Dividend Policy in South Africagsblibrary.uct.ac.za/ResearchReports/2006/Maytham.pdf · dividend...

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DIVIDEND POLICY IN SOUTH AFRICA

A research report presented to the

University of Cape Town’s Graduate School of Business

in partial fulfilment of the requirements for the

Master of Business Administration Degree.

Presented By Alison Maytham.

Supervised By Professor Colin Firer.

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TABLE OF CONTENTS

PREFACE...............................................................................................................................IV

ACKNOWLEDGEMENTS.................................................................................................... V

ABSTRACT ............................................................................................................................VI

1. Introduction................................................................................................................................ 1

2. Theory Review ........................................................................................................................... 3 2.1 The theory developed internationally...................................................................................................................3

2.1.1 Introduction...................................................................................................................................................3 2.1.2 Relevance theory ..........................................................................................................................................3 2.1.3 Irrelevance theory .........................................................................................................................................3 2.1.4 Tax ................................................................................................................................................................3 2.1.5 Transaction costs...........................................................................................................................................4 2.1.6 Signalling effect............................................................................................................................................4 2.1.7 Information Content......................................................................................................................................4 2.1.8 Clienteles.......................................................................................................................................................4 2.1.9 Disappearing dividends ................................................................................................................................4 2.1.10 Catering theory ...........................................................................................................................................5 2.1.11 Life cycle theory .........................................................................................................................................5

2.2 The impact of theory in South Africa...................................................................................................................6

3. Literature Review...................................................................................................................... 7 3.1 Historical overview of international research ......................................................................................................7 3.2 Historical review of South African research......................................................................................................11

4. Research Questions ................................................................................................................. 16

5. Methodology............................................................................................................................. 17

6. Results ....................................................................................................................................... 20 6.1 Demographic Data ..............................................................................................................................................20

6.1.1 What sectors of the JSE are represented by this survey?...........................................................................20 6.1.2 Who makes the decisions?..........................................................................................................................21 6.1.3 Range of responses .....................................................................................................................................22 6.1.4 The factors that affect dividend decisions as indicated respondents. ........................................................23 6.1.5 Distribution of capital .................................................................................................................................24

Table of Contents I

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6.1.6 Valuation of companies ..............................................................................................................................24 6.1.7 What is done with the cash generated by companies?...............................................................................25 6.1.8 The Alternate use of Funds.........................................................................................................................26

6.2 Dividend Decisions.............................................................................................................................................27 6.2.1 What are companies views regarding dividends?......................................................................................27

6.2.1.1 Earnings per Share.........................................................................................................................27

6.2.1.2 Signalling .......................................................................................................................................27

6.2.1.3 Valuation of Company ..................................................................................................................28

6.2.1.4 Investment plans ............................................................................................................................28

6.2.1.5 Tax .................................................................................................................................................28

6.2.1.6 Competitors...................................................................................................................................28

6.2.1.7 Clientele effect...............................................................................................................................29

6.3 Repurchase Decisions.........................................................................................................................................31

6.3.1 What are companies views regarding repurchase decisions?....................................................................32

6.3.1.1 Earnings per share..........................................................................................................................32

6.3.1.2 Signalling .......................................................................................................................................32

6.3.1.3 Valuation of the company .............................................................................................................32

6.3.1.4 Investment plans ............................................................................................................................32

6.3.1.5 Tax .................................................................................................................................................33

6.3.1.6 Competitors....................................................................................................................................33

6.3.1.7 Clientele effect...............................................................................................................................33

7. Discussion ................................................................................................................................. 34 7.1 The findings locally ............................................................................................................................................34

7.1.2 Dividends ....................................................................................................................................................34 7.1.3 Repurchases ................................................................................................................................................35

7.2 The findings compared with the Study conducted by Brav et al. in the United States in 2004. ......................36

8. Conclusion ................................................................................................................................ 39 8.1 The results on dividend policy in South Africa revealed the following:...........................................................39 8.2 In comparison with the international research, the results reveal the following:..............................................39 8.3 Limitations ..........................................................................................................................................................40 8.4 Suggested future research...................................................................................................................................40

9. References................................................................................................................................. 41

10. Interviews conducted: ........................................................................................................... 44

11. Appendices.............................................................................................................................. 45 Appendix 1: Cover letter to directors .......................................................................................................................45 Appendix 2: Questionnaire.......................................................................................................................................46

Table of Contents II

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Appendix 3: Electronic Report.................................................................................................................................51

Appendix 4: Analysis of Survey Questionnaires .....................................................................................................58

A: Analysis of Survey..........................................................................................................................................58

B: Industry Representation ..................................................................................................................................63

Table of Contents III

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PREFACE

PLAGIARISM DECLARATION

• I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that it

is one’s own.

• I have used a recognized convention for citation and referencing. Each significant

contribution and quotation from the works of other people has been attributed, cited and

referenced.

• I hereby declare that this submission is all my own work.

• I do not allow and will not allow anyone to copy this document or sections of this

document with the intention of passing it off as his or her own work.

SIGNATURE:__________________________________________________________

NAME: Alison Maytham

STUDENT NUMBER: ocnali001

DATE: 27 November 2006

0BPreface IV

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ACKNOWLEDGEMENTS

There are so many people who made this research possible, but more than most it was Professor

Colin Firer, who grasped a thought I had in class and challenged me to research the topic. Your

faith in my abilities has been an encouragement and an inspiration throughout the process.

My husband Chris, whom I adore, thank you for not minding my not being fully present for the

duration of this research. Your solidarity has been a foundation on which I could build this

work.

I would particularly like to thank; Mike Kane who supported me every step of the way along

the MBA journey. Kim Dubs and Lee Williams my assistants for all their meticulous efforts.

My colleagues at Ernst & Young who were always willing to help in whatever way, be it a

quick work or some technical advice, particularly Hannes Boshoff. The trainees who

telephoned all the directors, Lucian Rolleston, Unathi Mbenenge, Karen Kellerman, Nokuthula

Ngubenkomo and Gideon Kretchmer. Mark Wilson who was always available for finding

knowledge in McGregors. Steven Pieterse who enabled the online survey, your assistance was

invaluable. Kate Hunter and Jane English for their guidance and advice.

To the friends I had to go without for the two years and the people who lifted my spirits along

the way.

This report is not confidential. It may be used freely by the UCT, Graduate School of Business.

1BAcknowledgements V

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ABSTRACT

The question as to whether or not to pay dividends has puzzled many executives in the pursuit of

the ultimate policy to execute when managing the corporate finances of any profitable listed

organization. The objective of this study is to clearly identify dividend policy in South Africa.

The survey used a combination of field interviews and traditional questionnaire. A unique

aspect of the survey is that identical questions about both dividends and repurchases are asked.

312 companies listed on the JSE were surveyed over a 2 month period between August and

October in 2006. 81 Companies responded and the results revealed that dividends follow the

classical relevance model as established by Lintner in 1956. They are critically dependent on

sustainable increase in earnings. There is a severe penalty for reducing dividends and

institutional shareholders are attracted to firms paying dividends. Tax does not play a critical

role in the dividend decision. New investments are high on the agenda of JSE listed companies

prior to any dividend decision.

2BAbstract VI

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1. INTRODUCTION

A “puzzle” with “pieces that just don’t seem to fit.”

Black (1976)

The percentage of earnings paid out in the form of dividends and the impact that this payment

has on share prices have interested both South African and international researchers for many

years

Questions that have been posed are: Why do firms pay dividends? Does the size of dividend

impact the value of the share? Is the information carried in a dividend payout or change in

policy accurately interpreted? Is there a tax disadvantage to paying dividends? Is the dividend

policy appropriately matched to the firm’s investors? We seem to be no closer to untangling

this puzzle in 2006 than Fisher Black was in 1976.

To help explain this puzzle, financial economists developed various theories—signalling, tax-

preference, agency costs, and bird-in-the-hand explanations. The profusion of theories led Ang

(1987), to observe, “Thus, we have moved from a position of not enough good reasons to

explain why dividends are paid to one of too many.” Statman (1997) contended that solving the

dividend puzzle is impossible if the patterns of normal investor behaviour are ignored.

The fieldwork and surveys that have been undertaken over the past 50 years, since Lintner first

explored this issue in 1956 sets the foundation for an assessment of current dividend policy in

South Africa. The studies conducted in this field of research using questionnaires in South

Africa predate 1994. Marx examined the views of financial directors to dividend policy in

2001. In 2003 revisiting the Lintner model of 1956, Wolmarans tested the South African

market. It has been three years since Wolmarans and Marx’s work on dividend policy.

A question raised in an MBA finance lecture on why company directors make changes to

dividend policy was the conception of this research. The objective was to uncover what

influenced the decisions made by financial directors in determining and managing dividend

policy. Today, directors are left with a wide and often conflicting body of research about

dividends. A way to understand why firms pay dividends is by examining the views of

directors who are responsible for making such decisions.

3BIntroduction 1

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In August 2006 a survey of 312 JSE listed companies was conducted using an on-line

questionnaire. 25 % responded to an on line survey questionnaire and an additional 12

companies were interviewed to explore the detail behind the decisions that are made regarding

dividend policy.

This survey is based on the work done by Brav, Graham, Harvey and Michaely in 2004 in the

United States. Their comprehensive study surveyed dividend policy in the United States. They

surveyed 384 CFO's and Treasurers, and conducted in-depth interviews with 24 CFO’s from

that sample. Their intent was to determine the key factors that drive dividend and share

repurchase policies. They discovered that managers are very reluctant to cut dividends, that

dividends are smoothed through time, and that dividend increases are tied to long-run

sustainable earnings but much less so than in the past. Furthermore, they found that many firms

now use repurchases as an alternative to increasing dividends.

In order to benchmark the behaviour of South African directors of JSE Listed companies with

those of internationally listed companies, the findings were compared to those of Brav et al.

(2004).

3BIntroduction 2

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2. THEORY REVIEW

2.1 The theory developed internationally

2.1.1 Introduction

One of the unresolved debates in finance is the status of dividends within corporate financial

strategy. On the one hand dividends are regarded as an active decision variable within the

firm’s finance strategy, and dividend policies should be implemented by management to

maximise shareholders’ wealth. Proponents of this relevance theory are Gordon (1959, 1963)

and Lintner (1956, 1962 ). On the other hand, dividends can be seen as a passive residual where

the dividend decision follows the investment and financing decisions have been made. In this

context, shareholders are indifferent as to whether they receive their returns in the form of

dividends or capital growth. This irrelevance model follows from the seminal work of

Modigliani and Miller (1958, 1961).

2.1.2 Relevance theory

John Lintner first explored dividend policy in 1956. His study considered the distribution of the

incomes of corporations among dividends, retained earnings and taxes. His research at that

time revealed that dividends are sticky, tied to long-term sustainable earnings, paid by mature

companies, smoothed from year to year and that managers target a long-term payout ratio when

determining dividend policy. This study forms the basis upon which all subsequent work in the

area relating to the relevance theory has been undertaken.

2.1.3 Irrelevance theory

In 1961 Miller and Modigliani’s renown irrelevance theory was developed to show that the

dividends a company pays does not affect the value of its shares, because the higher the

dividend the less the investor receives in capital appreciation, no matter how the corporations

business decisions turn out.

In 1976 Fisher Black built on the earlier work by Miller and Modigliani and considered some of

the underlying assumptions surrounding their irrelevance theory. Regarding shareholder value

Black concurred with Miller and Modigliani the paying dividends or not paying dividends did

not influence share price.

2.1.4 Tax

Black (1976) concluded that tax relating to dividend payment did however impact share price.

If the investor pays tax on dividends received, he would value a non paying share higher than a

4BTheory Review 3

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dividend paying share. If a corporation is taxed for retained earnings as a penalty for not paying

dividends they would have to enter into tax avoidance tactics which may include capital

restructuring.

2.1.5 Transaction costs

Black (1976) noted that transaction costs of non paying shares could be come costly for investor

who need to liquidate some shares. They may as a result prefer dividends however there was

always the option of share repurchases and options exercise to consider.

2.1.6 Signalling effect

Black (1976) regarding signalling effects, concluded that the changes in dividend decisions

were clear indicators of the firm’s prospects. As a result, the change in dividend policy is

linked to the change in share price.

His research surrounding dividend policy concluded that the decision as to what policy to adopt

was “puzzling” when considered from both the investor and company point of view.

2.1.7 Information Content

In 1972 Pettit considered the information content of dividends by assessing the speed and

accuracy with which share prices respond to changes in dividends. Thus he strengthened the

link between dividend policy and share price established by Gordon in 1959 with his dividend

growth model.

2.1.8 Clienteles

In 1977 Petit went on to profile shareholders and he described the categories into which

individual groups of shareholders migrated seeking particular dividend policies as clienteles.

This went someway towards clarifying why different investors appeared to prefer certain types

of shares.

2.1.9 Disappearing dividends

Recent work by Fama and French in 2000 questioned why dividends are disappearing and their

conclusion lies in the changing characteristics of newly listed firms. Because of their high

growth opportunities and lower profitability, they typically have strong investment

opportunities and as a result never pay dividends. Amongst those firms who can pay dividends

many choose not to initiate dividend payments at all. Some of the reasons for the overall lower

propensity of firms to pay dividends were

(i) lower transaction costs involved with selling shares for consumption purposes,

4BTheory Review 4

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(ii) larger holdings of shares for share options by managers who prefer capital gains to

dividends and

(iii) better corporate governance systems that lower the benefits of dividends in controlling

agency problems.

2.1.10 Catering theory

Following the work by Fama and French, Baker and Wurgler (2004) developed the Catering

Theory. Their results suggested that managers cater to the demands of investors. When there is

a high price on dividends firms pay dividends and visa versa. Baker Wurgler’s theory has three

basic ingredients. First, it posits a source of uninformed investor demand for firms that pay

cash dividends. Second, limits on arbitrage allow this demand to affect current share prices.

Third, managers rationally weigh the short run benefits of catering to the current miss-pricing

against the long run costs and then make the dividend payment decision. The essence of the

catering theory is that managers give investors what they currently want. In the case of

dividends, catering implies that managers pay dividends when investors put a relatively high

stock price on dividend payers, and omit dividends when investors prefer non-payers.

2.1.11 Life cycle theory

Damodaran (1999) notes that a firm’s dividend policy tends to follow the firm’s life cycle.

During the introduction and rapid expansion stages, firms typically pay no or very low

dividends. The life cycle theory shows that young firms have abundant investment

opportunities with limited resources and as a result they retain all of their earnings, whereas

mature firms are in a better position to pay dividends because they have higher profitability and

fewer attractive investment opportunities. De Angelo, De Angelo and Stulz (2006) found that a

firms’ mix of internal and external capital indicates its stage in the life cycle. Dividend payers

tend to have high retained-earnings relative to contributed capital and non-payers the reverse.

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2.2 The impact of theory in South Africa

Examination of the empirical work done relating to dividend policy in South Africa reveals

several similarities with the theory established internationally. Theory specific to South Africa

which needs to be highlighted relates to the treatment of tax when paying dividends or

repurchasing shares.

Secondary tax on companies was introduced in 1993 by the South African government to

encouraged companies reduce the amount of dividends distributed and retain a greater portion

of earnings for investment purposes. The effect of this would be to strengthen the corporate

balance sheets of South Africa and stimulate the economy thus assisting in job creation.

Managers were encouraged to follow active dividend policies as shareholders should prefer

capital gain to dividends.

Subsequent to the introduction of STC in 1993, Capital Gains Tax was introduced in 2001.

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3. LITERATURE REVIEW

The follow two sections provide an overview of the research undertaken in corporate finance

specifically related to dividends. The sections begin with the earliest works done both

internationally and locally and capture the contributions to the knowledge in this field. They

end with the most recent studies.

3.1 Historical overview of international research

In 1956 John Lintner laid the foundation for the modern understanding of the relevance of

dividend policy. He interviewed managers from 28 companies and concluded that dividends

are sticky, tied to long-term sustainable earnings, paid by mature companies, smoothed from

year to year, and that managers target a long-term payout ratio when determining dividend

policy.

Pettit (1977) considered the clientele effect by examining the portfolios of 914 investors to see

whether their tax brackets affected their portfolios. Dividend yields were regressed against

characteristics of the investor base. The empirical research proved that safer companies with

older and poorer investors tended to pay more dividends than companies with wealthier

younger investors. Overall he concluded that dividend yield decreased as the tax disadvantage

of dividends increased.

Damodaran (2001) in his chapter on dividend theory refers to the three schools of thought on

dividend policy, the dividend irrelevance school who believe dividends do not matter because

they do not affect firm value. This thinking is based on the assumption that receiving dividends

is not a tax disadvantage for the investor and firms can raise funds in the capital market at a

reasonable price. The second school holds the view that dividends are bad for the shareholder

because they create a tax disadvantage, which results in lower value. The third school claims

that dividends are good because shareholders like them (page 658).

Damodaran also explored why dividend policy varies across countries. In comparing the G7

countries, he concluded that the differences in payout ratio could be attributed to

1. Differences in stages of growth

2. Differences in tax treatment

3. Differences in corporate control.

5BLiterature Review 7

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He adds that dividend payout ratios in companies in emerging markets are much lover than the

dividend rations in the G7 countries. The high growth rate and relative power of the incumbent

management in these countries help keep these payout ratios low, (Damodaran, 2001: 665 –

666).

In 2001 Fama and French found the incidence of dividend payers to be declining, which not

only reflects the changing characteristics of dividend payers but also their lower propensity to

pay dividends. They queried why some firms substitute repurchases for dividends and others do

not. And at the same time, why have many public companies never paid dividends, and

questioned if they would ever start. Their results indicated that corporate payout policies had

changed over the past 50 years and repurchases are now an important part of the payout

landscape. Repurchases were scarce in the first half of the 20th century and it is not surprising

that Lintner (1956) ignored them altogether.

In 2003 De Angelo, De Angelo and Skinner questioned whether dividends were disappearing.

Their research revealed that, while fewer firms paid dividends in 2000 than in 1978, aggregate

real dividends increased over that period. The combination of a decreased number of payers

and increased aggregate dividends reflects high and increased earnings concentration.

They showed that in 2000, most firms with very high earnings paid dividends, and the increased

real earnings of the largest dividend payers are responsible for the aggregate increase in

dividends and the concomitant increase in dividend concentration over 1978–2000. In 2000,

nearly half the industrial firms reported losses and, as one would expect, few of these firms paid

dividends. The decline over 1978–2000 in the number of dividend payers occurred

predominantly among firms that previously paid very small real dividends, and is due primarily

to acquisitions and secondarily to financial distress.

Their evidence reveals that publicly traded industrial firms exhibit a two-tier structure based on

dollar earnings. The first tier contains a few very high earners, most of which pay dividends,

and these firms’ dividends collectively dominate the aggregate supply. The second tier contains

many firms which, individually and jointly, have modest earnings and which collectively

contribute little to the aggregate dividend supply. In essence, the differing behaviour of first-

and second-tier firms explains why aggregate dividends increased as the number of payers

declined over the past two decades. The two-tier structure is perhaps the signature

characteristic that determines the dividend supply of industrial firms, and it has been so for at

least two decades (and probably longer).


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Although De Angelo et al’s evidence is limited to dividends; they speculate that the small set of

top-tier firms is also responsible for the majority of cash payouts via share repurchase.

In 2004, Baker and Wurgler proposed the catering theory of dividends, a view of dividends that

is based on relaxing the market efficiency assumption of the dividend irrelevance proof by

Miller and Modigiliani (1961). In their assumption, no rational investor has a preference

between dividends and capital gains. Arbitrage ensures that dividend policy is irrelevant.

Brav et al (2004), found that one of Lintner’s key findings with respect to dividend policy still

holds: dividend policy is very conservative. Dividend conservatism emanates primarily from

the severe asymmetric penalty the market assigns to firms cutting dividends. This can partially

explain disappearing dividends as noted in the findings of Fama and French (2001).

Unlike Lintner’s (1956) findings, Brav et al.’s (2004) evidence indicates that few firms target

the dividend payout ratio, but rather target the current level of dividends or dividend growth.

These targets are reportedly somewhat flexible. In addition, unlike the 1950s, share repurchases

are now a very important form of payout.

Perhaps the most important reason that repurchases are now important is that managers, and

apparently the market, view them as more flexible than are dividends. Brav et al. (2004) found

consensus among managers surveyed to substitute share repurchases in place of increasing

dividends per share – but not the other way around.

Consistent with the views of Miller and Modigliani (1961), Brav et al. (2004) found that payout

decisions may also convey information. Managers believe that both dividend and repurchase

decisions, in conjunction with other information the firm provides, helps disseminate

information to the market. Taxes are not a dominant factor affecting payout choices.

Brav et al. (2004) noted that payout clientele theory does not receive a strong endorsement from

managers. While executives acknowledged that dividends are tax disadvantaged relative to

repurchases for most individual investors, they did not view this issue as an important factor in

their payout decision. Managers “regretted” their firm’s dividend level – they viewed the

current dividend level as an undesired anchor.

Their research suggests that financial executives tend to employ decision rules that are

straightforward. With respect to payout policy, the “rules of the game” include the following:

• there is a severe penalty for cutting dividends,


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• do not deviate far from competitors,

• maintain a good credit rating,

• it is good to have a broad and diverse investor base,

• maintain flexibility,

• many investors price stocks using earnings multiples, so firms avoid actions that reduce

earnings.

These rules of the game are consistent with the informal rules that Graham and Harvey (2001)

find most affect debt policy, such as the desire for flexibility and a good credit rating, and equity

policy, such as earnings per share and stock price appreciation.

In 2005, De Angelo and De Angelo revisited the Miller Modigliani irrelevance theory and

relaxed the assumption surrounding free cash flows. Their study shows that there is in fact no

contradiction between the standard Fisherian model and practitioner intuition. The apparent

contradiction arises because Miller Modigliani’s assumptions artificially rule out retention and,

once retention is allowed, payout policy matters exactly as much as most managers believe it

does.

In 2006 De Angelo, De Angelo and Stulz examined dividend policy relative to the

earned/contributed capital mix, thereby testing the life cycle theory. They tested Damodaran’s

(2001) life-cycle theory by assessing whether the probability that a firm pays dividends is

positively related to its mix of earned and contributed capital, i.e., whether firms with relatively

high retained earnings as a proportion of total equity and of total assets are more likely to pay

dividends. They used the capital mix as a proxy for the life-cycle stage at which a firm

currently finds itself. It measures the extent to which the firm is self-financing or reliant on

external capital. Their findings are consistent with a life-cycle theory of dividends; the fraction

of publicly traded industrial firms that pays dividends is high when retained earnings are a large

portion of total equity, (and of total assets). This falls to near zero when most equity is

contributed rather than earned.


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3.2 Historical review of South African research

Sènéque and Gourlay (1983), surveying financial executives of top listed companies, found that

their approach to dividend policy was active and positive, and were thus in line with the

behaviours of their USA counterparts. In both cases the key factors of dividend policy are

continuity and stability of payment.

A study by Botha, Bosch and van Zyl (1987) found that there is no effect of dividend policy on

changes in shareholders’ wealth. They concluded that the financial theory in South Africa

states that the price of a share is determined by resolving the interrelated investment, financing

and dividend decisions. An optimal resolution of the three decisions, mainly in terms of

retention of income and payment of dividends from income, would lead to the achievement of

the primary goal of the firm – the maximization of shareholder wealth. They however

questioned the validity and applicability in South Africa of current financial theory based on

research findings using data mainly from ‘efficient’ and larger stock markets, such as the New

York Stock Exchange.

Botha et al. (1987) argued that the JSE was still relatively thinly spread, not mature and stable,

and there was likely to be discontinuous or thin trading, or both. They suggested reasons for

this may be that data obtained from the JSE did not necessarily reflect the same patterns and

relationships as those obtained from larger exchanges. Secondly, the JSE was dominated by a

few investment groups whose economic power and financial influence permeate through

crossholdings in subsidiary and related companies. Thirdly, it was primarily a mining-based

exchange in that the market capitalisation value of mining-based shares far exceeded that of

industrial-based shares.

This conclusion was supported by the findings of two further studies in the same year, by

Knight (1987) and Ooms (1987) who found evidence relating to the speed and accuracy with

which market prices reacted to dividend announcements.

In addition to their question of the validity of the South African current financial theory, Botha

et al. (1987) found support for the ‘irrelevance’ model that dividend policy does not affect

changes in shareholder wealth from year to year. Considerable controversy surrounded the

question of the effects, if any, of dividend policy on the change in shareholders’ wealth. The

depth of the controversy is highlighted by the rhetorical question asked by Fisher Black


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(1976:639): ‘What should the individual investor do about dividends in his portfolio? We don’t

know. What should the corporation do about dividend policy? We don’t know.’

In an evaluation of dividend signalling on the Johannesburg Stock Exchange, Knight and

Affleck-Graves (1987) found that the introduction of personal taxes with differential rates with

regard to capital and revenue would result in differential preferences for dividend policies

across the various categories of taxpayers. They argued that this so-called clientele effect

should not change the irrelevance conclusion if one caters for all tastes in dividend policy.

Dividend policy would not affect the value of any firms in such a setting; it would merely

determine the class of taxpayer that chose to hold shares in that firm.

The shareholder with extreme risk aversion would be able to sell a portion of his/her

shareholding and place the proceeds in the bank. Provided markets are reasonably efficient

such an investor would be in the identical wealth position as if the company distributed a similar

portion of its worth as dividends.

Knight and Affleck-Graves (1987) evaluated the dividend signalling associated with dividend

announcements by companies listed on the JSE during the 1973 – 1980 periods. Increased

dividend announcements were grouped as the “good news” portfolio and the announcements of

decreased dividends were grouped as the “bad news” portfolio. Both portfolios obtained

significant positive share price reaction in the week and the subsequent ten weeks following the

dividend announcement. Knight and Affleck-Graves (1987) concluded that the empirical

evidence suggested that dividend announcements on the JSE convey little or no information to

the market over and above that contained in the earnings announcements. A further conclusion

is that the signalling role is an unlikely explanation of the dividend phenomenon on the JSE.

They noted that the result of their study could well be due to the several methodological

shortcomings in the use of a forecasting technique to capture investors’ dividend expectations.

Bhana (1991) suggested that there is insider trading on the Johannesburg Stock Exchange and

suggests the need for stronger regulations for those trading in their own companies’ shares.

This information would enable a more efficient market. Bhana’s (1991) review of the literature

in overseas countries as well as in South Africa has revealed that insider trading is widespread

and highly profitable. In particular, insider trading related to unannounced company-specific

information has provided exceptionally large abnormal gains.

His study examined insider trading patterns and returns during the period prior to significant

changes in dividend policy – omissions and resumptions of dividends. The results indicate that


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insiders as a group seem to exhibit remarkable timing ability. Insiders purchase prior to

resumption announcement and sell prior to omission announcement. Significant changes in

insider trading patterns were detected during the six-month period prior to resumption

(omission) announcements. Company insiders who traded prior to dividend change

announcements earned consistently large positive abnormal returns (avoided large negative

abnormal returns). He concluded that insiders do time their trades in anticipation of significant

changes in company dividend policy and earn substantial excess returns from such transactions.

The existence of large insider profits represents evidence inconsistent with the strong form of

the efficient market hypothesis. The existence of statistically significant abnormal returns for a

period of six months prior to dividend announcement suggests that outsiders who merely mimic

insider trades are also likely to earn large profits.

According to Bhana (1991), the market reacts more dramatically to negative than to positive

dividend changes. This suggests that managers use dividend announcements to signal their

beliefs about the prospects of the firm. An announcement of an increase in the dividend rate

reflects management’s belief that the firm’s earnings in the foreseeable future will be

sufficiently high to sustain payment at the increased rate. Similarly, an announcement of a

dividend decrease occurs only when management is extremely pessimistic about the probability

that future earnings will be sufficient to continue dividends at their present rate.

The validity of the dividend information hypothesis hinges on the belief that a firm’s

management often possesses privileged information about the firm’s future earnings potential

and communicates this to the general investment community by altering the expected dividend.

The difference between the actual dividend declared and that ‘expected’ by the market i.e. the

unexpected change in dividends, purportedly is a signal that investors use to reassess their

estimates of a security’s value.

In 1997, in a study on the price adjustments on the JSE for announcement of share dividends,

Bhana found that a significant increase in company share price followed an announcement of a

share dividend and concluded that investors interpreted share dividends to be an important

signalling device. In 1998, Bhana found that the announcement of a special dividend conveyed

value increasing information to the market and that the gains from this information accrued to

shareholders.

A study was conducted by Graham in 1999 to consider the effect of Secondary Tax on

Companies (STC) on earnings retentions. According to Graham (1999), the introduction of


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STC should have a direct effect on a company’s dividend policy. This may result in dividends

becoming an ‘active variable’ in management’s financial strategy, as companies that continue to

pay cash dividends will suffer a double setback in the form of reduced after-tax earnings and

increased cash outflow of both the dividend and the tax thereon. Shareholders should no longer

be indifferent as to whether they receive their returns in the form of dividends or capital growth.

Graham’s analysis revealed that there was no significant difference in the retention ratios

between the years 1990 to 1993. However, there was a significant increase in the retention

ratios of companies between the years 1993 and 1995. This may have been the result of

companies reacting to STC either by reducing dividend payments or by affecting the dividend

by way of a capitalisation issue. Furthermore, when the periods 1991/1992 to 1994/1995 were

compared, representing a period before STC and a period after STC, it was found that there was

a significant increase in retention ratios after STC was introduced in 1993.

Graham commented on Keshwar’s (1983) study in which Keshwar notes that South African

managers were hesitant to reduce the dividend payout ratio because of the “unsophisticated

market reaction” to dividend cuts. He suggested that the tentative response to the introduction

of STC was part of a market education process, which was required to ensure that the cut was

favourably received. Keshwar concluded that it suggests that dividends play a consequential

role in corporate communication and control in South Africa.

Graham suggested that the introduction of STC has had the Government’s desired effect.

Companies have been encouraged to reduce the proportion of earnings paid to shareholders and

thereby retain an increased proportion of earnings. Furthermore, it seems that this new tax has

played a role in forcing management to follow active dividend policies as shareholders should

now prefer greater non-taxed (at that time - 1999) capital gains, rather than lower, highly taxed

dividends.

Thus since 1993, there has been an incentive for companies to reduce cash dividends and retain

a greater proportion of their earnings for reinvestment. Furthermore, given the relatively low

level of fixed investment in South Africa during the 1980s, this was regarded as a positive step

to generate growth within the economy (Van Blerck, 1993).

In 2001 Nell, Hamman and Smit studied the information content of dividends as indicators of

future in earnings. This study was conducted on data over a 22-year period between 1974 and

1996. They found there was no significant support for the dividend theory and that the size of

the dividend increases did not predict future earnings. The results also indicated that a change


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in the size of the dividend does not necessarily predict the size of the change in the future

earnings. They found that companies that cut dividends showed a growth in earnings in the

following years. In addition, they found the South African market to be reactionary to changes

in dividends. They found that companies that increase dividends are less likely to experience a

drop in future earnings when compared with companies with similar growth that do not change

earnings. The study concluded that stable dividends were associated with growth.

In 2001 Marx conducted a survey to establish the views of financial directors to dividend

policy. He found that financial directors acknowledge the existence of signalling and clientele

effect and agree that dividends have informational content. He surveyed 620 financial directors

and had a response of 29%.

In 2003 Wolmarans conducted a survey to ascertain whether Lintner’s (1956) dividend model

could sufficiently explain South African dividend payments. He surveyed JSE companies who

had been listed since 1994 and had paid an annual dividend. The outcome of this survey

concluded that in 2003 Lintner’s (1956) model did not fit the South African market. One of the

reasons suggested was the size of the sample used. Wolmarans specifically surveyed

companies listed since 1994, which were in the top 200 category on the 31 December 2000.

Nearly half the companies in this category were excluded, as they had not been listed for a

sufficiently long period. As with Brav et al. (2004), Wolmarans (2003) also took into

consideration that shareholders’ wealth could be distributed through the repurchasing of shares.

However, his survey only looked at dividends as part of distribution of shareholder wealth.

This review of studies indicates that some of the factors influencing dividend policy in South

Africa include: Secondary Company Tax (STC), Capital Gains Tax with respect to share

repurchase, Insider Trading, Market Signalling, the Clientele effect, the effect on shareholder

wealth and the issue of scrip dividends and share repurchases. The regulatory and accounting

changes in the market have substantially influenced the decisions faced by firms relating to

dividend decisions. The research done to date recognises these changes as they occur and we

are now in a position to explore their combined impact on dividend policy in South Africa.

The most recent work by Marx in 2001 examined financial directors’ views to dividend policy.

Subsequent work by Wolmarans established that we do not conform to Lintner’s model. These

studies however have not established the current dividend policy in South Africa and thus this

study hopes to address the this need and in so doing identify some of the factors considered in

determining dividend policy.


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4. RESEARCH QUESTIONS

Since the inception of democracy, South Africa has seen several regulatory and accounting rule

changes including the introduction of STC and CGT. This study’s aim is to identify the key

factors that drive dividend policy in South Africa today. The objectives are aligned to those

studies in a survey conducted by Brav et al in 2004 in the United States.

Secondly it also seeks to compare the empirical findings both locally and internationally with

current dividend policy thinking in South Africa, and hopes to shed some light on executives’

motives in paying dividends as well as the reasons for their policy decisions.

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5. METHODOLOGY

The most comprehensive recent international study to date is that of Brav, Graham, Harvey, and

Michaely in 2004 on Payout Policy in the 21st Century. It comprehensively covers all the issues

raised in the literature around the question of dividend policy and share repurchases.

To gain an insight into the views held by listed company Directors in South Africa three

meetings were conducted with financial analysts from; Fraters Asset Management, Sanlam

Investment Management and Investec Asset Management. The insights from these analysts

suggested that the Brav et al study was appropriate for use in South Africa.

Permission was obtained in writing from John Graham at Fuqua School of Business at Duke

University in Durham, North Carolina to use their research instrument in South Africa. It is a

questionnaire designed to be completed on-line.

A database of companies to be survey was created using McGregors directory. All the details

of JSE listed company directors are available in the McGregors directory. The directors were

selected according to the following criteria; area of responsibility as listed in the financial

statements, relevant financial qualifications and in the event of not identifying an appropriate

director the CEO/ MD was selected. The selection provided the target population to be

surveyed. Based on the selection criteria it is assumed that the specific directors selected would

have an understanding of the factors relating to dividend decisions.

Six articled clerks from Ernst & Young were used to conduct a telephonic survey of these

directors. The directors were telephoned between the third and the seventh of July 2006 to

ascertain their suitability to the survey. This also assisted in creating a level of awareness

around the survey.

The questionnaire was adapted to localize the specific South African terminology. In addition,

adjustments were made for specific differences in the treatment of tax relating to Secondary Tax

on Companies and Capital Gains Tax. The questionnaire otherwise remains unchanged to allow

comparisons across markets. A copy of the questionnaire is included in Appendix 2.

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The survey was piloted on six individuals on Wednesday 2 August 2006. The six individuals

were chosen randomly from a group of people who, like the target population, would have an

understanding of dividend policy process followed by JSE listed companies. The individuals

were as follows, three non-executive directors of listed companies: KWV, Distell and Nu-

Clicks, one financial manager of a globally listed company, Old Mutual South Africa, an

academic from UCT and a Chartered Accountant in a Big Four Professional Firm. They were

asked for comments on content, completion time and their ability to gain access to the

questionnaire on-line was assessed. They commented on the time taken for completion to be

between 12 – 15 minutes and on the accessibility of the questionnaire via the hyperlink in the e-

mail. These comments were incorporated into the cover letter. The survey was then sent via e-

mail to the 312 directors of the JSE listed companies. It was sent out on Wednesday 16 August

2006 and was accompanied by a covering letter, which can be found in Appendix 1. Their

responses were elicited on-line. Appendix 3 contains the electronic report containing these

responses.

Historically on-line surveys do not have a high response rate and therefore every effort was

made to limit poor response by telephoning the directors prior to the electronic release of the

questionnaire. The e-mail was sent out on a Wednesday because research conducted by GSB

UCT department of Information Technology (Pieterse, 2006) suggested that surveys sent out on

a Wednesday attract a better response than those sent at other times during the week. By the 31

August 2006 the response rate was 10%. This was not felt to be representative enough of the

population and a second round of the survey was sent out to the directors who had not

previously responded. By the 30 September 2006 the response rate had risen to 25%. This was

seen to be an acceptable level for the results to have validity as representative of the population.

In order to probe some of the issues in more depth, one-on-one interviews were conducted with

a sample of 12 directors chosen to include those whose companies pay dividends, those who do

not pay dividends and those who repurchase shares. Five of these were conducted face to face

and five and were recorded and transcribed. The remaining seven were conducted via

telephone. The interviews were in no way structured and some lasted for 30 minutes while one

lasted for an hour and 30 minutes. In 10 interviews the financial director was present but in two

cases both the financial director and the company secretary were present.

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The findings of the surveys and the interviews were collated and compared with the findings of

research undertaken to date on the factors driving dividend policy in South Africa. The numeric

data gathered from the matrix type questions relating to dividend and repurchase decisions was

weighted and ranked based on the summary findings. Appendix 4A contains the data for the

ranked questions. The categorical data was represented in graphical format. The comparison of

the various dividend decision factors was done by means of pair wise correlation using the

numeric data was provided. The conclusions drawn were then compared to those of Brav et al.

(2004).

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6. RESULTS

6.1 Demographic Data

6.1.1 What sectors of the JSE are represented by this survey?

The largest group of responses for this survey was received from the financial services sector,

which includes Banking, Insurance and Financial Services companies. This is followed by

manufacturing, retail and mining. The JSE is a fundamentally different exchange when

compared with the one examined by Botha, Bosch and van Zyl (1987) where they observed the

exchange to be a predominately mining based one. There were 19 industrial sectors

representing 313 firms. Their final sample was taken from seven sectors representing 33 firms,

which did not include mining.

While mining does still comprise a large portion at 21% of the exchange, the growth of the

financial services at 17%, manufacturing at 14% and retail at 9% is observed.

Proportion of responses per JSE sector

0 10 20 30 40 50 60 70 80

Retail and Wholesale

Mining, ConstructionTech

(software/biotech/etc) Communications/Media

Bank/Finance/Insurance

Manufacturing

Consulting/Service

Public Utility

Transport & Energy

other

Number of responses

Number of companies per sector

Figure 1: Proportional number of responses per JSE sector

Figure 1 above indicates the composition of the responses as a representation of the sectors of

the JSE. Appendix 4B contains a numeric table representing this data. The category of other

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includes; hotels, entertainment and leisure, property and tourism. The largest number of

responses where obtained by companies in the banking, finance and insurance section. The

largest proportions per sector are public utilities, consulting services, communication, transport

and energy, retail technology, manufacturing, other, banking and finally mining. This order of

proportional response is explained by the relative size of each sector.

6.1.2 Who makes the decisions?

The directors selected for the survey from McGregors database were financial directors and

Chief Executive Officers. Of the companies who were surveyed some supplied the detail as to

the process followed for setting dividend policy. Those interviewed were specifically

questioned as to their dividend process. Their information was collated and the process

followed by all the companies interviewed is described here after.

The financial director drafts the policy based on the company’s strategy. This policy is

presented to the board and instituted following a vote by the board. The policy is reviewed

annually and is changed in line with changes to the company’s strategy.

Three of the companies interviewed declare dividends semi-annually, 2 declared dividends

quarterly the remaining companies declare dividends annually. The dividend is suggested by

the financial director. This proposed dividend is then presented to the board that makes the

final decision by voting. Once approved, the dividend is publicly declared. This indicates clear

board involvement and scrutiny of all payout and policy decisions.

The declared dividend is published in the national newspapers and normally includes a clearly

communicated message from the company regarding their performance. Changes to the

dividend policy are clearly communicated to the market through analyst briefings and

newspaper publications and include reasons for the change.

The decisions for repurchases of shares follow a different process due to compliance with the

Companies Act. A shareholders meeting has to be called for a special resolution to be passed

by shareholders who represent a 75% majority of shares. Once the vote is passed the company

can repurchase the shares. There is however an average cap on the number of share repurchases

a company may make of 10% annually (in accordance with the company’s articles of

association). In addition, the shares repurchased have to be cancelled if they are to be held

within the same company. According to the financial directors interviewed, share repurchases

are made primarily for the purpose of distribution to shareholders and remuneration of

employees through employee share schemes and are held in special purpose vehicles like share

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trusts. The distribution of capital to shareholders by means of a share repurchase is an

alternative to a special dividend. The advantage of this is that share repurchases are free of STC

if paid out of share premium.

The majority of respondents were financial directors who are directly involved with drafting the

policy and declaring dividends.

6.1.3 Range of responses

Of the 81 companies who responded, 39% generate revenues below a billion rand and 45%

generate far in excess of five billion rand. This demonstrates the breadth of the range of the

respondents as well as the spread of companies in terms of size on the JSE.

Revenue distribution of participants

0 5 10 15 20 25 30

Less than R20 million

R20-200 million

R200m - 1billion

R1-5 billion

R5 – 20 billion

More than R20 billion

number of companies percentage of companies

`

Figure 2: Revenue distribution of participants

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This breadth of range is also observed by the number of employees per company as indicated by

figure 3 below. 40% of companies have less than 2499 employees while 60% have more than

2500 with 32% of those being in excess of 10 000.

Number of employees

0 5 10 15 20 25 30 35

Less than 100

100-499

500-999

1,000-2,499

2,500-4,999

5,000-9,999

More than 10,000

percentage of responses Number of responses

Figure 3: Number of employees of participating companies

6.1.4 The factors that affect dividend decisions as indicated respondents.

Data collected indicated in figure 4 that there is a strong positive correlation between the current

share price and the annual dividend per share during the last year. As expected the dividend per

share is positively correlated to earnings per share in the last year. The correlation between the

debt to total assets ratio and the three factors namely annual dividends per share, Income

statement EPS and the PE ratio is positive but very weak. There is no correlation between debt

to total assets ratio and the current share price. The factor with the strongest positive correlation

to the PE ratio is annual dividends per share during the last year. While the PE ratio is

positively correlated to Income statement EPS over the past few years the correlation is very

weak. None of the factors are negatively correlated.

FactorsDebt/total

assets ratio

Annual dividends per

share during the last year

Income statement EPS during the

last year

P/E ratio over the past few

yearsCurrent share price

Debt/total assets ratio 1.00Annual dividends per share during the last yea 0.03 1.00Income statement EPS during the last year 0.06 0.86 1.00Price/Earnings ratio over the past few years 0.11 0.31 0.09 1.00Current share price 0.00 0.93 0.89 0.19 1.00

Yellow indicates strongest positive correlation

Figure 4: Correlation table of factors affecting dividend decisions

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6.1.5 Distribution of capital

When asked hypothetically what they would do if they were to payout cash for the first time

58% of respondents indicated that they would choose dividends as the method of distribution.

33% indicted the use a combination of dividends and repurchases.

Paying capital for the first time

0 10 20 30 40 50 60 70

dividends only

share repurchases only

some combination of dividends andrepurchases

Percentage of responses Number of responses

Figure 5: The alternative use of capital

6.1.6 Valuation of companies

44% of companies believe their shares to be somewhat undervalued but 35% indicated that their

shares are correctly valued.

The value of our shares

0 10 20 30 40 50

greatly undervalued

somewhat undervalued

somewhat overvalued

greatly overvalued

correctly valued

Percentage of responses Number of responses

Figure 6: Participating companies observation regarding the value of their shares

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6.1.7 What is done with the cash generated by companies?

The results from question 1 indicate that the payment of dividends dominates as the preferred

mechanism of distribution to shareholders. None of the companies who responded only

repurchase shares and pay no dividends. 39% of respondents both pay dividends and

repurchase shares. This may be the result of the relative newness of the repurchase practice of

South African companies. Repurchases have only been allowed since 1999 in South Africa.

16% of the companies chose to neither pay dividends nor repurchase shares in the past three

years, the preferred use of those retained funds is investment followed by merger and

acquisition opportunities.

In the past 3 years

0 10 20 30 40 50

Both paid dividends and repurchasedshares

Only paid dividens

Only repurchased shares

Neither paid dividends norrepurchased shares

Number of responses Percentage of responses

Figure 7: Historic payout decision by companies who responded

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6.1.8 The Alternate use of Funds

Figure 8 below indicates the alternate use of funds by companies paying dividends and

repurchasing shares. Companies paying dividends indicated that their alternative use of funds

would be investments 34%, mergers and acquisitions 29% and repurchase of shares 21%. The

interviews conducted indicated that funds are retained for investment and expansion purposes.

That expansion may be via merger or acquisition. Companies who repurchase shares indicates

that their alternate use of funds would be mergers and acquisitions and investments at 29%

payment of dividends at 21%. Debt reduction is a third order consideration when considering

alternate uses of funds.

Alternative use of funds

0 10 20 30 40

retain as cash

invest more

mergers/acquisitions

repurchases/dividends reduce debt

Dividends Repurchases

Figure 8: The indicated alternate use of funds by participating companies retained funds

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6.2 Dividend Decisions

6.2.1 What are companies views regarding dividends?

6.2.1.1 Earnings per Share

The factor given the highest priority when making dividend decisions is a sustainable change in

earnings. 90% of companies will only increase dividends if they are able to sustain the change

in earnings and 52% maintained that dividends were targeted as a percentage of earnings - this

is however not a strict goal. 53% of companies are reluctant to make dividend changes that

might have to be reversed in the future. 47% of respondents rated a temporary change in

earnings as important to making dividend decisions.

Other factors targeted regarding dividend decisions included earnings cover, dividends per

share, dividend cover and cash flow forecast. 79% of companies consider the level of dividends

per share paid in recent years when deciding on the next dividend.

88% of companies regard the stability of future earnings to be important. 61% of companies

indicated that they try to maintain a smooth dividend stream from year to year. 65% said that

they try to avoid reducing dividends per share.

Liquidity of assets and extra cash relative to desired cash-holdings was regarded as very

important by 29% of all companies surveyed. The dividends would therefore not have to be

externally funded.

6.2.1.2 Signalling

87% of companies surveyed agreed that dividend decisions convey information about the

company to investors. Of this 87% - 39% strongly agreed. While 71% said that maintaining

consistency with their historic dividend policy is very important. 75% agree that there are

negative consequences to reducing dividends. 68% of companies agree that they consider the

change or growth in dividends per share when making dividend decisions.

51% of companies indicated that the market price of their shares was an important when

considering the dividend decision. Only 23% of companies agree that they use dividend policy

to improve their image with investors amongst the competition. 83% of companies disagree

that paying dividends signals their ability to borrow funds or pass up on investment, which

improves their competitive position.

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55% of companies disagreed that paying dividends may signal their lack of profitable

investments. 75% disagreed that paying dividends may signal their strength to pass up on those

profitable investments.

6.2.1.3 Valuation of Company

63% of companies believe that dividends are as important now to the valuation of shares in their

industry as they were 15 to 20 years ago. 52% of companies agree that paying dividends makes

a firm’s shares less risky (vs. retained earnings). 53% of companies disagree that dividend

policy is a tool used to attain a desired credit rating. 45% of companies surveyed indicated that

flotation costs to issuing additional equity was unimportant to the dividend decision.

6.2.1.4 Investment plans

73% of companies make dividend decisions after investment plans are determined thus

supporting the fact that one of the priority uses of retained funds is investment opportunities.

Companies did not strongly support the need to reduce cash, as a means of disciplining the firm

to make efficient decisions 41% rated this factor as neutral and 32% rate it unimportant to

dividend decisions.

52% of companies agreed that they would rather raise new funds than reduce dividends to

undertake a profitable project. This correlates to the high percentage of companies who agree

that there are negative consequences to reducing dividends.

21% of respondents agreed that the cost of raising external capital was lower than the cost of

cutting dividends, 40% however disagreed.

6.2.1.5 Tax

The liability for Secondary Tax on Companies was rated by 38% of the respondents as

unimportant to dividend decisions.

6.2.1.6 Competitors

The dividend policies of competitors or other companies in the specific industry were

considered by 57% of companies surveyed to be unimportant but the interviews revealed that

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the industry norm was strictly adhered to particularly in the retail industry which is typically a

cash rich business.

6.2.1.7 Clientele effect

55% of companies surveyed indicated that the influence of institutional shareholders is

important to the dividend decision. This was confirmed by the interviews conducted,

Companies with large institutional investment have experienced pressure from those investors

to increase dividends. 45% of companies surveyed believe that dividend decisions are

important in terms of attracting institutional investors to purchase shares. This confirms that

institutions desire dividend income; there would be a tax advantage to this form of income from

a company perspective. Dividends received are not taxable. Should the company receiving

those dividends choose to pay them out to its shareholders the dividends would not be taxable

due to the secondary tax on companies already having been paid out by the first company.

Only 29% of companies surveyed regarded the need to attract retail investors as important.

40% of companies disagreed with the view that they pay dividends to attract investors subject to

"prudent man" investment restrictions.

Companies who indicated that it was unimportant to attract institutional investors for their

ability to monitor management decisions confirmed this.

Percentage of shares owned by corporate insiders

5% 5 – 10 % 11 – 20 %

Figure 9: Percentage of shares owned by corporate insiders

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Figure 9 above demonstrates the answer to question 9 regarding the percentage of shares owned

by corporate insiders in South Africa. 52% hold between 11 – 20% of the companies surveyed.

This indicates the large participation by institutions in investment in other companies. Results

from the interviews confirm that institutions hold by far the majority of all listed company

shares.

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6.3 Repurchase Decisions

Repurchases are primarily driven by investment decisions. Merger and acquisition strategy are

equally as important when shares are being considered for repurchase. It is must be noted that

dividends are considered as an alternate form of capital distribution to repurchases.

Alternative use of funds used for repurchases

0 10 20 30 40

retain as cash invest more

mergers/acquisitionspay more dividends

reduce debt

Number of Responses Percentage of Responses

Figure 10: The alternative use of funds from repurchases

Share repurchases are a relatively new practice in South Africa having only been allowed since

1999. 42% of companies surveyed indicated that they had repurchased less than 1% of their

company shares in the last 3 years. 23% had repurchased between 1-3% and 23% had

repurchased 10% or more.

Percentage of share repurchased in the last 3 years

0 10 20 30 40 50

Less than 1%

4-6%

10% or more

Number of reponses Percentage of responses

Figure 11: Percentage of shares repurchased by companies that responded in the last 3 years

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6.3.1 What are companies views regarding repurchase decisions?

6.3.1.1 Earnings per share

When repurchasing shares the increase in earnings per share is rated by 63% of companies

surveyed as the highest priority factor. The stability of future earnings and market price of

shares were rated as being of equal importance when making repurchase decisions.

Maintaining sustainable earnings was considered important by 45% of companies surveyed. A

temporary change in earnings was rated by 50% as unimportant and 36% rating it neutral when

making repurchase decisions. 45% of companies surveyed repurchase shares to offset the

dilution effect of share option plans to other share programs. Maintaining consistency with

historic repurchase policy was rated unimportant by 51% of companies and neutral by 28% of

companies.

6.3.1.2 Signalling

78% of companies agreed that repurchase decisions convey information about the company to

investors. The possibility that repurchasing indicates a lack of profitable investments to

investors was rated as unimportant by 46% and neutral by 43% in terms of making repurchase

decisions. 33% of respondents rated the negative consequences to reducing repurchases as

neutral and 46% as unimportant.

6.3.1.3 Valuation of the company

The large majority of respondents disagreed with the statement that repurchases are as

important now to the valuation of shares as they were 15 to 20 years ago. 42% of firms

disagreed that repurchasing makes a firm’s shares less risky (vs. retaining earnings) 40% of

respondents were neutral.

45% of companies indicated the gains made by selling shareholders who were cashing out were

unimportant to them. Floatation costs to issuing additional equity was rated by 47% of

companies as unimportant and 34% as neutral. 65% disagreed with the fact that the repurchase

policy was used as a tool to attain a desired credit rating. The choice to use repurchases rather

than dividends due to share options not being dividend protected was rated as unimportant by

47% of companies.

6.3.1.4 Investment plans

85% of repurchase decisions are made after investment plans are determined. 75% of

companies regard repurchases as important when considering the availability of good

investment opportunities for the firm to pursue. Merger and acquisition strategy of companies

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ranks second to investments when considering repurchase decisions. 53% of companies

repurchase because their shares because they are a good investment relative to other available

investments.

The liquidity of shares was rated as unimportant by 38% of companies. Contrary to the

responses on dividends, 71% of companies surveyed indicated that having extra cash/liquid

assets relative to their desired cash holdings was important to repurchase decisions. 65% of

companies surveyed indicated that accumulating shares to resist a takeover bid was

unimportant.

Changing the capital structure was rated important by 33% of respondents, unimportant by 26%

of respondents and 33% were neutral on the importance of this factor when considering

repurchase decisions. 68% stated that they would rather reduce repurchases than raise new

funds to undertake a profitable project. The majority of companies surveyed regarded the

sophistication of investors as neutral in terms of importance of their repurchase decision.

6.3.1.5 Tax

51% of companies rated investors paying lower capital gains tax as unimportant. The liability

for STC when paying dividends was rated as important by 29% of respondents, neutral by 32%

and unimportant by 38%. Unlike dividends when considering repurchases the reduction of cash

in order to discipline the firm was rated slightly less important.

6.3.1.6 Competitors

60% of companies rated the repurchase policies of competitors as unimportant. 64% disagreed

that their repurchase policy was used to improve their image as an investment against the

competition. 80% of companies said they did not use repurchases to show that they can afford

debt or forgo investments to improve their competitive position.

6.3.1.7 Clientele effect

The least important factor relevant to the repurchase decision was the influence of institutional

shareholders with 38% rating it unimportant and 26% rating it neutral. Attracting institutional

investors because they monitor management decisions was rated equally between neutral and

unimportant by 40%. Attracting institutional investors to purchase our shares was rated equally

important and unimportant highlighting again the range amongst the companies who responded.

Attracting retail investors to purchase our shares was regarded as unimportant by 47% and

neutral by 43%.

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7. DISCUSSION

7.1 The findings locally

Dividends are the preferred means of distributing shareholder profits. None of the company’s

surveyed use share repurchases exclusively as a means of distributing profits. The repurchase

of shares is a relative new practice in South Africa and as such is not used as extensively as it

could be.

7.1.2 Dividends

Sustainable earnings are the most important factor when making dividend decisions. When

making a dividend decision earnings cover is a targeted goal for the value of the dividend but

this is not an inflexible rule when making dividend decisions. Consistency in dividend policy

and dividend cover is considered important factors by all of the companies surveyed. Dividends

payments follow a smooth but sticky upward trend based on secure future earnings. Decreasing

dividends have negative consequences and as a result, dividends are only increased when the

change can be maintained. Liquidity was not regarded as critical to most companies when

paying dividends.

In this regard, the results are inline with the relevance theory as established by Lintner in 1956

where dividends are sticky, tied to long-term sustainable earnings, paid by mature companies,

smoothed from year to year and target a long-term payout ratio. The results emphasize the

findings by Bhana in 1991 where he noted that an increase in the dividend rate reflects

management’s belief that the firm’s earnings in the foreseeable future will be sufficiently high

to sustain payment at the increased rate.

There is overwhelming agreement that dividends convey information. Reducing dividends

carries a penalty which was agreed to by the majority of respondents

The company’s current share price was an important consideration when making the dividend

decision. This supports the negative response by investors to reducing the dividend. The

implied negative signalling, that paying dividends indicates a lack of availability or ability to

make profitable investments was refuted by the majority of companies who responded.

Dividends are still an important factor in the valuation of companies and indicate the level of

risk in a share.

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Dividends decisions always follow investment decisions. Companies would rather raise debt

than reduce dividends.

STC was only a secondary consideration to investment and operational requirements.

While competitor’s dividend policy was not a consideration when paying dividends as indicated

by the response to the survey the dividend cover of competitors was important to the companies

interviewed.

Institutional investors are attracted to dividend paying firms. Institutional investors play a large

role in dividend decisions. Dividend policy is not designed to attract institutional investors for

monitoring management’s decisions. Dividend decisions are not aimed at attracting retail

investors.

The results find support for the findings by Marx in 2001 in South Africa, in which he found

that financial directors acknowledge the existence of signalling and clientele effect and agree

that dividends have informational content.

7.1.3 Repurchases

Increasing the earnings per share is the main reason driving share repurchases. Mergers and

acquisitions and investment opportunities are important considerations when making repurchase

decisions. The change to capital structure when making repurchase decisions was not

considered as important to repurchase decisions.

The majority of companies surveyed regarded liquidity as important to repurchase decisions.

The use of repurchases over dividends was not regarded as important. Institutional

shareholding was not regarded as important to share repurchase decisions. Repurchase

decisions are not made to introduce institutional investors for monitoring management’s

decisions. Repurchases were not regarded as important in the attraction of retail investors.

The capital gains tax liability when making repurchases was considered unimportant. STC is a

secondary consideration when making repurchase decisions.

The majority of respondents did not view the practice of repurchases as a means by which to

value a firm. Repurchases have only been allowed since 1999 and with the 10% cap on the

amount of repurchases any company can make it is not as effective a means of wealth

distribution as dividends. The actual number of shares repurchased was not part of a fixed goal

and were not targeted in any way. Repurchases are not used to gain competitive advantage.

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Repurchases like dividends convey information to investors, however the implied negative

signal relating to investment opportunities was refuted by the majority of respondents.

Repurchases are not used as a tool to signal a company’s risk appetite.

7.2 The findings compared with the Study conducted by Brav et al. in the United

States in 2004.

The 2004 survey by Brav et al, which is the basis for this study, found evidence to both support

and challenge some of the existing theory regarding dividends and repurchases. Their survey

indicated that maintaining the dividend level is a priority on par with investment decisions.

In South Africa investment decisions are a priority before dividends and repurchases are made.

This may be attributed to the fact that South Africa is a developing country with a government

using STC as a mechanism for growth by investment.

Brav et al (2004) found that there remains a strong desire to avoid dividends cuts, except in

extraordinary circumstances thus resulting in dividends that are sticky, smoothed from year to

year, and linked to permanent changes in profitability. The findings of this study concur with

these results.

Beyond maintaining the level of dividend per share, payout policy is a second-order concern

after meeting investment and liquidity needs. Policy payout is secondary to investment needs

but liquidity is not regarded as important to making dividend decisions.

There is reluctance among firms to increase dividends in tandem with increased earnings and

contrary to Lintner’s findings, they no longer view the target percentage of earnings paid out as

dividends as the primary decision variable.

The South African study revealed that dividends increased with sustainable earnings in line with

Lintner. Brav et al (2004) research indicated that dividends are targeted as a percentage of

earnings. While in South Africa the phraseology used is “ x times cover”, this has the same

meaning as “percentage of earnings”. For example: “2 times cover” means a dividend

declaration of “50% of earnings”; “3 times cover” means a dividend declaration of “33.3% of

earnings”, etc. Where in South Africa earnings indicates profit after tax.

Brav et al (2004) concluded that repurchases are extensively used. Repurchase policy is more

flexible than dividend policy and repurchase decision is secondary to investment decisions. In

addition to flexibility, factors that influence repurchases policy are;

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(i) accelerated repurchases when share price is low,

(ii) the effect of repurchases on earnings per share and

(iii) repurchases that are made out of temporary earnings increases or when good investments

are hard to find.

Of the non-paying firms, 70 percent never plan to initiate dividends and more than half do not

plan to repurchase shares.

Repurchases are not extensively used in South Africa while they are more flexible than

dividends they mimic the United States policy by being second to investment decisions. The

increase in earnings per share following a repurchase decision was one of the most important

factors regarding the decision to repurchase.

Brav et al observed that among the paying firms the overwhelming majority will use

repurchases.

Conversely in South Africa the overwhelming majority of firms will prefer to use dividends as a

means of capital distribution.

Brav et al observed that the most important factors influencing the decision to repurchase are

equity undervaluation and surplus cash.

Share price and liquidity were not regarded as being the most important factors to the

repurchase decision in South Africa.

Brav et al concluded that the critical factor influencing the payment of dividends is sustainable

increases in earnings. These results concur with those observed in South Africa

Brav et al found evidence that dividends and repurchases convey information to investors. The

South African survey concurred with these findings.

Brav et al found that there is little recognition for the effects or value of signalling. Firms do

not believe that changes in dividend policy signal the market over and above what they

explicitly tell analysts and investors. They are of the view that dividend policy merely endorses

what they communicate. In addition, signalling is not used to convey information about their

“true worth” nor do they separate themselves from their peers through (painful) dividend

payments or repurchases.

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South African firms indicated that signalling has an affect on their share price and while the

interviews concurred with the view that little more than what is communicated to the analyst is

communicated through the company announcements, the survey results indicated that company

decisions definitely have a signalling effect on the market.

Brav et al noted that dividends are attractive to individual investors but both dividends and

repurchases are equally attractive to institutions. Dividend policy cannot however be used to

alter the proportion of institutional investors among investors.

In the South African survey companies indicated that dividends are more attractive to

institutional investors than repurchases. Dividend policy could be used to alter the proportion

of institutional investors.

Regarding the effect of tax in determining dividend policy Brav et al found it to be of second-

order importance. Similarly in South Africa it was found that both secondary tax on companies

and capital gains tax were found to be of secondary importance to both dividend and repurchase

decisions.

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8. CONCLUSION

This study’s aim was to identify dividend policy in South Africa and the factors that are used to

determine dividend policy. In addition it compares the current policy established in South

Africa with the empirical findings internationally.

The study surveyed a population of 312 listed companies on the JSE by means of an on-line

questionnaire submitted electronically. In addition 12 companies were chosen from the

population as a sample to gain some detailed insight into the responses given in the survey.

25% of companies responded to the survey and their responses where combined with the

information obtained from the interviews to formulate the results discussed in the paper.

8.1 The results on dividend policy in South Africa revealed the following:

The primary reason for paying dividends and repurchasing shares is to distribute capital to

investors and the key reason when making those decisions is a sustainable increase in earnings

per share. Dividends convey information and there is a penalty for reducing dividends. The

market price of shares is very important to both dividend and repurchases decisions. Despite

their introduction in 1999 repurchases are not being extensively used. Dividends are attractive

to institutional investors and they do influence the decision by companies to pay dividends. Tax

considerations are not regarded as important when making dividend and repurchase decisions.

There is a significant focus on investment by listed companies in South Africa when making

dividend and repurchase decisions, this is in line with the governments initiative to stimulate

growth in the economy.

8.2 In comparison with the international research, the results reveal the

following:

In South Africa dividends and repurchases follow the investment decision, whereas in the USA

the decisions are on par. In South Africa dividends decisions mimic the Lintner theory of

relevance. Repurchases are not used as extensively as in the USA and are not the preferred

means of capital distribution. Signalling does exist in both markets but South African

companies believe that their announcements convey information to the market whereas Brav et

al found that company announcements endorse what is already known. Dividends are attractive

to institutional investors in South Africa whereas in the USA they are more attractive to

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individual investors. Tax is of second order importance in both in South Africa and

Internationally.

8.3 Limitations

The limitations of this survey relate to the mechanism of administrating the survey and the fact

that survey and interviews measure beliefs and not necessarily action. In addition, field studies

may face the objection that market participants do not have to understand the reason they do

things for economic models to be valid (Friedman’s (1953) “as if” thesis). This may be

particularly relevant in this study because executives are asked about both the assumptions and

predictions of specific theories. Friedman’s “as if” thesis basically says that it is unimportant

whether the assumptions of a particular economic model are valid, or whether economic agents

understand why they take certain actions, as long as the theory can predict the agents’ actions.

While it was predominantly financial directors who would reflect the views of executives who

completed this study, financial directors are not the only individuals involved in making

dividend policy decisions.

The method of administration of questionnaire based surveys typically yield a low response

rate, Marx’s questionnaire based study of financial directors’ views on dividend policy in 2001

yielded a 29% response and internationally Brav et al in 2004 achieved a 16% response rate to

their study on payout policy in the 21st Century.

8.4 Suggested future research

Further research in this field may consider an empirical study on payment of dividends in South

Africa. In particular, it would be beneficial to test the effect of the institutional investment

influence on dividend payments. In addition the area relating to the use of dividend payments

to finance Black Economic Empowerment Investment Deals needs further investigation.

Research would need to consider the success of the repayment and the appropriateness of this

means of financing for BEE deals.

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9. REFERENCES Ang JS, 1987, Do Dividends Matter? A Review of Corporate Dividend Theories and Evidence.

Salomon Brothers, New York University.

Baker M and Wurgler J, 2004, “A catering theory of dividends”, Journal of Finance 59,

1125–1165.

Bhana N, 1991a, “Reaction on the Johannesburg Stock Exchange to major shifts in dividend

policy”, South African Journal of Business Management, 22, 33 – 40.

Bhana N, 1991b, “Significant changes in dividend policy and insider trading activity on the

Johannesburg Stock Exchange”, South African Journal of Business Management, 22, 75 –

82.

Bhana N, 1997, “Price adjustment s on JSE for announcements of share dividends”,

Investments Analyst Journal, 46, 35-44.

Bhana N, 1998, “The share price reaction on the Johannesburg Stock Exchange for special

(extra) dividend announcements”, Investment Analysts Journal, 47, 5 – 15.

Black F, 1976, “The Dividend Puzzle”, Journal of Portfolio Management 2, 5-8.

Botha D, Bosch JK and Van Zyl G J J, 1987, “The effect on dividend policy on changes in

shareholders’ wealth”, South African Journal of Economics, 55, 101-113.

Brav A, Graham JR, Harvey CR and Michaely R, 2003, “Payout Policy in the 21stCentury”

Journal of Financial Economics, 77, 483 – 527.

Damodaran A 2001, Corporate Finance: theory and practice 2nd Edition, John Wiley & Sons

Inc, United States of America.

DeAngelo H and DeAngelo L, 2006, “ The irrelevance of the MM dividend irrelevance

theorem”, Journal of Financial Economics, 79, 293–315.

DeAngelo H, DeAngelo L and Skinner D, 2004, “Are dividends disappearing? Dividend

concentration and the consolidation of earnings” , Journal of Financial Economics, 72,

425–456.

DeAngelo H, DeAngelo L and Stulz R, 2006, “Dividend policy and the earned/contributed

capital mix: a test of the lifecycle theory.” Journal of Financial Economics, 81, 227-254.

11BReferences 41

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Fama E F, Fisher L, Jensen M C and Roll R, 1969, “The Adjustment of Stock Prices to New

Information”, International Economic Review, 10, 1 – 21.

Fama E F and French K R, 2001, “Disappearing dividends: changing firm characteristics or

lower propensity to pay?” Journal of Financial Economics, 60, 3-43.

Fama E F and French K R, 2002, “Testing Trade-Off and Pecking Order Predictions about

Dividends and Debt”, The Review of Financial Studies, 15, 1-35.

Firer C, Ross S A, Westerfield RW and Jordan BD, 2004, Fundamentals of Corporate

Finance 3rd Edition, McGraw Hill, London.

Friedman M, 1953, The Methodology of Positive Economics, in Essays in Positive Economics,

The University of Chicago Press.

Graham M, 1999, “The effect of STC on earnings retention”, South African Journal of

Accounting Research, 13,63-74.

Gordon M J, 1959, “Dividends Earnings and Stock Prices.” Review of Economics and

Statistics, 41, 99–105.

Gordon M J, 1963, “Optimum Investing and Financing Policy.” Journal of Finance, 18,264–

272.

Grullon G, Michaely R and Swaminathan B, 2002, “Are dividend changes a sign of firm

maturity?” Journal of Business, 75, 387–424.

Knight R F and Affleck-Graves J F, 1987, “An evaluation of dividend signalling on the

Johannesburg Stock Exchange”, South African Journal of Business Management, 18, 79 –

82.

Lintner J, 1956 “Distribution of Incomes of Corporations among Dividends, Retained Earnings

and Taxes.” American Economics Review, 46, 97-113.

Lintner J, 1962 “Dividends, Earnings, Leverage, Stock Prices and the Supply of Capital to

Corporations.” Review of Economics and Statistics, 44, 243 -269.

Marx J, 2001, “Emperical Findings on Directors’ Views on Dividend Policy”, Management

Dynamics, 10(2), 50-66.

Modigliani F and Miller M, 1958, “The Cost of Capital, Corporation Finance and the Theory

of Investment.”, The American Economic Review, 48(3),261–297.

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Miller M and Modigliani F, 1961, “Dividend policy, growth, and the valuation of shares.”,

Journal of Business, 34, 411–433.

Nell A E, Hamman W D and van de M Smith E, 2001 “Dividendveranderings in Suid-Afrika

– Tekenend van die verlede of toekoms?”, Studies in Economics and Econometrics, 25, 50-

66.

Ooms LL, Archer AA and van der M Smit E, 1987, “The Informational Content of

Dividends on the Johannesburg Stock Exchange: An empirical Analysis”, South African

Journal of business management, 18, 187 – 197.

Pettit RR, 1977, “Taxes, Transactions Cost and the Clientele effect of Dividends”, Journal of

Financial Economics, 5, 419 – 436.

Sènéque PJC and Gourley BM, 1983, “Dividend Policy and Practice in South Africa” The

Investment Analysts Journal, 21, 35 – 41.

Van Blerk MC, 1993, “Secondary Tax on Companies: a legislative guide”, South African Tax

Review, 6, 38 – 49.

Wolmarans, H P, 2003, “Does Lintner’s dividend model explain South African dividend

payments?”, Meditari, 11, 243-254.

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10. INTERVIEWS CONDUCTED:

Name Title Company Date Div/Repurchase

*Rene Drotsky FD Idion Technology Holdings Ltd 4 Sept Don’t pay

Nico Ackerman FD John Daniel Holdings Ltd 7 Sept Don’t pay

*Rob Frankel FD Control Instruments Group Ltd 7 Sept Pay

*Gerhard Swiegers FD Medi-Clinic Corporation Ltd 8 Sept Pay

*Mr Copelyn FD Hosken Ltd 12 Sept Repurchase

Wayne v d Merwe FD Truworths International Ltd 12 Sept Repurchase

Sean MacKay FD CBS Property Portfolio Ltd 13 Sept Don’t pay

Merwe Botha FD Distell 19 Sept Pay

*Hishaam Ally FD Sekunjalo Investments Ltd 20 Sept Don’t pay

*R van Dyk FD Spur Corporation Ltd 21 Sept Repurchase

Ronnie Steyn FD Foschini Ltd 29 Sept Repurchase

*Machiel Reyneke FD Santam Ltd 29 Sept Pay

* Telephonic Interviews

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11. APPENDICES

Appendix 1: Cover letter to directors

We would appreciate your views on Dividends

Why do firms pay dividends? Fisher Black once described this issue as a dividend “puzzle”

with “pieces that just don’t seem to fit.”

To help explain this puzzle, financial economists have developed a profusion of theories—

signalling, tax-preference, agency costs and wealth distribution explanations. This has led to the

observation that, “we have moved from a position of not enough good reasons to explain why

dividends are paid to one of too many.”

This study represents the research component of my MBA degree and is supervised by

Professor Colin Firer of UCT GSB.

The survey is conducted on line and will take no more than 15 minutes. Directors of all JSE

listed companies will be approached to participate in the survey. Its objective is to gain a better

understanding of the factors which drive dividend policy decisions in South Africa. If you

received this survey and you are not the most appropriate person to complete it please give it to

someone who is actively involved with your firm’s dividend policy.

Practitioners who are faced with making the dividend decision are in the best position to help

resolve the dividend puzzle. As a senior decision maker in the South African Economy, we

would highly value your considered contribution to this study. It is an extension of a survey

conducted in the United States and the findings will help to inform a global perspective on this

subject.

I have signed a confidentiality agreement with UCT and under no circumstances will your

company be identified. The report and results will be compiled in summary and no individual

company will be mentioned.

If you would like a copy of the results please drop me an e-mail at [email protected]

Thank you in anticipation.

Alison Maytham

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Appendix 2: Questionaire

46

UCT GSB 2006 SURVEY OF CORPORATE DIVIDEND POLICY

Please answer all questions with respect to your primary class of shares and for open market repurchases. 1. During the past three years, my company has (check one)

2a. Of funds that could be used to pay dividends, the most likely alternative use would be to: (check one)

retain as cash invest more mergers/acquisitions repurchase shares 2b. Of funds that could be used to repurchase shares, the most likely alternative use would be to: (check one)

retain as cash invest more mergers/acquisitions pay more dividends

For #3 and #4, provide separate answers related to your company’s current “dividend policy” (to the left) and “share re-purchase policy” (to the right), even if your current policy is “zero dividend payout” or “do not repurchase shares”. 3. How important are the following factors to your company’s dividend / repurchase decisions?

Dividends ll

Repurchases Not at all VerNot at a

important Very

ortant imp

important y

ortant imp-2 -1 0 1 2 0 1 2 -2 -1 A temporary change in earnings A sustainable change in earnings Stability of future earnings Having extra cash/liquid assets, relative to our desired cash

holdings

The dividend/repurchase policies of competitors or other companies in our industry

Reducing cash, thereby disciplining our firm to make efficient decisions

Liability for STC when paying dividend The availability of good investment opportunities for our firm

to pursue

The influence of our institutional shareholders Merger and acquisition strategy Flotation costs to issuing additional equity Maintaining consistency with our historic dividend/repurchase

policy

The possibility that paying dividends/repurchasing indicates to investors that we are running low on profitable investments

Attracting retail investors to purchase our shares Attracting institutional investors to purchase our shares

both paid dividends and repurchased shares only repurchased shares

other_______________

reduce debt

reduce debt other______________

only paid dividends neither paid dividends nor repurchased shares

Please would you respond to this survey, whether your company currently pays dividends, repurchases shares, or neither.

Note that no company will be identified, discussed or analysed individually

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Attracting institutional investors because they monitor

management decisions

Market price of our shares 4. Do these statements agree with your company’s views?

Dividends Repurchases Not at all important

Very important

Not at all important

Very important

-2 -1 0 1 2 -2 -1 0 1 2 We make dividend/repurchase decisions after our investment

plans are determined

Dividend/repurchase decisions convey information about our company to investors

Paying dividends/repurchasing makes a firm’s shares less risky (vs. retaining earnings)

There are negative consequences to reducing dividends/repurchases

Rather than reducing dividends/repurchases, we would raise new funds to undertake a profitable project

Dividends/repurchases are as important now to the valuation of shares in our industry as they were 15 to 20 years ago

We use our dividend/repurchase policy as one tool to attain a desired credit rating

We use our dividend/repurchase policy to make us look like a better investment than our competitors

We use dividends/repurchases, to show we can afford to borrow costly external funds or pass up investments, to make us look better than our competitors

5. If you were hypothetically deciding to pay out capital for the first time, would your first payout be

dividends only share repurchases only some combination of dividends and repurchases 6. Our shares are currently (check best box)

greatly undervalued somewhat undervalued correctly valued

somewhat overvalued greatly overvalued 7. Please fill in blanks: Our company’s credit rating is approximately __________ (e.g., AA-, BBB+, no rating, etc) Our company’s debt/total assets ratio is approximately __________ (e.g., 0.0, 0.32, etc) Our company’s annual dividends per share during the last year was R __________ (e.g., R0, R0.50) Our company’s income statement EPS during the last year was R __________ (e.g., -R0.25, +R0.55) Our company’s Price/Earnings ratio over the past few years was approximately __________ (e.g., 18, n/a) The current price for our shares is R __________ (e.g., R25.12) 8. Please check one square from each category that best describes your company

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On a fully diluted basis, about what percentage of your shares are owned by corporate insiders?

5 % 5 – 10 % 11 – 20 %

Manufacturing Consulting/Service Public Utility

Answer #9 only if you paid dividends within the past 3 years 9a. When you make your dividend decisions, do you target (check best box)

level of dividends per share growth in dividends per share dividend yield

dividends as a % of earnings Other ___________________ do not target at all 9b. Is the target in 9a part of

a strict goal somewhat strict goal a flexible goal not really a goal a 9c. Do these statements describe factors that affect your company’s dividend decisions? Strongly Disagree

Strongly Agree

-2 -1 0 1 2 We consider the level of dividends per share that we have paid in recent years We consider the change or growth in dividends per share We try to maintain a smooth dividend stream from year-to-year We try to avoid reducing dividends per share We pay dividends to attract investors subject to “prudent man” investment

restrictions The cost of raising external capital is less than the cost of cutting dividends We pay dividends to show that our firm is strong enough to raise costly external

capital if needed We pay dividends to show that our firm is strong enough to pass up some

profitable investments We are reluctant to make dividend changes that might have to be reversed in the

future OTHER factors that affect our dividend policy are: ________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ Answer # 10a and # 10b only if you repurchased shares within the last 3 years 10a. What percentage of your shares have you repurchased in the last 3 years?

<1% 1-3% 4-6% 7-9% 10% or more not sure

Trans. & Energy ia Other _____________

Retail and Wholesale Mining, Construction Tech (software/biotech/etc) Communications/Med Bank/Finance/Insurance

2,500-4,999 5,000-9,999 >10,000

100-499 500-999

R20-200 million R200m - 1billion R1-5 billion R5 – 20 billion > R20 billion

Industry Number of Employees Revenues 1,000-2,499 <100 <R20 million

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0b. For the actual number of shares you repurchase in a given year, do you target (check best box)

level of repurchases growth in repurchases repurchases as a % of earnings

other do not target at all

0c. Is the target in 10b part of

a strict goal a somewhat strict goal a flexible goal not really a goal

0d. How important are the following factors to your company’s share repurchase decisions

1

1

1 ?

1

Strongly Strongly Disagree -2 -1

Agree 2 0

Investors paying Capital Gains lower taxes on repurchases Increasing earnings per share Accumulating shares to resist a takeover bid Changing our debt-to-equity ratio so it is closer to our desired debt ratio Whether our shares are a good investment relative to other available investments Offsetting the dilutionary effect of share option plans or other share programs Using repurchases rather than dividends because share options are not dividend

protected Selling shareholders cashing out and taking some benefits of the repurchase

program with them The float or overall liquidity of our shares The belief that well-informed investors benefit more from a repurchase program

than do less-informed investors OTHER factors that affect our share repurchase policy are: _________________________________________

__________________________________________________________________________________________

our answer to # 11 will only be used to gather publicly available data. No company will be identified by name or

Yanalyzed individually, nor will the information in this survey be shared with anyone except in aggregate form.

1. Our company name is ________________________ 1

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THANK YOU FOR YOUR HELP !!

Other comments ? __________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ If you would like an advanced copy of the survey results, please provide us with your email address: ____________________________________ Please return to Alison Maytham E-mail – [email protected] P.O.Box 319 Newlands 7725 Contact details Tel – 021 443 0366 Cell - 083 461 7921 Fax – 021 443 1200

mailto:[email protected]

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Appendix 4: Analysis of Survey Questionnaires

A: Analysis of Survey Weightings 2 1 0 -1 -2 weighting How important are the following factors to your company’s dividend decisions?

Very Important Important # Neutral # Unimportant # Very

Unimportant # Response Total

A sustainable change in earnings 45 23 45 23 6 3 4 2 0 0 67 Stability of future earnings 41 21 47 24 10 5 2 1 0 0 65 The availability of good investment opportunities for firm 39 20 51 26 6 3 2 1 2 1 63

Merger and acquisition strategy 35 18 39 20 20 10 4 2 2 1 52 Maintaining consistency with our historic dividend policy 16 8 55 28 18 9 8 4 4 2 36

Having extra cash/liquid assets, relative to our desired cash holdings 29 14 27 13 31 15 12 6 0 0 35

The influence of our institutional shareholders 12 6 43 22 29 15 8 4 8 4 22 Market price of our shares 18 9 33 17 27 14 10 5 12 6 18 Attracting institutional investors to purchase our shares 14 7 31 16 31 15 14 7 10 5 13

Reducing cash, thereby disciplining our firm to make efficient decisions 12 6 25 13 35 18 24 12 4 2 9

A temporary change in earnings 6 3 41 21 22 11 22 11 10 5 6 Liability for STC when paying dividend 8 4 27 14 29 15 27 14 8 4 0 Attracting institutional investors because they monitor management decisions 4 2 24 12 41 21 18 9 14 7 -7

Attracting retail investors to purchase our shares 4 2 25 13 31 16 25 13 14 7 -10 Flotation costs to issuing additional equity 4 2 22 11 29 15 27 14 18 9 -17 The dividend policies of competitors or other companies in our industry 4 2 16 8 24 12 35 18 22 11 -28

The possibility that paying dividends indicates to investors that we are running low on profitable investments

4 2 6 3 35 18 39 20 16 8 -29

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2 1 0 -1 -2 5. How important are the following factors to your company’s repurchase decisions?

Very Important Important Neutral Unimportant Very

Unimportant

Merger and acquisition strategy 34 16 45 21 13 6 9 4 0 0 49 The availability of good investment opportunities for our firm to pursue 30 14 45 21 19 9 6 3 0 0 46

Having extra cash/liquid assets relative to our desired cash holdings 27 13 44 21 21 10 8 4 0 0 43

Stability of future earnings 23 11 38 18 19 9 17 8 2 1 30 Market price of our shares 28 13 37 17 17 8 7 3 11 5 30 A sustainable change in earnings 15 7 30 14 26 12 26 12 2 1 14 The influence of our institutional shareholders 15 7 26 12 32 15 19 9 9 4 9 Reducing cash thereby disciplining our firm to make efficient decisions 4 2 34 16 30 14 21 10 11 5 0

Attracting institutional investors to purchase our shares 2 1 34 16 26 12 23 11 15 7 -7

Liability for STC when paying dividend 6 3 23 11 32 15 21 10 17 8 -9 Attracting institutional investors because they monitor management decisions 2 1 17 8 40 19 23 11 17 8 -17

Floattion costs to issuing additional equity 2 1 17 8 34 16 28 13 19 8 -19 The possibility that repurchasing indicates to our investors that we are running low on profitable investments

0 0 11 5 43 20 35 16 11 5 -21

A temporary change in earnings 0 0 13 6 36 17 43 20 9 4 -22 Maintaining consistency with our historic repurchase policy 4 2 17 8 28 13 30 14 21 10 -22

Attracting retail investors to purchase our shares 0 0 11 5 43 20 30 14 17 8 -25 The repurchase policies of competitors or other companies in our industry 0 0 11 5 30 14 43 20 17 8 -31

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2 1 0 -1 -2 6. Do these statements agree with your company’s views in terms of dividends?

Strongly Agree Agree Neutral Disagree Strongly

Disagree

Dividend decisions convey information about our company to investors 25 12 62 30 4 2 8 4 0 0 50

There are negative consequences to reducing dividends 21 10 54 26 12 6 12 6 0 0 40

We make dividend decisions after our investment plans are determined 29 13 44 21 10 5 17 8 0 0 39

Dividends are as important now to the valuation of shares in our industry as they were 15 to 20 years ago

15 7 48 23 25 12 12 6 0 0 31

Rather than reducing dividends, we would raise new funds to undertake a profitable project 10 5 42 20 19 9 29 14 0 0 16

Paying dividends makes a firm’s shares less risky (vs. retained earnings) 8 4 44 21 23 11 21 10 4 2 15

We use our dividend policy to make us look like a better investment that our competitors 4 2 23 11 25 12 33 16 16 7 -15

We use our dividend policy as one tool to attain a desired credit rating 4 2 19 9 25 12 40 19 13 6 -18

We use dividends, to show we can afford to borrow costly external funds or pass up investments, to make us look better than our competitors

0 0 4 2 13 6 45 21 38 18 -55

2 1 0 -1 -2 7. Do these statements agree with your company’s views in terms of repurchase decisions?


Disagree

We make repurchase after decisions after our investment plans are determined 39 18 46 21 11 5 4 2 0 0 55

Repurchase decisions convey information about our company to investors 17 8 61 28 13 6 9 4 0 0 40

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Repurchases are as important now to the valuation of shares as they were 15 to 20 years ago 0 0 22 10 39 18 37 17 2 1 -9

Paying Repurchasing makes a firm’s shares less risky (vs. retaining earnings) 4 2 15 7 39 18 35 16 7 3 -11

There are negative consequences to reducing repurchases 4 2 15 7 33 15 33 16 13 6 -17

Rather than reducing repurchases, we would raise new funds to undertake a profitable project 2 1 13 6 17 8 48 22 20 9 -32

We use our repurchase policy to make us look like a better investment than our competitors 0 0 16 7 20 9 34 15 30 13 -34

We use our repurchase policy as one tool to attain a desired credit rating 0 0 11 5 24 11 39 18 26 11 -35

We use repurchases, to show we can afford to borrow costly external funds or pass up investments, to make us look better than our competitors

2 1 4 2 13 6 41 18 39 16 -46

2 1 0 -1 -2 17. Do these statements describe factors that affect your company’s dividend decisions?


Disagree

We consider the level of dividends per share that we have paid in recent years 11 5 68 30 11 5 7 3 2 1 35

We try to avoid reducing dividends per share 20 9 45 20 20 9 11 5 2 1 31 We consider the change or growth in dividends per share 11 5 57 25 20 9 9 4 2 1 29

We try to maintain a smooth dividend stream from year to year 9 4 52 23 20 9 16 7 2 1 22

We are reluctant to make dividend changes that might have to be reversed in the future 2 1 51 21 23 10 16 7 7 3 10

We pay dividends to attract investors subject to "prudent man" investment restrictions 5 2 33 14 23 10 26 11 14 6 -5

The cost of raising external capital is less than the cost of cutting dividends 0 0 21 9 40 17 33 14 7 3 -11

We pay dividends to show that our firm is strong enough to raise costly external capital if needed 0 0 14 6 23 10 36 16 27 12 -34

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We pay dividends to show that our firm is strong enough to pass up some profitable investments 0 0 9 4 16 7 40 17 35 15 -43

2 1 0 -1 -2

22. How important are the following factors to your company’s share repurchase decisions?

Very Important Important Neutral Unimportant Very

Unimportant

Increasing earnings per share 14 6 49 21 19 8 7 3 12 5 20 Whether our shares are a good investment relative to other available investments 9 4 44 19 28 1 9 4 9 4 15

Offsetting the dilutionary effect of share option plans to other share programs 5 2 40 17 26 11 16 7 14 6 2

Changing our debt-to-equity ratio so it closer to our desired debt ratio 2 1 33 14 30 13 26 11 9 4 -3

The float or overall liquidity of our shares 7 3 23 10 33 14 26 11 12 5 -5 The belief that well-informed investors benefit more from a repurchase program than do less informed investors

0 0 16 7 60 26 9 4 14 6 -9

Selling shareholders cashing out and taking some benefits of the repurchase program with them 2 1 7 3 47 20 26 11 19 8 -22

Using repurchases rather than dividends because share options are not dividend protected 0 0 12 5 42 18 21 9 26 11 -26

Investors paying lower Capital Gains Taxes on repurchases 0 0 2 1 47 20 30 13 21 9 -30

Accumulating shares to resist a takeover bid 0 0 5 2 30 13 44 19 21 9 -35

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B: Industry Representation

Industry Yes No Grand Total Communications and Media 3 9 12

Consulting Businesses 1 9 10 Finance Banking and Insurance 9 47 56

Manufacturing 6 38 44 Mining and Construction 5 64 69

Other 7 49 56 Public Utility 1 2 3

Retail and Wholesale 7 23 30 Technology 5 27 32

Transport and Energy 1 11 12 Grand Total 45 279 324

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