and charitable organizations are another

prominent feature of Bata’s corporate social responsibility.

Bata, in partnership with CARE, extends assistance to over two thousand rural women in

order to become independent entrepreneurs in the Rajshahi, Comilla and Chittagong

division selling shoes from door to door under its Rural Sales Programme. Since its

inception, Bata Shoe Company (Bangladesh) Ltd. has strived towards one goal –

customer satisfaction. With the vision of building a worldwide family of satisfied

customers and dedicated workers the legacy of Tomas Bata continues strong and

unabated to this day – the tradition is safe.

Listing of Bata Bangladesh in Stock Exchange

  Dhaka Stock Exchange                      

  Chittagong Stock Exchange     

Dividend Theories

Dividend Irrelevance TheoryA theory put forth by Metorn H. Millar & Franco Modigliani  (M&M) that in a perfect

world, the value of a firm is unaffected by the distribution of dividends and is determined

solely by the earnings power and risk of its assets. Bata shoe Bangladesh does not follow

this theory.

Bird-in-the Hand theoryA theory developed by Myron J. Gordon & Linter that tells Stockholders prefer current

dividend. It also tells that there is a direct link between Dividend Policy of the firm and

its market value. Fundamental to this proposition is that Bird-in –the-Hand argument

suggests that investors are risk averse & attach less risk to current as opposite to future

dividends or capital gains.

We can determine which Dividend Policy is being followed by Bata Shoe after analyzing

some of its financial data for the last 5 years.

Year % Dividend Stock Price in DSE

(TK)

NET

INCOME(TK)

2006 235.00 121.4 277,022,059

2007 250.00 223.6 324,849,273

2008 220.00 320.70 449,415,702

2009 220.00 528.30 449,406,445

2010 250.00 645 543,970,530

Table 1: Dividend %, Stock Price and net Income of Bata Shoe

According to available data of Bata Shoe BD from 2006 to 2010, it is clear that Bata

Shoe is following Bird-in -The Hand Theory which is developed by Myron J. Gordon

& Linter. Myron J. Gordon & Linter said that a company may declare higher dividend

because of the following reason:

Stockholders Prefer current dividend

Direct link between Dividend Policy of the firm and its market value

Investors are risk averse & attach less risk to current as opposite to future

dividends or capital gains.

Investors believe that “a bird in the hand is worth two in the bush”

Cash Dividend reduce uncertainty – causing earning at a lower rate

Fail to provide conclusive evidence in support of dividend relevance arguments

Financial manager & stockholders believe that dividends are relevant.

Bata Shoe follows Bird-in -the Hand Theory: From last few years, Bata Shoe declared

higher dividend and retained less earnings in order to attract those risk averse investors

who prefer current dividend and think that declaration of higher dividend minimize the

uncertainty of the company therefore share price of its also increases up to certain level

of pay-out ratio that is the indication of Bird-in -the Hand theory.

Dividend Policies

Constant- Pay-out ratio

The dividend policy ratio indicates the percentage of if each amount earned that is

distributed to the owners in the form of cash. It is calculated by Dividend payout ratio =

Cash Dividend Per Share / E.P.S. With a constant-payout-ratio dividend policy, the

firm established that a certain percentage of earnings are paid to owners in each dividend

period.

The problem with this policy is that if the firm’s earnings drop or if a loss occurs in a

given period, the dividends may be low or even nonexistent which could adversely affect

the firm’s share price.

Regular Dividend PolicyThe regular dividend policy is based on the payments of a fixed amount dividend in each

period. This policy provides the owners with generally positive information, thereby

minimizing uncertainty. Often, firms that use this policy increase the regular dividend

once a proven increase in earnings has occurred. Under this policy, dividends are never

decreased.

Low-Regular-And- Extra Dividend PolicySome firms establish a low-regular-and-extra dividend policy, paying a low regular

dividend supplemented by an additional dividend when earnings are higher than normal

in a given period. By calling the additional dividend an extra dividend, the firm avoids

giving shareholders false hopes. This policy is especially common among companies that

experience cyclical shifts in earnings.

Key Components of Discussion

Net Income

YEAR NET

INCOME(TK)

GROWTH (%)

2005 206,638,315 -----

2006 277,022,059 (277,022,059 - 206,638,315) / 206,638,315 * 100 =

34.06%

2007 324,849,273 (324,849,273 - 277,022,059) / 277,022,059 * 100 =

17.26%

2008 449,415,702 (449,415,702 - 324,849,273) / 324,849,273 * 100

=38.35%

2009 449,406,445 (449,406,445 - 449,415,702)/449,415,702 * 100 =

(0.00206)%

2010 543,970,530 (543,970,530-449,406,445)/ 449,406,445*100 =

21.04%

Table 2: NI and its growth in the last 5 years

Interpretation:

Growth in net income is even more important than sales because net income tells the

investor how much money is left over after all of the operating costs are subtracted from

sales. From the above table, we can see that Bata Shoe Bangladesh has earned profit in

the years 2006, 2007, 2008 and 2010. But in the year 2009 it had a negative growth rate

of (0.00206) % in profit. In 2009, the growth of Bata shoe was significantly affected

because of global economic recession. Therefore, consumers concentrated more on

essential consumable items instead of footwear. Moreover, electricity shortage

throughout the country has interrupted production. This is why growth was negative.

Earnings per ShareAn Earnings per Share (EPS) is the amount of money earned by a company expressed in

per share. Following table provides the information of EPS of Bata Shoe in different

years. It shows that from 2005 to 2008, EPS is increasing but the rate of increasing is not

same. It is fluctuating in this time period. EPS in 2008 and 2009 is same. So the, growth

rate for 2010 is 21%.

YEAR EPS GROWTH (%)

2006 20.25 20.25 - 15.11 / 15.11 * 100 = 34%

2007 23.75 23.75 - 20.25 / 20.25 * 100 = 17%

2008 32.85 32.85 - 23.75 / 23.75 * 100 = 38%

2009 32.85 32.85 - 32.85 / 32.85 * 100 =  0%

2010 39.76 39.76- 32.85 / 32.85 * 100 =  21%

Table 3: EPS and its growth in the last 5 years

Interpretation:

From the above chart, we can see that the Earning per share is increasing each year,

which is good for both the firm and for the shareholders.

Information Regarding Dividend, Bata Bangladesh

a.       Dividend Payout Ratio

Dividend payout ratio = Cash Dividend per Share / E.P.S.

Dividend payout ratio says the % of EPS that is paid as dividend. It helps us to determine

whether it is following dividend relevance theory or dividend irrelevance theory.

YEAR

(1)

CASH

DIVIDEND PER

SHARE (2)

EPS

(3)

DIVIDEND PAY OUT RATIO (4)=

(2)/(3)

2006 23.50 20.75 113.25%

2007 25.00 23.75 106.26%

2008 22.00 32.85 66.97%

2009 22.00 32.85 66.97%

2010 22.00 39.76 55.33%

Table 4: Dividend Payout ratio for last 5 years

Interpretation:

From the above table, we can see that the dividend payout ratio is decreasing each year.

This is due to the increase in Cash Dividend is not as much as the increase in EPS. This

indicates that Bata Shoe is trying to retain its earning for future expansion needs.

b.      Dividend payout & Retention ratio

YEARDividend payout

ratioRetention ration (1-

payout ratio)

2006113.25%

0%

2007106.26%

0%

200866.97%

33.03%

200966.97%

33.03%

201055.33%

44.67%Table 5: Dividend Payout and retention ratio for last 5 years

Interpretation:

In 2006 & 2007 retention ratio was 0 (zero), but Bata shoe company retained 33.03 % of

their earning in 2008 & 2009 consecutively. However, they raised the portion of their

retained earnings in 2010 and that was 44.67%, which shows us they are now following

dividend irrelevance theory for their future growth.

c.       Stock Dividend

After analyzing % Dividend of the last 5 years, we found out that Bata Shoe had not

declared any Stock Dividend to its shareholders. A stock dividend is paid when a

company needs to preserve funds to finance rapid growth. Since, Bata is an established

firm; it has numerous sources for funding. So, it does not required to use Stock Dividend

instead of Cash dividend. This could send a positive signal to investors thinking that Bata

has enough financing power for future growth, which we can see by observing the

increase in its share price for the last 5 years.

Year % Dividend Stock Price in DSE (TK)

2006 235.00 121.4

2007 250.00 223.6

2008 220.00 320.70

2009 220.00 528.30

2010 250.00 648.00

Table 6: Percentage of Dividend Payments

Interpretation:

From the above table, we could see that the rates at which Bata Shoe is offering Cash

Dividend to its shareholders is quite attractive. This activity can be attributed to the cause

that Bata Shoe is trying to attract more investors to invest in Bata Shoe. For this reason,

they are trying to give a positive signal to the stock market through high percentage of

dividend payments. We can say that Bata has been able to attract more investors just by

looking at its yearly increase in stock price.

d.      Relation between Dividend Rate and Market

Price of Stock

The Chart given below depicts that market price was low when rate of dividend was

lower in 2006. Then the increasing rates of dividend results gradually increase of market

price. Highest the market price growth rate occur from 2007 to 2010. At this time it has

reduced payout ratio substantially. Here we can comment according to dividend

irrelevance theory as it says dividend should be paid whatever is left after meeting all

available investment decision. In last two years firm follow dividend irrelevance theory

and was able to increase shareholders value.

Figure 3: Relationship between Dividend and Share Price

Interpretation:

We can see from the above line graph that the price of Bata Shoe stock is increasing each

year as the % of dividend payments is quite stable.

e.       A comparison of year end P/E ratio for 5 years

Year Year End P/E % Dividend % Dividend Yield

2005 8.22 120.00 8.062006 6.00 235.00 19.36

2007 9.42 250.00 11.182008 9.76 220.00 6.862009 16.08 220.00 4.162010 16.46 250.00 3.83

Table 7: P/E ratio for 5 yearsInterpretation:

It is seen that year end P/E ratio has been increasing in 5 years which is a good sign for

the future growth and prospect of the company, which will encourage the investors for

investing in the company.

Findings

 The findings of the study are as follows….

      During 2008 to 2010 Bata Shoe Company paid on an average 63.09% of their net income

as dividend where in 2006 & 2007 those were 113.25% and 106% respectively.

That is more than their net income. In that year firm finance this extra dividend

amount from their retained earnings. According to our theory we can assume that for

reducing dividend payout ratio the stock price of Bata Shoe Company may

fall. But the management team was able to convince the stockholder  that  they

cut  their  payout  for  increasing  growth  and  running recession. For this reason their

stock price goes up.

      Clientele effect means the tendency of a firm to attract a set of investors who like its

dividend policy .If the large number of investors of the particular company

prefer high dividend then company must pay more dividends to the investors. On the

other hand, if large number of investors of the particular company do not

prefer high amount of dividend then company must retain most of their earnings inside

the organization. I n c a se o f Ba t a Shoe Company mos t o f t he i nves to r s

p r e f e r more d iv idends because the company has small number of wealthy

investors.

      The company believes that the investors are irrational and they like bird-in the-hand

theory but after a certain payout it started to follow dividend irrelevance theory.

      In last five years they did not pay any stock dividend.

      The analysis shows that dividend was not stable over time.

      In the year 2008 and 2009 the firm used the residual dividend model to set payout ratio at

a level that will permit the firm to meet its Financing requirements with retained

earnings.

      It is not following any particular dividend policy. As it is paying varying amount of

increasing dividend rate.

Recommendation

      Bata should continue to follow dividend irrelevance theory for their future growth.

      They should follow any particular dividend policy so that investors can assume their

expected return on the basis of their preference (Short term or Long term).

Bata Shoe is currently trading at 12.5 P/E. With a BDT 542.57 million in 2010 earnings

and BDT 96.57 2010 Net Asset Value per Share, Current price of share is BDT 526.4. So

it can easily be said that the dividend policy adopted by Bata Bangladesh is effective

enough. They usually pay cash dividend instead of stock dividend which satisfy its

investors who want instant income or gain.

Appendix

o http://www.batabd.com/

o http://www.dsebd.org/displayCompany.php?name=BATASHOE

o Ahsan, A 2008, ‘Security price relation to dividend announcement: evidence from

Dhaka stock exchange Ltd.’ viewed 18 July 2011,

o http://www.bdresearch.org/home .