Relationship between Dividend Payout and Economic Value Added: A Case of Square Pharmaceuticals Limited, Bangladesh

The financial goal of a firm is to maximise the economic welfare of the owners. Owners' economic welfare could be maximised by maximising the shareholders wealth as reflected in the market value of shares. The value of shares is represented by their market price which is a reflection of the firm's financial decisions that include investment or long-term asset-mix decision, financing or capital-mix decision and dividend or profit allocation decision. Among the critical decisions, decision relating to dividend is the most crucial as the financial manager must decide whether the firm should distribute all profits or retain them or distribute a portion and retain the balance. However, the preachers of shareholders value theory have discouraged payment of dividend as it implies inefficiency on the part of the management towards shareholder's wealth maximisation. Taking this argument into account, this paper attempts to study the relationship between dividend payout and economic value added (EVA), an indicator to shareholders wealth creation, introduced by United States based consultants Stern Stewart and Company, New York, in 1990, using data of Square Pharmaceutical Limited (SPL), one of the largest pharmaceutical companies in Bangladesh, for the periods 2004-05 to 2010-11. Using simple regression equation method, the study comes to the conclusion that there is an inverse relationship between dividend payout and EVA and recommends SPL to continue the existing dividend policy of retaining a bulky portion of earnings rather than high payout ratio.