Which companies are allowed distribute dividend?
The company with the highest accumulated profit (or high free profit) can provide the large dividend but the company with negative accumulated profit are not allowed to distribute dividends. So in the process to choose a stock with high dividend possibility we need to find the company with highest accumulated profit.
How dividend effects balance sheet?
Dividend affects primarily the (1) the paid up capital and (2) reserve & surplus additionally we will discuss its effect on capital adequacy ratio.
Cash dividend: It reduces the reserve & surplus and capital adequacy ratio but the paid up-capital will remain the same. So the banks with high capital adequacy ratio and paid-up capital prefers to distribute dividend as cash (Bank have to maintain a minimum of 11% capital adequacy ratio as per the NRB directives).
Bonus share: It will decrease the reserve & surplus while the paid-up capital will increase but the capital adequacy ratio will remain the same. So the company with tight CAR prefers bonus share over cash dividend.
How can we separate the banks which can provide bonus or cash dividend?
Growing company usually provides bonus shares as it requires huge capital to flourish its business but the well-established companies prefer cash dividends. In the case of commercial banks we need to take into consideration the capital adequacy ratio and core capital, total risk weighted exposure and its growth, required capital to meet the next year business growth, past dividend distribution record to estimates the dividend distribution rate and type.
Free profit is calculated as per the audited report of last year fiscal year 2073/74, latest BASEL report and unaudited report of FY 2074/75. All the regulatory requirements (reserve) as per NRB are deducted from Net profit and useable free profit is taken in consideration. There can be minor changes in free profit as per the bank decisions. The below presented free is just an expected figure.
The table below shows the paid-up capital, free profit (which can be distributed as dividends), dividend capacity of fiscal year 74/75 and total dividend capacity.
(Pink cell denotes the highest value of every headings in the table, orange cell denotes the second highest value and purple cell denotes the lowest value)
By researching on 4th quarter data of 2074/2075 we have calculated the possible dividend type and rate of different commercial banks by estimating their dividend capacity, dividend history, capital adequacy ratio, whether they are growing company or not.
From our analysis, the bank which can distribute the highest dividend is Nabil Bank whose capacity for dividend distribution is 46.16% additionally Nabil bank doesn’t requires huge capital for the growth as it is already established and its business is at the zenith right now. Considering these things, we can expect a dividend of 30-35% from the fiscal year 2074/2075. Majorly it will be distributed as cash but we can expect a small percentage of bonus shares too.From the fiscal year 2073/2075, Nabil Bank has distributed bonus of 30% and cash dividend of 18% to meet the minimum paid-up requirement set by NRB.
NMB bank has the highest capacity for the dividend distribution, the bank can distribute up to 61.44% but dividend distributable capital was majorly contributed by premium from the FPO sell. From NMB's real earnings it can distribute up to 14.61% as dividend. Considering these facts we can expect a dividend of 18-20% from NMB both in the form of cash and bonus.
This year we can expect a bonus from Nepal Bank as well, its capacity for the distribution is around 22% and it can distribute up to 15-20% majorly in the form of cash from the fiscal year 2074/2075.
The lowest dividend is expected from the mega bank and Janata bank whose capacity for the distribution is 7.8% and 7.12%. So we can expect a dividend of around 5-6%. Further, Mega bank is more likely to distribute cash dividend while from the Janata Bank we can expect a bonus distribution.
Disclaimer:Real figures may vary , the numbers given above are expected values.