Volume 11 - Issue 59
/ November 2022
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http:// www.amazoniainvestiga.info ISSN 2322- 6307
DOI: https://doi.org/10.34069/AI/2022.59.11.14
How to Cite:
Aman, Q., Altass, S., & Qadri, F.A. (2022). Factors affecting the dividend payout: Evidence from Saudi Arabia. Amazonia
Investiga, 11(59), 151-160. https://doi.org/10.34069/AI/2022.59.11.14
Factors affecting the dividend payout: Evidence from Saudi Arabia
Received: November 8, 2022 Accepted: December 15, 2022
Written by:
Qaiser Aman45
https://orcid.org/0000-0003-4358-7940
Sultan Altass46
https://orcid.org/0000-0003-3733-7400
Faran Ahmad Qadri47
https://orcid.org/0000-0003-4892-0335
Abstract
Businesses need financing and investors need
higher returns. Both are indispensable for each
other. Keeping in view the above fact, the current
study examined the dividend payout factors
affecting the Saudi cement industry. Secondary
data are used to investigate the mentioned
purpose over the period from 2006 to 2020. It
was noticed that cement industry has become
crucial for all other industries in general and
particularly to the construction industry of Saudi
Arabia. The study has employed the regression
examination to explore the association regarding
endogenous and exogenous variables. The
present study has used the dividend payout ratio
as an endogenous variable, while exogenous
variables are liquidity (CR), profitability (ROA),
FS (Firm Size), and financial leverage. The study
reported that ROA has statistical significant and
positive association with depended variable i.e.
(dividend disbursement ratio). ROA is an
important predictor of dividend payout, while
FS, LEV, and CR have reported insignificant
association with the dividend payout ratio.
Cement industry of Saudi Arabia and investors
would benefit from the current findings.
Keywords: Dividend payout, liquidity, financial
leverage, profitability, and total assets.
20062020
(CR) (ROA) FS (
FS LEV CR
.
45
Ph. D., Associate Professor, Accounting department, College of Business, King Abdulaziz University Jeddah, Rabigh Campus,
Saudi Arabia.
46
Dr. Sultan Altass, Vice Dean, College of Business, King Abdulaziz University Jeddah, Rabigh Rabigh Campus, Saudi Arabia.
47
Dr. Faran Ahmad Qadri, Associate Professor, Accounting department, College of Business, King Abdulaziz University Jeddah,
Rabigh Campus, Saudi Arabia.
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Introduction
Effective and efficient financial management of
a company become critical for the success and
competition of businesses. The financial
management of companies requires a dynamic,
sincere, committed, knowledgeable, and
visionary team. A good financial performance of
a company depends upon the proper utilization of
financial resources. Financial resources are
scarce and must be utilized wisely. Many
financial decisions like capital budgeting,
financing, assets management, liquidity, risk
management, investor’s relation, government
reporting, employee compensations, and
dividend decision affect the company’s
performance. All of them require systemic and
scientific analysis. Before 1950s, there were only
two functions of the financial management, just
raising funds and cash management. However,
nowadays this section of a company requires lots
of responsibilities, and all responsibilities have
equal importance.
There is no rule of thumb for the development
and progress of companies, but best practices can
achieve the targets of a company. The future of a
company links with a good brand image, and a
good brand image needs a lot of attention such as
resources (financial and non-financial),
commitment, sincerity, artificial intelligence,
company mission, and vision. It is important to
know why some fail to achieve the desired
objectives and some become successful
companies. Companies usually fail due to war,
recession, misuse of resources, poor
management, high taxation and interest rates,
excessive regulations, inability to compete, lack
of trust from the public’s side, agency problems,
trust deficit between investors and the company,
hostile takeover, and inappropriate strategies.
They do not synchronize the resources according
to the need and priority of the factor/area. A
company needs a huge amount of funds to
operate, and it has to utilize its resources after
proper analysis like technical analysis and
efficient market analysis. Dividend decision
plays a vital role in raising and using funds in
companies. Dividend decisions of companies
should properly evaluate the possible factors
associated with it, especially the cost and earning
that should be considered while making the
dividend policy of the company. The main
objective of the study is to examine the factors
affecting the dividend payout of cement industry
of Saudi Arabia. The factors considered in this
study are size, profit, leverage and liquidity.
While dividend payout is taken as dependent
variable.
Dividend is a return of investment. Every
investor wants to earn maximum return on their
investment. Investors invest money where they
get higher returns. Some investors are long term
so they do not consider higher returns in the near
future, but short-term investors always consider
higher returns in the near future. Investors
consider the following factors for their
investment in the company’s share: earnings per
share (EPS), dividend payout (D/P), price to
earnings (P/E), return on equity (ROE), debt to
assets (DTA), book value per share (BV/S), and
market price. They also check the trend of past
dividends. After that they decide to make an
investment in the company shares. The existing
shareholders make a decision to retain, sell, or
buy stocks of a company (Patra et al., 2012).
Higher dividend always motivates investors to
make investments in a company’s shares.
Company’s dividend decisions depend upon
internal and external factors: internal factors like
company growth, profit, size, leverage, and
liquidity, whereas external factors like inflation,
competitors’ dividend policy, tax rate, interest
rate, policy control, attitude of powerful
investors, and so on. In our understanding very
few studies have been conducted in Middle East
in general and particularly in the cement industry
of Saudi Arabia. Hence, the current study will
contribute to the dividend theories in the context
of Middle East.
Indeed, higher return on investment is the
ultimate main target of investors and companies.
No company has unlimited resources; each
company needs financial resources for
expansion, growth, profit maximization
strategies. The cement industry has a lot of
opportunities for expansion and growth. Such an
industry needs a substantial amount of financing.
Therefore, dividend payout plays a vital role in
the company expansion, growth and profit
maximization. That is why, it is important to
examine the factors affecting the dividend payout
of the cement industry. This study would also
contribute to the existing literature for
researchers and practitioners for future research.
This study would also help to the cement industry
to design a comprehensive dividend policy.
The current study is consisted into 5 sections.
First section of the study is related to
introduction, which contains brief introduction of
cement industry, objectives, significance of the
study. Section two of the study is described the
review of literature. While third section is
demonstrated the research methodology of the
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study. Whereas, fourth section of the study is
consisted on data collection and analysis. Last
but not least section five of the study is provided
comprehensive conclusions which is based upon
research findings.
Cement sector of the kingdom of Saudi Arabia
Cement sector of the kingdom plays a very
important role in uplifting the economic
development. Some key indicators are as
follows:
1. Production of Cement.
The production of a product definitely matter in
the image building of a company and also a major
contributor in the revenue generation. The below
chart demonstrates the production figures of
different cement companies of Saudi Arabia.
Graph No. 1. Cement Production of Saudi Arabia.
Source: Jitendra Roychoudhury (2020)
2. Construction industry of Saudi Arabia.
The cement industry is highly dependent on the
construction market, and it plays a significant
role in the development, renovation, maintenance
and building of structures. There is a positive
development in the construction sector to GDP.
Its growth was negative in 2018, that is, -3.06%
and then improved in 2019 to 0.90% and 1.20%
in 2020. It indicated a good sign for the cement
industry. Numerous mega- and giga-projects of
the kingdom such as Qiddiya tourism
development, the Red sea and NEOM will
enhance the performance and growth of the
cement sector.
Graph No. 2. Construction Real Growth Rates
Source: General Authority for Statistics (2018)
Review of the literature
Substantial amount of capital seems to be
considered like a life blood for companies.
Always companies prefer less expensive
financing to support their assets. Debt and equity
financing also affect the dividend policy of a
company. Khan and Ahmad (2017) performed an
Yamamah Cement
Saudi Cement
Eastern Cement
Qassim Cement
Yanbu Cement
Arabian Cement
Southern Cement
Tabuk Cement
Riyadh Cement
Najran Cement
Al Madina Cement
Northern Cement
Al Jouf Cement
Al Safwa Cement
Hail Cement
Umm Al Qura Cement
United Cement
0
10
20
30
40
50
60
70
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
%
-4.00
-2.00
%
0.00
%
2.00
%
4.00
%
6.00
%
8.00
%
2014
2015
2016
2017
2018
F
2019
2020
F
Construction
GDP
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experimental study to identify the dynamics
affecting the dividend payout of the
pharmaceuticals sector. Trade theory explained
the positive relationship between size and
financial leverage ratio. They took data from
Pakistan stock exchange listed companies (PSX)
in 2019. Their results showed that profit and
audit type had optimistic relationship regarding
to a firm dividend disbursement ratio, whereas
growth, risk, and liquidity show significant but
negative relation with the dividend disbursement.
In addition to that, size, leverage, and taxation
showed no relationship with the dividend payout.
Pecking order theory of dividend explains the
negative relationship between firms’ size and
leverage ratio. Big firms’ can easily raise to
financial markets so that more likely to disburse
dividend. Hence the study proposed the
hypothesis:
H1: There is positive relationship between firm
size and dividend payout
H2: H2. There is a negative relationship between
leverage and dividend payout
There is no sole factor to affect the dividend
policy of a company. Many factors have been
analyzed with respect to dividend policy of a
company and found different results. According
to Jabbouri (2016) studied the factors affecting
the dividend payout in the Middle East and North
African economies. The results showed that size,
profit, and liquidity affect the dividend payout.
He found an inverse association of dividend and
financial leverage. The examination also
investigated that the economic stability of a
country impacts the dividend payout. In addition,
free cash affects dividend payout. Whereas,
Khan, Naeem and Salman (2016) analyzed the
textile sector with respect to the factors of the
dividend disbursement ratio. They collected the
data of textile companies from PSX. They found
no evidence of size and risk effects on the
dividend disbursement. Profitability and
leverage factors affect the dividend disbursement
ratio positively and negatively, respectively.
Enhancing profitability is the core objective of
profit-oriented companies. High profit ultimately
leads to distribute substantial amount of dividend
to stockholders and it is imperative for running
businesses in a smooth way. Kaźmierska-
Jóźwiak (2015), examined the determinants of
dividend policy with respect to Polish Listed
Companies. He considered profitability,
liquidity, size, leverage of the firm as
independent variables and dividend payout as a
dependent variable. His results showed negative
relationship between profitability and dividend
payout. He explained that Polish companies
retain profit as a sources of capital and as a result
pay less dividend to shareholders. His results also
in line with US firms (Titman and Wessels 1988),
G-7 countries (Rajan and Zinglales 1995), US
and Japan firms (Kester 1986). The study also
indicated negative relationship between leverage
and dividend payout ratio. Whereas, firm size
and price to earnings ratio showed insignificant
relationship.
A sufficient amount of profit is also a good
predictor for taking loans. Numerous researchers
pointed an optimistic and significant predictor of
dividend disbursement. Arshad et al., (2013) also
identified a positive and significant association
between profitability and the dividend payout
ratio in Pakistan. According to pecking order
theory of dividend policy, profitability and
dividend payout have negative relationship. High
profitability leads to higher retained earnings as
a source of capital. So, companies pay less
dividend to stockholders. The theory
hypothesized:
H2: There is negative relationship between
profitability and dividend payout.
Financial leverage management plays an
important role in a dividend policy decision of a
company. It has been analyzed in the literature
with respect to profitability, cost and risk of a
company. Ajanthan (2013) studied the
hospitality sector and reported an irrelevant
relationship regarding debt and dividend
disbursement in Sri Lanka. Another research by
Bolbol (2012) estimated the impact of leverage
on the dividend disbursement. The study reported
insignificant association between dividend
payout and debt in Malaysian construction
companies.
Dividend policy seems to be considered an
important factor of market price/share and easier
access to capital market for companies.
According to Mehta (2012) conducted a
quantitative analysis of the non-financial sector
registered on the stock exchange of Abu Dhabi.
The main objective was to identify the factors
contributing to the dividend policy. After the
analysis, he found mixed results; some
independent variables showed important and
progressive relationship with the dividend
disbursement of the firm, while risk was a
negative and significant contributor to the
dividend payout. However, current profit,
leverage, and liquidity were insignificant with
regards to the dividend payout.
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No doubt, all companies try to enhance the
profitability. Many factors affect the profitability
of a company such as, product/service quality,
company’s management, availability of funds,
company’s reputation and so on. It also affects
the dividend policy decision of a company.
According to Bolbol (2012), he analyzed the
impact of profitability with respect to firms’
dividend disbursement and the study reported
insignificant association with the dividend
disbursement ratio. Whereas, Abdelsalam et al.,
(2008) also estimated the same results that
profitability of the firm has a positive impact on
the dividend disbursement of the firm.
Dividend disbursement depends upon the
profitability of a firm. It is expected that higher
profitability of a firm means higher return on
stocks as a dividend. Chang (2009) and Abor and
Bokpin (2010) estimated the association
regarding firm profitability and dividend
disbursement ratio. They found a progressive and
significant association regarding profitability and
the dividend disbursement ratio. Al-Shubiri
(2011) also evaluated several factors such as
investment opportunity, profitability, the firms’
size, and financial leverage with respect to the
dividend policy and the firms’ value. He found
that these factors are important and affect the
firms’ dividend policy to the value of the firm
directly and indirectly.
Firms’ management always looking for an
opportunity in a market. When there is
opportunity in a market and firm does not has
sufficient amount of capital then firm goes for
debt financing. Firm must evaluate the financial
leverage with respect to positive impact on
business performance. Wang et al., (2011)
evaluated the firm’s age cycle and dividend
policies in Taiwanese stock exchange market.
They expressed results that disbursement of
dividends in newly established company’s
ultimate lead to high growth and low
profitability. Their results also indicated that
businesses with little growth capacity and huge
profitability ultimately dispersal of cash dividend
against stock dividend.
Income considers to be main factor to judge the
efficiency of management which ultimate leads
to predict the company’s performance. Aivazian,
Booth and Cleary (2003) analyzed a pragmatic
study of 8 developing markets in the United
States of America. The research pointed out that
income was a significant and positive factor that
affects the dividend payout of emerging markets.
They found a significant and negative relation
with regards to the dividend payout. Their results
showed an insignificant effect on the dividend
payout.
Working capital condition of a company affects
the company performance. It also affects the
dividend policy of a company. A substantial
amount of working capital are more likely to pay
dividend and vice versa. Such kind of positive
relationship is supported by signaling theory of
dividend policy (Ho, 2003). It is hypothesized
that:
H4: There is positive relationship between
liquidity and dividend payout.
Market price/share is a good predictor for overall
performance of a company. It has been analyzed
in the literature as an important determinant for
the dividend policy. Share Allen & Rachim
(1996) reported a robust association between the
share prices and firm dividend policy. While,
Miller & Modigliani (1961) supposed that
appreciation in stock prices and announcement of
dividend have dependent each other. Whereas,
price benefit does not motivate to investor. Fama
& Kenneth (1993), on the other hand, believed
that stock prices persist direct stimulus of the
dividend payout of a company. It was supposed
that a firm dividend policy may affect the
potential investors.
Keep in view the above studies, it is concluded
that many studied have been conducted to
analyze the effect of debt and equity decision on
dividend payout. Some studies analyzed to
examine the internal factors and dividend payout
decisions. No study is related to cement sector
and it is worth mentioning that it plays a vital role
in the economic development of a country. No
one can deny the importance of cement sector.
Such study is going to fill this gap and considered
the above factors affecting the dividend payout
of cement sector.
Methodology
Attaining research objectives relies on suitable
research methodology that justify authentic
research project results. The current research
project investigates the factors affecting the
dividend payout of the cement sector of Saudi
Arabia. The study objectives are attained by
using correlation and linear regression. A linear
regression model is developed, and multiple
regressions are used to obtain the results by using
SPSS software. Secondary data are collected
from the Argaam website
(https://www.argaam.com/en) regarding the
cement sector of Saudi Arabia.
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Data Collection and Measurement:
Seventeen cement firms are listed in the Saudi
stock exchange (Tadawal). Seven firms are taken
as a sample for analysis such as, Saudi Cement,
City Cement, Yamama Cement, Southern
Cement, Qassim Cement, Najran Cement, and
Yanbu Cement. Secondary data are used over the
period from 2006 to 2020. The reason behind
seven firms is the data limitation. Only seven
firms’ data is available from the said period. This
study has taken a case study of the cement sector
of Saudi Arabia. The study has considered
dependent variable to dividend disbursement
ratio, while size, profit, leverage, and liquidity
are used as explanatory variables. The said
variables have based upon previous research
studies. Descriptive statistics are used to mean,
trend, minimum, and maximum values of said
variables. The correlation is measured to know
the association and direction between variables.
The study employed multiple regression to
examine the nexus between dependent and
explanatory variables.
Specification of Variables:
I. Dependent Variable:
The return of investors will be measured by the
dividend payout. It will be measured as follows:
Dividend payout = Dividend paid / Net income--
-----------------------------------------------(i)
II. Explanatory variables
Table No. 1.
Independent variables
Explanatory variables
Variable Calculations
Firm Size
Natural Log of Total assets
Return on asset
Net income / Total asset
Financial leverage
(Current debt + Long term debts) / Total assets
Liquidity
Current assets / Current liabilities
Proposed Research Model:
Yit = α + β1it ROA + β2it ln FS + β4it CR + β5it LEV
+ Ut,
Where Yit is the dividend payout, ROA is the
return on assets, FS (natural log of total assets),
CR (current ratio), LEV is the leverage, and Ut is
the error term.
Results and discussion
Descriptive statistics provide useful summary to
investors and brokers. They may use past return
performance by carrying out analytical and
empirical analysis on their investment in order to
make better future investment decisions. The
above descriptive statistics explains the data
feature of each variable in detail.
Table No. 2.
Descriptive Statistics
No.
of
Obs.
Minimum
Maximum
Mean
Std.
Deviation
Variance
Skewness
Kurtosis
Std.
Error
Std.
Error
Statistic
Std.
Error
DPR
105
-1.35
19.66
11.0
5
1.22
4.71
22.23
-1.00
0.58
3.02
1.12
FS
105
2.90
6.29
5.63
0.29
1.11
1.23
-1.71
0.58
1.78
1.12
LEV
105
0.01
0.06
0.04
0.00
0.02
0.00
0.33
0.58
-1.82
1.12
ROA
105
0.53
5.87
3.63
0.43
1.65
2.74
-0.57
0.58
-0.56
1.12
CR
105
1.25
4.20
2.22
0.26
1.00
1.00
0.97
0.58
-0.40
1.12
Valid N
(listwise)
105
Normality Test: Normality test is employed to
check the normality of the data. It was found that
the data was distributed normally.
Correlation Analysis: It is employed to check
the association, direction, and multicollinearity
between the variables.
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Table No. 3.
Correlations
*. Correlation is significant at the 0.05 level (2-tailed).
The correlation explains the association,
strength, and direction between variables. LEV
has a negative correlation with DRP. ROA has a
positive correlation with DRP, whereas CR and
FS have a very weak correlation with DRP.
Table No. 4.
Anova test
a. Predictors: (Constant), FS, LEV, CR, ROA
b. Dependent Variable: DPR
Table No. 5.
Model summary
Model
R
R Square
Adjusted R Square
Std. Error of the Estimate
Durbin-Watson
1
a
.556
.309
.033
4.63636
2.939
a. Predictors: (Constant), FS, LEV, CR, RO
b. Dependent Variable: DPR
F (4, 10) = 0.019, P < .05, R2 = 0.309. The overall
regression model was significant.
In the above table, R-squared = 0.309; taken as a
set, the predictors LEV, FS, ROA, and CR
account for 31% of the variance in DPR.
Table No. 6.
Regression coefficients
a. Dependent Variable: DPR
DPR
FS
LEV
ROA
CR
EPS
DPR
Pearson Correlation
1
Sig. (2-tailed)
FS
Pearson Correlation
-.046
1
Sig. (2-tailed)
.872
LEV
Pearson Correlation
-.317
-.045
1
Sig. (2-tailed)
.250
.874
ROA
Pearson Correlation
.493
-.323
*
.636-
1
Sig. (2-tailed)
.062
.240
.011
CR
Pearson Correlation
-.115
**
.666-
.234
.212
1
Sig. (2-tailed)
.684
.007
.400
.448
b
ANOVA
Model
Sum of Squares
df
Mean Square
F
Sig.
1
Regression
96.249
4
24.062
4.619
a
.019
Residual
214.959
10
21.496
Total
311.208
14
Model
Unstandardized Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
6.843
13.475
.508
.623
ROA
1.544
.707
..542
2.184
.050
CR
-1.519
1.790
-.322
-.849
.416
LEV
46.232
100.818
.179
.459
.656
FS
-.160
1.551
-.037
-.103
.920
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Graph No. 3. Normality of dependent variable
The above regression coefficients explain each
predictor with respect to the criterion variable.
Results show that ROA has a significant positive
relation (t-value 2.184/ significant value 0.05)
with DPR. ROA coefficient brings a significant
change in dividend payout. ROA is a significant
predictor of DPR, where CR, FS, and LEV have
reported no significant relationship with the
dependent variable, that is, DPR. They do not
have significant contribution in DPR of the
cement industry.
Conclusions
Indeed, dividend payout plays a significant role
in the corporate world. Management should
know what factors affect the dividend payout.
The dividend policy is very important for a
company. The company’s management can
attract and retain investors through dividend
payout. Dividend payout needs substantial
amounts of funds. Proper financial management
is needed to make sure that funds are easily
available for dividends. Sufficient amount of
profit, suitable liquidity position, and high
earning per share matter for the dividend payout.
The overall company’s performance depends
upon financial indicators and market position.
The cement sector of a country plays a vital role
in uplifting the economy. Such industry provides
job opportunities, plays an important role in the
balance of payment, and facilitates other
industries especially construction companies. It
is concluded that ROA is a good predictor for
DPR. Higher ROA leads to higher dividend
payout and vice versa. The study estimated that
higher ROA attracts investors. Assets
management of the cement sector would enhance
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efficiency and generate substantial revenue. The
cement sector would use the total assets at full
capacity and earn a lot of revenue. Sufficient
amount of profit is directly linked to the sales
turnover of a company. Saudi cement industry
would find new domestic and international
markets for the purpose of sales maximization.
Companies can satisfy investors through higher
return on investment. ROA would become a
good factor to attract new investors. Low
corporate tax, that is, 20% in Saudi Arabia, is a
good opportunity for the cement industry to
generate sufficient profit and ultimately give
substantial amount of return to investors as a
dividend. Various mega-projects are being
started in the kingdom, and the cement sector
would take advantage of this opportunity. There
is no interest in bank deposits in the kingdom. It
is also a good opportunity for the cement sector
to attract the investors.
Limitations of the research: this study was co-
relational and non-experimental (i.e., none of the
participating firms will be assigned to
conditions) a causal link between independent
variable (e.g., sales growth) and dependent
variable (e.g., dividend payout ratio) cannot be
definitively established. Therefore, a link
between independent variable (e.g., sales
growth) and dependent variable (e.g., dividend
payout ratio) can only be suggested.
Additionally, the findings of this study can only
be generalized to firms similar to those who
participated in the research
Author contributions: Conceptualization, Q.A;
Data curation, Q.A; Formal analysis and
interpretation, Q.A; Research project
administration. Q.A, Software, Q.A, Validation,
S.A, Original draft, Q.A, Writing-review and
editing, S.A and F.A.Q. All authors have read
and agreed to publish this version of the
manuscript.
Acknowledgement: This work was funded by
the Deanship of Scientific Research, King
Abdulaziz University, Jeddah, Under Grant
No. (G:301-849-1442). We are grateful to the
Deanship of Scientific Research, King Abdulaziz
University, Jeddah for their funding this project.
Conflict of interest: The authors declare no
conflict of interest.
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