Journal of Research in International Business and Management

The Effect of Dividend Policy on Financial Performance: A Case Study of Engro and Fauji Fertilizer Companies in Sindh Pakistan

Muhammad Yaseen Burdi^*, Akram Ali Lashari, Asif Jamal and Foazia Jamal Department of Mathematical and Statistical Sciences, Clemson University, South Carolina, USA
^*Corresponding Author:
Muhammad Yaseen Burdi, Department of Mathematical and Statistical Sciences, Clemson University, South Carolina, USA, Email: ybuledi3@gmail.com

Received: 18-Nov-2024, Manuscript No. JRIBM-24-151533; Editor assigned: 04-Nov-2024, Pre QC No. JRIBM-24-151533 (PQ); Reviewed: 18-Nov-2024, QC No. JRIBM-24-151533; Revised: 10-Feb-2026, Manuscript No. JRIBM-24-151533 (R); Published: 17-Feb-2026

Introduction

The decision regarding the distribution of profits as dividends or their retention for reinvestment represents a critical financial management challenge for companies (Ali AJ et al., 2015). This decision not only influences the company's immediate cash flow but also shapes investor perceptions and long-term shareholder value (Ahmed et al., 2013). A company’s dividend policy reflects its financial health and its management's approach to balancing immediate shareholder returns with sustainable growth (Enekwe et al., 2015).

In the context of the fertilizer industry, which plays a vital role in agricultural productivity and food security, understanding the implications of dividend policy is particularly significant (Modigliani et al., 1961). Engro and Fauji fertilizer companies are two leading players in this sector in Pakistan (Priya et al., 2013). This study aims to investigate the effects of their dividend policies on financial performance, specifically focusing on the period from 2014 to 2017 (Shisia, 2014).

Research problem

The dividend policy is a crucial aspect of a company's financial strategy, affecting its ability to attract investors and sustain growth. However, there is ongoing debate regarding its impact on financial performance (Velnampy et al., 2014). While some studies suggest a positive relationship, others report mixed results, particularly in the context of the fertilizer sector in Pakistan (Yegon et al., 2014). This research aims to clarify the relationship between dividend policy and financial performance in this specific industry.

Research objectives

The primary objectives of this study are:

•To assess the effect of Dividend Payout Ratio (DPR) onthe financial performance of Engro and Fauji fertilizercompanies.

•To analyze the impact of Dividend per Share (DPS) onfinancial performance.

•To evaluate the relationship between leverage, firmsize, and financial performance in the context ofdividend policy.

Value of the study

The findings of this research will provide valuable insights for various stakeholders, including investors, financial managers, and policymakers. Understanding how dividend policy influences financial performance can aid investors in making informed decisions, enable financial managers to develop effective dividend strategies, and inform policymakers on the regulatory environment for corporate governance.

Hypotheses

The study tests the following hypotheses:

H₁: There is a significant relationship between Dividend Payout Ratio (DPR) and firm performance (ROA).

H₂: There is a significant relationship between Dividend per Share (DPS) and firm performance (ROA).

H₃: There is a significant relationship between the size of the firm and firm performance (ROA).

H₄: There is a significant relationship between leverage and firm performance (ROA).

Materials and Methods

Dividend policy has been a subject of extensive research, with various theories proposed to explain its impact on firm performance. The Modigliani-Miller theorem asserts that in a perfect market, dividend policy is irrelevant to a firm's value; however, this theory has been debated extensively, with many scholars emphasizing the importance of dividends as signals of financial health. The bird in hand theory posits that investors prefer the certainty of dividends over uncertain future capital gains, suggesting that higher dividend payouts could lead to increased stock prices. This theory is supported by empirical evidence that links dividend announcements to positive stock performance. Moreover, signaling theory suggests that companies use dividend announcements to convey information about their future profitability. High dividends may signal strong future performance, while cuts in dividends could indicate financial distress.

Prior research has produced mixed findings regarding the relationship between dividend policy and financial performance. For instance, studies have shown a positive correlation between dividend payout and firm performance in various sectors, but others have found no significant relationship, highlighting the need for further investigation, particularly in the fertilizer industry, Kariuki John Muchira found a significant positive association between dividend policy and firm financial performance, emphasizing that stable dividend payments are perceived positively by investors.

Methodology

This study employs a descriptive research design to analyze the relationship between dividend policy and financial performance in Engro and Fauji fertilizer companies. Secondary data was collected from the companies’ financial statements for the period 2014-2017.

Key performance indicators were identified as follows:

Dividend Payout Ratio (DPR): Calculated by dividing total dividends by net income.

Dividend per Share (DPS): Determined by dividing total dividends by the number of outstanding shares.

Return on Assets (ROA): Measured as net income divided by total assets, representing the company's efficiency in generating profits from its assets.

Leverage: Defined as the ratio of total debt to total equity, indicating the level of financial risk.

Firm size: Measured using the natural logarithm of total assets, representing the scale of operations.

Data analysis was conducted using SPSS to perform correlation, regression analyses, and ANOVA, ensuring a comprehensive understanding of the relationship between dividend policy and financial performance.

Descriptive statistics

The average ROA for the study period was 11.98%, indicating a relatively stable performance. The DPR averaged 81.26%, suggesting that both firms prioritize returning profits to shareholders. The average DPS was 8.11, reflecting consistent dividend payouts over the years (Table 1).

Table 1. Descriptive statistics.

Correlation analysis

The correlation analysis reveals a significant positive correlation between DPS and ROA (r=0.827, p=0.011), suggesting that higher dividends per share are associated with improved financial performance. A weak positive correlation between DPR and ROA (r=0.085, p=0.841), indicating that the dividend payout ratio does not significantly influence financial performance. A negative correlation between firm size and ROA (r=-0.654, p=0.078), suggesting larger firms may struggle to maintain high performance levels, potentially due to inefficiencies (Table 2).

Table 2. Correlation analysis.

ANOVA analysis

To assess the overall significance of the regression model, ANOVA was performed. The results indicate that the regression model significantly predicts ROA, as evidenced by an F-statistic of 51.151 and a p-value of 0.004 (p<0.05). This suggests that the independent variables collectively explain a significant portion of the variance in financial performance (Table 3).

Table 3. ANOVA analysis.

Regression analysis

The regression analysis further supports the findings, with an R² value of 0.986, indicating that 98.6% of the variance in ROA is explained by the independent variables. The results of the regression coefficients indicate a negative coefficient for DPR (-0.121), implying that increases in the dividend payout ratio slightly reduce financial performance. A strong positive coefficient for DPS (1.389), reinforcing the positive impact of dividends on financial performance (Table 4).

Table 4. Regression analysis.

Results and Discussion

The findings of this study align with the signaling theory, emphasizing the role of dividend payments as indicators of financial health. The significant positive correlation between DPS and ROA highlights the importance of consistent dividend payments in attracting and retaining investors. In contrast, the weak relationship between DPR and financial performance suggests that while dividends are essential, the manner in which they are distributed may not directly influence profitability. The negative correlation between firm size and ROA raises questions about potential inefficiencies in larger firms, which may dilute performance despite higher resources.

These results contribute to the existing literature on dividend policy by providing insights specific to the fertilizer industry, an area that has been relatively under-researched.

Conclusion

In conclusion, this study confirms that dividend per share significantly affects the financial performance of Engro and Fauji fertilizer companies, whereas dividend payout ratio and leverage show limited influence. The negative impact of firm size on performance suggests a need for larger companies to enhance operational efficiencies to maintain profitability.

Recommendations

For practitioners: Financial managers should develop robust dividend policies that prioritize increasing shareholder value while ensuring sufficient funds for reinvestment.

For researchers: Future studies should explore the dividend policies of other sectors and geographical regions to further validate these findings and understand the broader implications of dividend policy on financial performance.

Limitations

This study is limited by its focus on only two companies within the fertilizer sector and may not be generalizable across other industries. Additionally, the reliance on secondary data may introduce biases based on reporting practices.

Suggestions for Further Research

Future research could consider a longitudinal analysis of dividend policy effects over a more extended period. Comparative studies between different sectors to assess the variability in dividend policies and financial performance. The influence of macroeconomic factors on dividend policies across various markets.

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Citation: Burdi MY, Jamal F, Jamal A, Lashari AA (2026). The Effect of Dividend Policy on Financial Performance: A Case Study of Engro and Fauji Fertilizer Companies in Sindh Pakistan. JRIBM. 13:048.