Dividend policy as a factor for managing company value: Comparing trends in emerging markets

Note: the table is compiled using the Monte Carlo method. Based on the data, the average estimated share value was calculated

Using the obtained parameters of the intrinsic value, it is possible to determine the margins of its valid values. Figure illustrates the distribution of the obtained values. The histogram below shows that the largest number of simulated options of the estimated share value ranges from 5 500 to 7 500 rub. The average value in this case amounts to 5 983.02 rub.

Fig. 1. Fundamental value per share, rub

We have thus provided a detailed description of the capital valuation procedure for one company using simulation methods. Similar procedures should be carried out for other oil and gas companies in emerging markets. With the discount rate at 14.65 %, the estimates conducted with the help of Monte Carlo method resulted in obtaining forecasted values of dividend payments and, accordingly, made it possible to determine the margins of estimated equity (share value) of the analyzed companies (Table 3). Here and below, the estimated values for companies from different countries were calculated in their national currencies: peso for Argentina, real for Brazil, ringgit for Malaysia, rupee for Pakistan, zloty for Poland, ruble for Russia, and leu for Romania.

Values presented in columns 6 and 7 of Table 3 demonstrate that 8 out of 18 companies have simulated shares value above the market average. By contrast, estimated values of other companies are lower than market figures. It should be emphasized that the calculated value represents the forecasted value of the company's share based on future dividend projections (no other factors have been included). Thus, these company value estimates are conducted in view of the position of shareholders (future estimated dividend flows are discounted to conduct theoretical assessment of company share). A logical conclusion is that, with all the assumed conditions, company share value is viewed by the company owners either as undervalued or overvalued, depending on specific circumstances.

Let us now consider a less optimistic situation, when dividends in the forecast period (from 2019 to 2025) will be the same as the last accrued value, i.e. will show practically no. The algorithm of calculation remains the same. The results are presented in Table 4.

Table 3. Results of calculating model indicators with a constant growth rate: average DIV value for each period

This article examined the dependence between the actual market capitalization of a company and the estimation of its intrinsic value as a distinctive feature of dividend policy. The general proposition was that when diagnosing a stable correlation of this kind, the reviewed markets and companies in them transition from the emerging market phase to the developed one (i.e. they are governed by the corresponding regularities). Accordingly, there have been put forward the hypotheses that there is no correlation between the current market capitalization and the estimated value as to the impact of the dividend policy. This very criterion, in our opinion, can be used to determine the current level of market development and, with a certain degree of conditionality, to classify it as developed or emerging.

In order to either confirm or reject the hypotheses, the intrinsic value of a number of oil and gas companies representing emerging markets has been calculated. The information trends in the markets in question seem to be roughly the same, i.e. with companies evolving, their dividend policy is changing in the same way and the companies themselves are becoming more and more credible and predictive in providing information to their shareholders.

The study identified two key issues in calculating dividends: identifying the correct discount rate and determining meaningful forecast data on dividend payments. The discount rate in this study was obtained using the CAPM model for one of the emerging markets and extended to the others. The calculated discount rate of 14.65 %, with certain reservations, has been then extended to other emerging markets. The problem of assigning dividend forecast data was solved with the help of a Monte Carlo simulation model, which allows us to include relatively expected scenarios with predetermined deviation values. Also, we examined the case when the forecasted dividend values remained constant over a number of years. It should be noted that, in comparison with many researchers in this field, we were driven by the idea of determining the actual impact of dividends. The model excluded factors that could somehow affect the value of the business (profit, revenue, profitability factors, etc.), which is the distinctive feature of the research conducted. We have also excluded all accompanying trends that could give a false picture of the correlation between dividends and value. The research was undertaken from the perspective of the business owner, who sees a specific company share as a profitable financial instrument. This is expressed in the correlation between the incoming dividend flows and the outflow of the share's current market value. An extra focus of the research was to establish whether the share market value was overvalued or undervalued from the point of view of its holder. In order to offset the impact of other factors on the value of the share, the model was assigned only projectable dividend cash flows (whole number of factors, included as significant by other scholars, have been left out of this research).

The picture that emerges is interesting, provided that we consider not the entire conventional aggregate emerging market (18 companies from different countries), but a segment. In this study, the most significant representation in the sample is observed in the Russian market (8 companies). Based on the estimates, it is possible to assume that their values, based on dividends growth, are generally higher market capitalization values. This indicates that investors in the Russian market do not particularly pay attention to longterm dividend policy (the prevailing stock prices do not take into account dividend income). Thus, the Russian market is still more attractive for speculative players (gain on growth/decline), while investment savings (purchase of shares and receiving dividends) have not been fully formalized yet. All the obtained values have been tested for their correlation with market values based on econometric analysis. After checking a number of tests (t-statistics, F-test), as well as estimating the strength and significance of the identified relation, it was concluded that there is a correlation between the current market value and the estimated value of the company. Thus, the general hypothesis about the interdependence between dividends and the oil and gas companies' market value in the markets under consideration is confirmed.

The value calculation according to the model as proposed by the authors takes into consideration the investor's position (the infinite dividend flow is what determines the share price). Therefore, based on this study, it can be assumed that an average market investor is implicitly seeking to increase dividends paid by the company. Situations in which dividends do not increase lead to a significant undervaluation of the forecast company value as compared to the market ones. Thus, the markets expect the companies in our sample to increase dividends (the increase is included in investors' estimations). Strictly speaking, the dividend policy should not necessarily be characterized by an even growth throughout the entire existence of the company. Apparently, it is more correct to speak about an increasing piecewise linear trend, i.e. the company as a whole follows the policy of not reducing payments to shareholders, but periodically, as resources accumulate, the level of dividends can be increased. Similarly, it is necessary to take into account inflationary expectations of the investors (inflation in emerging markets are generally higher, which should be considered by the investors in the long-term).

It is thus reasonably possible to assume that there are the same dividend policy mechanisms as those that operate in developed markets, and that market forces and behavioural factors work in the same direction. This fact enables us to assert that emerging markets (at least in the oil and gas sector) are increasingly subject to the rules and regularities characteristic of the developed markets in terms of dividend distribution. The existing segmentation in this area is becoming more and more conditional and subjective. From the point of view of interrelation of dividends and the market value of the companies, the attribution of markets in the sample as emerging is not quite justified. Besides, we actually presented a verification criterion which determines whether the market (company) development is in a stable phase, namely, the net impact of dividends on the business value. The further direction of the research may involve determining the nature of investment in the analyzed market (savings or speculative motivation of investors operating in the market).

References

1. Amidu M. (2007) How does dividend policy affect performance of the firm on Ghana stock Exchange?

2. Investment Management and Financial Innovations, vol. 4, iss. 2, pp. 104-112.