DuPont analysis and dividend policy : empirical evidence from Malaysia

Purpose: The purpose of this paper is to investigate the informativeness of asset turnover (ATO) and profit margin (PM) of the DuPont analysis in explaining dividend policy. Design/methodology/approach: Annual financial data from Compustat for the period 2004-2009 were used to analyze a sample of Malaysian firms. Findings: This study finds both PM and ATO to strongly explain contemporaneous dividends. The decomposition of return on net operating assets (RNOA) into PM and ATO also improves the explanatory power of dividends. The results of the predictive model show that PM and ATO are useful in predicting the propensity of firms to pay dividends. The results of the change dividend model, however, do not provide any significant results for PM and ATO. Practical implications: Understanding the influence of ATO and PM on dividends could enable managers to realize the importance of these factors when making dividend policy decisions. Other market participants, such as financial analysts and lenders, could also recognize the empirical specifics related to decomposing the profitability measure into its two components, one measuring the asset efficiency and the other measuring the profitability per unit of product, in the context of dividend policy. Originality/value: This study extends the empirical specifics of prior dividend policy studies by decomposing the popular profitability measure of return on assets into its two components of PM and ATO.