Analyzing Determinants of Dividend Payout Practices in Pakistan Textile Industry (2008-2013)

Abstract

This study of 151 textile firms, each having 6 yearly (2008-13) data, provided a total sample size of 906 observations for analyzing dividend payout practices and its various determinants. Of a total sample of 151 textile firms, 14% were found having negative and 86% were found having positive equity. Majority (75%) of these negative equity bearing firms, on average, have total assets worth Rs.709, 834 million against which they each have to pay Rs. 871, 213 million as total debts. These firms are paying no dividend and their dividend cover ratio (number of times an organization is capable of paying dividends to shareholders) is also equal to zero. Hence these firms are technically bankrupt. Of the total 129-130 positive equity bearing firms, 45-46 firms (35%) are yielding negative and 84 firms (65%) positive net profit before tax (NPBT). The leverage of former type of firms is much higher (2.9 times) than that of later type of firms. The average total asset of latter firms is 392.78 times of that of the former. The average dividend payout of the latter firms is 935.92 times of the former. The average total debt of the latter firms is 316.50 times of the former. The average total equity value of the latter firms is 615.89 times of that of the former. The average sale of the latter firms is 22,345.39 times of that of the former firms. Analysis of the 84 positive NPBT yielding firms portrays statistically significant negative relationship between dividend payout and leverage and dividend payout and debt while statistically significant positive relationship between dividend payout and variables like net profit, sales and equity. Since fourteen percent of the total 151 sampled textile firms on the basis of 6 years data (2008-13) appear to have negative equity values, suggesting that such firms have already gone in to bankruptcy. Thirty-five percent of the remaining firms, which though have positive equity values, yield negative net profit before tax (NPBT) and 65% firms yield positive NPBTs. High debts and high ratios of leverage are suspected as the prime reason for bankruptcy and negative NPBTs of the firms. A detailed enquiry is recommended to reconfirm our findings and for an appropriate remedial step. Eighty-four firms (55.63% of total 151 sampled textile firms) bear positive equity values and also yield positive NPBTs; an analysis of such firms indicate a statistically significant positive relationship between dividend payout and net profit before tax, firms’ total sales and equity value of the firms but statistically significant negative relationship between dividend payout and leverage and debt. Since a stable dividend payout practice is considered desirable and dividend payout and equity financing are positively correlated, it is therefore recommended that firms pay greater attention towards equity-financing relative to debt-financing of the firms.