By Francis Kwaku Egu

Introduction

The growth of businesses in corporate Ghana will depend much more on the ability of these businesses to expand and have greater market share not only in Ghana but also beyond the boundaries of Ghana. This means businesses will have to raise additional capital either from retained earnings, share capital or borrowing in order to expand. Basically, the size of retained earnings of a business depends largely on what is paid out to share holders or the dividend policy of the business. Many views have been expressed on whether businesses should pay dividends to shareholders or should rather invest retained earnings into projects with positive NPVs.

Considering the fact that gearing usually has negative implications on the image of a business and retained earnings is difficult to come by, the probable option will be the raising of share capital. In recent times many investors within the West African sub region and even beyond have found Ghana as an attractive business environment to invest their capital. Most of these investors are risk averse. They will therefore prefer to invest in shares of high performing businesses instead of setting up their on businesses. Businesses in Ghana must therefore find a way of attracting these investors. One way of attracting them is by adopting very good dividend policies and having very good payment records.

Apart from the above, the flourishing of the stock exchange in Ghana could depend to some extent on the dividend policies and payment records of businesses in Ghana. Dividend policy is known to be very important in signalling share prices. Researchers have hypothesized that a firm uses dividend policy as a signal to outsiders regarding the stability and growth prospects of the firm. Woodridge and Ghosh (1988, 1991) argued that stock price is affected by dividend pattern, hence the reluctance of managers to eliminate or reduce dividend payment. Petit (1972) found a strong positive relationship between dividend changes and stock price changes, and that the size of the stock price reaction depended heavily on the size of the dividend change.

Dividend Policy and Share Prices

Dividend policy theory is described as the effect of change in dividends on a firm’s value. Brealey et al (1986:p 417) defined dividend policy as “the trade off between retaining earnings on the one hand and paying out cash and issuing new shares on the other.” Woolridge (1960) observed that in order to measure the effects of dividend changes on stock prices, it was important to distinguish between anticipated and unanticipated changes in dividends. Dividends itself are described as payments made by businesses to their shareholders. It is the distribution of the business’ recent profit to its owners and also a reward for investing in a business.

According to a study conducted by Smith and Watts (1995) based on a sample of US businesses, dividends tend to be lower when there are more investment opportunities. However, many businesses tend to base their dividends on the profit or earnings of the most recent year. They concluded that there are many factors that determine dividend policy of firms.

Dividend Controversy

Dividend payment has generated a lot of controversy among researchers. It is a puzzle which researchers are finding it very hard to solve. Over the past years, researchers have come out with three schools of thought in an attempt to solve the dividend puzzle. One school of thought argues that dividends are attractive and have a positive influence on stock prices. A second bloc believes that stock prices are negatively correlated with dividend payout levels. The third group of theorists maintain that firm dividend policy is irrelevant in stock price valuation.

Miller and Modigliani (MM theory) [1961] belong to the third group of theorists who believe dividend payments are irrelevant to stock prices. According to them, the investor is indifferent between dividend payment and capital gains. Their theory focuses on what makes dividend policy matter, just like their capital structure propositions. Other studies done by researchers such as Black and Scholes (1974), Miller and Scholes (1978, 1982), and Bernstein (1996) maintain that dividend policy makes no difference because it has no effect on either stock prices or the cost of equity.

The MM theory was criticised for being unable to address the importance of dividend payments in businesses. According to the critics, if dividends are irrelevant as claimed by the theory, why do firms struggle to maintain dividend payments? Some firms even have to borrow to pay dividends. R.R Petit [1972] in his ‘dividend information hypotheses’ argued that market changes in dividend policy affect stock prices. The hypothesis further went on to explain that dividend increases send a good signal to the market while dividend cuts send bad signals. The argument in short is that dividend changes signal information to the market.

Profit and Dividend Payments

The truth is for any firm to be able to pay dividend to its shareholders that firm must first declare profit. It is true some managers borrow money to pay dividend but I do not think businesses in Ghana have got to that level yet. Luckily, when the unaudited financial reports of some of the GSE listed companies for the 2007 financial year were released, the results were quite encouraging. Most of the companies declared profits with the exception of Sam-Woode Ltd (SWL). Some of the companies, which declared profits showed remarkable increase in profit over the previous years. Though there were drops in profit of some of the listed companies compared to the profits they declared the previous year, it is still encouraging considering the current financial turbulence across the globe.

The companies that saw remarkable increase in their profits were Camelot Ghana Limited (CMLT), British American Tobacco, Ghana LTD, (BAT), PZ Cussons (Ghana) Limited (PZ), Ghana Commercial Bank Ltd (GCB), Cocoa Processing Company Ltd (CPC) etc. There was an increase in Camelot Ghana Limited (CMLT)’s profit after tax from GHC 39,800.00 in 2006 to GHC 48,591.79 in 2007. British American Tobacco, Ghana LTD, (BAT) declared a profit of GHC 27.51 billion the period ended June 30, 2007. Profit after tax for the same period in the previous year was GH 16.43 billion. This figure represents 67.4% increment in profit for the period. PZ Cussons (Ghana) Limited (PZ) profit after tax increased 23% over the corresponding period for the previous year from GH C449, 108 to GHC553, 292.

Profit after tax for Ghana Commercial Bank Ltd (GCB) was GHC91.03 billion compared to GHC 56.20 billion for the same period last year. In the case of Cocoa Processing Company Ltd (CPC), profit after tax was GHC5.31 billion. Profit after tax for the same the previous year was GHC4.47 billion. One Ghanaian based company that has maintained constant increase in its profit margin was Unilever Ghana. Total turnover of the company grew from ¢398bn in 2000 to ¢888bn in 2004 at an average rate of 24% over the past five years. Profit after tax grew at a similar trend from ¢28bn in 2000 to ¢62.7bn in 2004. (Unilever Ghana website)

The companies which saw drop in their profit, were SG-SSB Bank Limited (SG-SSB), Guinness Ghana Breweries and CFAO Ghana Limited (CFAO). The profit for SG-SSB dropped from GH 8,527,000 in 2006 to GH 8,285,000 in 2007. The profit after tax for Guinness Ghana Breweries Limited (GGL) was GH 150,062m in 2006 but this dropped to GH 140,110m. CFAO Ghana Limited (CFAO) saw its profit after tax figure of GH 615,000 drop to GH392, 000. Starwin Products Limited (SPL) posted a profit of GHC237.25 million. This figure is 68% lower than earnings of GHC741.50 million for the same period last year. SAM-WOODE LTD (SWL) - SWL reported a loss of GHC619.88 million. The company reported a profit of 463.57 million for the same period last year, (GSE report 2008).

Dividend Announcement and Share Price Increase

Some of the listed companies, which declared profit, also announced dividend payments for the year. The payments are quite encouraging and mouth watering. Cocoa Processing Company (CPC) announced dividends of GH0.0004 per share for the 2007 financial year. Standard Chartered Bank (SCB) announced a dividend of GH 0.0343 per share for its Preference Share holders for the six-month period of September 29, 2007 to March 30, 2008. PZ also announced a dividend of GH 0.0105 per share for the financial year ending May 31, 2007. (GSE report 2008). Unilever Ghana has consistently paid about 60% of its earnings to shareholders since 2000. According to Unilever Ghana report, a total sum of ¢203bn has been paid in the last five years from a total earning of ¢349bn. For the past five years, trading of Unilever shares has been rising in response to investor confidence in the company.

The announcement of dividend payments by some of the listed companies sent a very positive signal to the market and the response from investors was quite positive. The GSE 2008 first half market report showed a high demand for shares on the market and increase in share prices throughout the period. SIC Insurance Company Limited (SIC) share price appreciated on the Ghana Stock Exchange (GSE) with GH¢ 0.0049 rise to close at GH¢ 0.3550 from the initial offer price of GH¢ 0.3000. SG-SSB Bank shares went up by GH¢ 0.0009 to close at GH¢ 1.3070. The shares of Ghana Commercial Bank (GCB) were GH¢ 0.0002 better at GH¢ 1.0061 while Ecobank Bank Ghana Limited (EBG) shares appreciated by GH¢ 0.0001 at GH¢ 2.1762 (GNA). Out of the 34 listed equities, nine companies recorded above 50% growth in share prices and seven recorded above 10% while three recorded gains above 5%. Of the thirty-four listed equities, only seven companies recorded losses in their share prices while eight maintained their prices. Among the top gainers on the market are Benso Oil Palm plantation, SIC Co Ltd, Ecobank, Guinness and Ghana Brewery Ltd. (GSE report 2008).

In this respect, we can clearly see the role played by dividends announcement. It has been argued that a company’s decision to cut dividends communicates a loss of confidence in the firm’s future earnings capability, and the market reacts to such cuts. This situation clearly agrees with information content theory of dividend which says dividend announcement provides shareholders and the marketplace with the missing piece of information about current earnings upon which their estimation of the firm's future depends.

Unilever Ghana’s Dividend Policy

Unilever is known to have created a niche for itself as the highest payer of dividends to shareholders. Taking a close look at the dividend payment records of Unilever Ghana, it is evident that earnings remain one of the most important factors influencing the company’s dividend policy. It could be argued that dividend has become a function of Unilever Ghana’s “sustainable growth” in earnings. Earnings per share for the company had increased significantly over the five-year period of 2001 to 2005. Earnings per share of the company increased from GHC 892 in 2001 to GHC1470 in 2005. This could be attributed to the increase in net profit before tax over the same period. Net profit before tax for the company increased from GHC 55,725 in 2001 to GHC 91, 962 in 2005. This probably compelled the managers to increase dividend. There has been substantial increase of dividends from as low as GHC31, 940 in 2001 to GHC56000 in 2006 (Unilever Ghana website).

This development in the company is consistent with the findings of Lintner (1956), which reports that firms have long-run target dividend payout ratios and place their attention more on dividend changes than on absolute dividend levels. It also confirms a research survey of businesses, which indicates that companies tend to change dividend steadily in response to a sustainable increase in earnings and high earnings tend to follow high dividends. Unilever Ghana’s dividend also reflects their future cash flow. Net cash flow from turnover increased from GHC600, 002 in 2001 to GHC1035, 247 in 2005. (Unilever Ghana website).

It has been suggested that the level of dividends paid by a particular business, at a particular time is largely dictated by the amount of cash available, (Maloney 1986)). Over the five year period, Unilever Ghana’s financial strength has been very strong enabling them to pay consistent and increasing dividends. This is an indication of excess cash readily available for distribution to shareholders. As liquidity is vital for the survival of any business, so has Unilever Ghana made cash and liquid assets available at any particular time for them to meet maturing and other shareholders’ obligations. Unilever Ghana has enjoyed a pattern of strong positive cash flow over the years.

Future Prospects

Certain significant changes happened on the market which could likely enhance future prospect of the market with regards to dividend payments. One such change is the sale of government holdings in certain state owned companies. The government sold 60% of it’s holding in State Insurance Company (SIC) for an amount of GHC 35.2million. In the year 2007 government also sold its share in Ghana Oil (GOIL), (GSE report 2008). This is a very good development in the sense that the government is gradually implementing its de- regularisation policy to the letter. The sales of these shares however will be more beneficial if they are sold to ordinary Ghanaians. There will be no point in selling these shares to institutional shareholders, to reap the benefit at the expense of the ordinary people. This is because SIC is a high performance company with very good dividend payment records. It is therefore very important if such dividends trickle down to ordinary taxpayers.

Another significant development, which could change the equation of the market, is the Ghana Commercial Bank (GCB) right issue. The bank raised a capital of GHC60m from the right issue. A right issue is when existing shareholders are given the right to subscribe for more shares in the company in proportion to their holding of shares in respect of which the rights may be exercised. Right issues are usually sold at discount to market price. The issue is why should GCB issue right instead of floating new shares? A lot of factors may have caused that. Usually, rights are issued by troubled companies to settle debts or to fix troubled balance sheets. Considering the fact that GCB declared a profit after tax of GHC91.03 billion in 2007, the bank may not be anywhere near having trouble with its balance sheet. The pprobable reason may be perhaps the bank wanted to raise capital to fund a new acquisition or implement some very important growth strategies. The only problem is that the value of each share of GCB will be diluted because of increased number of shares issued.

Golden Star Resources (GRS), a gold mining company of high repute listed on the Ghana Exchange Stock in 2008 floated a whooping 1,881,630 number of shares to the public at GHC 3.00 per share, raising an equity capital of GHC5.64million. The total issued shares of GSR listed are 235, 426. 911. The good thing is Golden Star Resources (GRS), is listed on AMEX and Toronto Stock Exchange, (GSE report 2008). If the exchange is attracting such reputable firms then it goes to confirm that it has come out of age.

Conclusion

From the information gathered so far, it could be argued that most of the firms in Ghana are high dividends paying firms. They pay large portions of their earnings as dividends. This is very good because it could help in attracting more investors to Ghana. The only problem is this seems to suggest that the firms have few attractive investment opportunities (projects) and have therefore decided to pay large amounts of their earnings as dividends. In order to continue paying such high dividend payout, these firms need to invest into more attractive projects with positive NPVs. They could do this by using funds raised internally or externally or retain much of the earnings to sustain the high dividend payout.

Francis Kwaku Egu (Finance & Investment Analyst), UK

Honorary Member & Research Associate- Licensed International Financial Analyst (LIFA) – USA kwakuhull@yahoo.com