Dividends and Stock Prices

Of
Square Pharmaceuticals Limited

Course Title: Managerial Finance

Course Code: FIN 3123

Prepared for:

Kazi Ashraful Alam

Assistant Professor
BBA Program
United International University

Prepared By:

Saquifa B. Seraj
ID: 111063015
Sec: A

Submission Date: 14.01.09

Origin of the Paper

Our respected course instructor Kazi Ashraful Alam, assistant professor,

school of business, United International University, assigned this term paper,
as a partial requirement of the course “Managerial Finance” to gather
knowledge in our study related fields. The assignment was to prepare this
report on “Dividend Policy and Stock Price” of a company.

Purpose of the Paper

 The purpose of the report is to speculate, predict and assess what

determines the dividend policy of a company and what is the
relationship between dividends paid and stock price of a company.

 In addition, this report may serve the purpose of factual investigation of

what actually determines the dividends paid and stock price of a
company in Bangladesh.

Limitation

It is not easy to find out the dividend policy of a company. None of the
Bangladeshi companies follow any particular dividend policy strictly. The time
that was allocated to prepare this report was not enough for extensive
research. Problems were also faced in preparing the paper correctly. A
substantial amount of secondary information related to this topic was found on
the internet, some information was also taken from the Dhaka stock
exchange, but it was very much difficult to organize the data. Overall, the best
effort was given in this report.
Methodology

For this report, the following qualitative and quantitative technique was used:–

Secondary Data: Some relevant secondary data from different sources like:
annual reports, Dhaka stock exchange, finance books and websites were
used.

Quantitative Study: Many relevant figures, ratios and percentages were

calculated using financial formulas and the relationships between them were
shown graphically for clear understanding.

A Snapshot of Square Pharmaceuticals

Limited

1958: Debut of Square Pharma as a Partnership Firm.

1964: Converted into a Private Limited Company.

1974: Technical Collaboration with Janssen Pharmaceutical, Belgium, a

subsidiary of Johnson and Johnson International, USA.

1982: Licensing Agreement signed with F. Hoffmann-La Roche Ltd.,

Switzerland.

1985: Achieved first position in the Pharmaceutical Market of Bangladesh

among all national and multinational companies.

1987: Pioneer in pharmaceutical export from Bangladesh.

1991: Converted in to a Public Limited Company

1994: Initial Public Offering of Square Pharmaceutical Shares.

1995: Chemical Division of Square Pharmaceuticals Ltd. starts production of

pharmaceutical bulk products (API).

1997: Won the National Export trophy for exporting pharmaceuticals.

1998: Agro-chemicals & Veterinary Products Division of Square Pharma starts

its operation.

2001: US FDA/UK MCA standard new Pharmaceutical factory goes into

operation built under the supervision of Bovis Lend Lease, UK.

2004: Signing of agreement with ROVIPHARM, Vietnam to manufacture and

market Square products under license in Vietnam.

During the same year, the company secured the top position for the best
published accounts and report for 2003 in the manufacturing category for
transparency and excellence in corporate reporting.

2005: New State-of- the-Art Square Cephlosporins Ltd. goes into operation;
built under the supervision of TELSTAR S.A. of Spain as per US FDA/ UK
MHRA requirements.

2007: Square Pharmaceuticals Ltd., Dhaka Unit gets the UK MHRA approval.
Dividends declared and share prices of
Square Pharmaceuticals Limited

The relationship between share prices and dividends declared is usually

positive, when share price is the dependent & dividend declared the
independent variable. This means that the share prices should receive a
boost after dividend declaration. But one important influencer in this
relationship is market rumor and the resultant shareholders expectation. The
DSE and CSE have a lot of small investors, who are not necessarily well
versed in the tools and mechanisms that determine share prices and a
company’s earnings. Thus they will purchase share and therefore hike up its
price based on rumor that may be totally false and baseless. Thus often even
after dividend declaration, if the amount declared does not meet the rumored
amount or if the price had been hiked up well above what is justified by the
dividend actually declared; share price will go down.

Another thing to factor into this process is bonus shares. Often Square
Pharma has given bonus shares instead of declaring high amounts of
dividend. This has had two effects. One, the number of shares has increased,
resulting in price decrease of all the shares. Two, as the investors have not
got the dividend in cash, some of them would sell the bonus shares resulting
in prices going down.

Through the prism of above layers let us examine the relationship between
the said two variables over the last 5 years :–
 Share price before and after dividend declaration

3,650.00
3,600.00
Share prices

3,550.00
3,500.00
3,450.00
3,400.00 Share prices
3,350.00
3,300.00
3,250.00
3,200.00
30-06-2004

05-07-2004

06-07-2004

07-07-2004

12-07-2004

13-07-2004

14-07-2004
04-07-2004

08-07-2004

10-07-2004

15-07-2004
3,150.00

Dates

The line curve above shows that share prices went down after dividend
declaration – on 8th July, 2004 – as shareholders expected rate of return was
not obtained.

Share prices before and after dividend is declared

3,700.00
Share Prices

3,600.00
3,500.00
3,400.00
Share Prices
3,300.00
3,200.00
3,100.00
3,000.00
12-07-2005
10-07-2005
11-07-2005

13-07-2005
14-07-2005
17-07-2005
18-07-2005
19-07-2005
20-07-2005
21-07-2005
23-07-2005

Dates

In 2005, the same phenomenon was experienced, as share prices went down
after the company was unable to match market expectation for dividends and
bonus shares.
 Share prices before and after dividend is declared

2,600.00
2,550.00
2,500.00
Share prices

2,450.00
2,400.00
2,350.00 Share Prices
2,300.00
2,250.00
2,200.00
2,150.00
2,100.00
23-07-2006

25-07-2006

26-07-2006

30-07-2006

31-07-2006

02-08-2006
03-08-2006
20-07-2006

24-07-2006

27-07-2006

01-08-2006
Dates

In 2006, however Square Pharma was able to exceed shareholder

expectations with 20% bonus share in excess of a Tk. 75 dividend and it
resulted in prices going up after dividend declaration.

Share prices before and after dividend declaration

6,000.00
5,000.00
Share prices

4,000.00
3,000.00 Share Prices
2,000.00
1,000.00
0.00
7

-0 07

-0 07

-0 07

-0 07

7
07
10 200

11 200

15 200

17 200

19 200

23 200
0

20
0

0
2

2
7-

7-

7-

7-
7-

7-

7-

7-

7-

7-

7-
-0

-0

-0

-0

-0

-0

-0
09

12

16

22
18

Dates

In 2007, the company’s dividend was much less than expected but still it
resulted in a slight increase in prices after dividend declaration because as
high as 50% of bonus share was declared in addition to a Tk. 50 dividend
which is very low compared to Tk. 75 of 2006. Share price did not rise
significantly because those investors who prefer dividend instead of bonus
shares sold their shares to gain cash.

Share prices before and after dividend declaration

6,000.00
5,000.00
Share prices

4,000.00
3,000.00 Share prices
2,000.00
1,000.00
0.00
-0 08

-0 08

-0 08

-0 08

-0 08

-0 08
-0 08

7- 8
08
17 200

24 200

28 200
16 -20

20 -20

21 -20

22 -20
15 -20

23 -20

20
2
7-

7-

7-

7-
7

7
7

-0
-0

-0

-0
14

27
Dates

In 2008, share prices fell dramatically after dividend was declared. This is
mainly because the shareholders’ expectations were shattered as the
company paid a very low dividend as well as bonus shares compared to the
previous year. This is mainly due to macro economic factors as the whole
market was experiencing a period of uncertainty just after a massive price rise
that resulted in market index going over 3000.

As can be seen from the trends above and the graph below, the share prices
have fluctuated over the years but Square Pharmaceuticals have continued to
increase their retained earnings. In 2006 the firm’s net income fell but the
company has given its shareholders a good value for their investments, in
form of dividends and bonus shares. Hence, the retained earnings of 2006
dropped. However, the company managed to make a considerable profit in
2007 and attain a much higher retained earning compared to the past three
years.
 Changes in Retained Earnings

1200000000
Retained Earnings

1000000000
800000000
600000000 Retained Earnings
400000000
200000000
0
2004 2005 2006 2007
Year

The table below shows that as the net income increased retained earnings
also increased. An exception to this trend is seen in 2006, when the net
income dropped. The company compensated for its declined retained earning
of 2006 by retaining a higher percentage of the net income in 2007. This
enabled the company to continue its previous growth trend. However, as we
have seen above it came at a cost to the shareholders. They received much
less dividend than the previous years. Consequently, the company tried to
compensate the shareholders with higher than expected bonus shares

Year Net Income Retained Earnings Growth (%)

2004 Tk.970,043,543 718,043,543 15.64316628

2005 Tk.1,255,848,153 956,472,153 17.1755826

2006 Tk.1,165,864,616 830,524,616 12.97286316

2007 Tk.1,303,242,840 1,034,970,840 14.11338446

Price Earning Ratio

Price/ Earnings ratio: The Price/ Earnings ratio (price-to-earnings ratio) of a

stock is a measure of the price paid for a share relative to the income or profit
earned by the firm per share.
P/E ratio = Price per share / earnings per share

Year Price per share Earning per share P/E ratio

2004 2,272 108.48 20.9439528
2005 3,768 140.44 26.82996297
2006 2,276 130.37 17.45800414
2007 2,447 145.74 16.79017428
2008 4,110 154.53 26.59677732

The P/E ratio was 20.94 times in 2004 and increased further to as high as
26.82 times in the following year. However, in 2006 it sharply declined to
17.45 times which is an alarming signal for the potential investors. P/E ratio
went further down in the following year. Paradoxically, it increased by more
than 50% in the year 2008 which is a very good signal for the investors.
Although the average share price dropped in 2006 it showed an upward trend
in 2007, despite a further fall in P/E ratio on that year. This shows that the
investors of our country do not usually calculate the ratios before buying or
selling shares. They mostly act on impulse and on wild guesses. This could
also be an indication of market manipulation.