Report on Dividend Policy of NTC

Introduction
This is a research group project assigned in the module 'Dividend Policy of Nepal Telecom'. For
this group project a formal group of 5 members were created. The group work was based on the
descriptive study of the 'Dividend Policy of Nepal Telecom and analyzing the trend of
distribution of dividend by one of the major public company of Nepal.

To start this group project we organized our first formal meeting where we decided among
ourselves and enlisted the facts and points that we wanted to include in our project. We
researched on our assigned company (Nepal Telecom) briefly in the internet and many other
available sources. We collected the financial statement and based on the different available
information, this project has been prepared.

Introduction to Nepal Telecom

Nepal Doorsanchar Company Ltd, popularly known as Nepal Telecom is state owned
telecommunication service provider in Nepal with 91.49% of the government share. NEPAL
TELECOM was registered on 2060-10-22 under Company Act, 2053. Then Nepal
Telecommunications Corporation (NTC) was dissolved and all assets and liabilities were
transferred to Nepal Telecom effective from 2061-01-01 (i.e. 13th April 2004). The company
with its long history is on the way of customer service and nation building.

In Nepal, the telecom service was provided mainly after the establishment of MOHAN
AKASHWANI in B.S. 2005. Later as per the plan formulated in First National Five year plan
(2012-2017); Telecommunication Department was established in B.S.2016. To modernize the
telecommunications services and to expand the services, during third five-year plan (2023-2028),
Telecommunication Department was converted into Telecommunications Development Board in
B.S.2026. After the enactment of Communications Corporation Act 2028, it was formally
established as fully owned Government Corporation called Nepal Telecommunications
Corporation in B.S. 2032 for the purpose of providing telecommunications services to Nepalese
People. After serving the nation for long years with great pride and a sense of accomplishment,
Nepal Telecommunication Corporation was transformed into Nepal Doorsanchar Company
Limited from Baisakh 1, 2061. Nepal Doorsanchar Company Limited is a company registered

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under the companies Act 2053. However the company is known to the general public by the
brand name Nepal Telecom as registered trademark. Nepal Telecom has always put its endeavors
in providing its valued customers a quality service since its inception. To achieve this goal,
technologies best meeting the interest of its customers has always been selected. The nationwide
reach of the organization, from urban areas to the economically non- viable most remote
locations, is the result of all these efforts that makes this organization different from others.
Definitely Nepal Telecoms widespread reach will assist in the socio-economic development of
the urban as well as rural areas, as telecommunications is one of the most important
infrastructures required for development. Accordingly in the era of globalization, it is felt that
milestones and achievements of the past are not adequate enough to catch up with the global
trend in the development of telecommunication sector and the growth of telecommunication
services in the country will be guided by Technology, Declining equipment prices, market
growth due to increase in standard of life and finally by healthy competition. Converting NT
from government owned Monopoly Company to private owned, business oriented, customer
focused company in a competitive environment, Nepal Telecom invites its all-probable
shareholders in the sacred work of nation building.

Objective

Mission

Nepal Telecom, as a progressive, customer spirited and consumer responsive entity, is

committed to provide nation-wide reliable telecommunication services to serve as an impetus to
the social, political and economic development of the country.

Vision

NT vision is to remain a market leader in information and technology sector in the country
while also extending reliable and cost effective services to all.

Goal

NT goal is to provide cost effective telecommunication services to every nook and corner of the
country.

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Effects of Dividend on Different Business Factors

Effect on financial statement

The dividends declared and paid by a corporation will be reported as a use of cash in the
financing section of the statement of cash flows. Dividends are also reported on the statement of
changes in stockholders equity.

Dividends presented for common stock are not reported on the income statement as they are not
expenses. Dividends presented on preferred stock are not expenses, but will be deducted from net
income in order to report the earnings available for common stock on the income statement.
Since the balance sheet reports only the ending account balances at an instant of time, the Cash
and Retained Earnings amounts reflect the balances after past dividends and other transactions.

Dividends paid in cash affect a company's balance sheet by decreasing the company's cash
account on the asset side and decreasing retained earnings on the equity side. Thus, cash
dividends result in the overall reduction of a company's balance sheet.

If a company pays stock dividends, these dividends reduce the company's retained earnings and
increase common stock and additional paid-in capital accounts. Stock dividends do not result in
asset changes of the balance sheet but rather affect only the equity side by reallocating part of the
retained earnings to the common stock and additional paid-in capital accounts.

Effect on Stockholders equity

The effect of dividends on stockholders' equity is dictated by the type of dividend issued. When a
company issues a dividend to its shareholders, the value of that dividend is deducted from its
retained earnings. Even if the dividend is issued as additional shares of stock, the value of that
stock is deducted. However, a cash dividend results in a straight reduction of retained earnings,
while a stock dividend results in a transfer of funds from retained earnings to paid-in capital.
While a cash dividend reduces stockholders' equity, a stock dividend simply rearranges the
allocation of equity funds.

If the board of directors had declared a cash dividend on its preferred shares in addition to its
common stock dividends, the preferred shareholders will have a preference in receiving the cash

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payouts. As with common stock, the declaration of preferred dividends by the corporation will
result in the overall reduction of shareholders' equity on the company's balance sheet.

Effect on General public

When a company pays dividend regularly to its shareholders, then it forms a trustworthy brand
image among the general public. This encourages the public to look up to the company and
invest in those companies.

Dividend Policy of NTC (Nepal Telecom)

Fiscal Year Bonus Share % Cash Dividend % Total Dividend % Earnings Per Share
2070/2071 - 47% 47% 77.12
2071/2072 - 50% 50% 97.04
2072/2073 - 51% 51% 91.21

According to financial statement published by NTC, they are using the mediums such as banks in
order to ease the process of dividend payments to its shareholders.

The total number of outstanding shares of Nepal Doorsanchar Company Limited (NTC) is
150,000,000 with a paid up value of Rs.100 per share, making the total share capital equal to
NPR 15 billion over all three years mentioned in the table above. Along with the increasing cash
dividend provided by NTC to the shareholders, the market price of share of NTC has also been
increasing in the above 3 years mentioned in the table from NPR 498.72 in the year 2070/71 to
NPR 539.99 in 2071/72 and NPR 573.53 in the year 2072/73. Currently, the market price of
share is NPR 685.

Through the information above, it can be roughly said that the increasing cash dividend being
paid by NTC to its shareholders have shown the shares of NTC to be attractive in the eyes of
general investors, which in turn in leading the price of the shares of NTC to be traded at a higher
price in the market. Since NTC has been paying out increasing dividend, the market psychology
leads an investor to think that the future of the company is good and leads the investors to invest
in the company as soon as possible to reap the highest level of return. Due to this, there is a
likelihood that the increase in payment of dividend by the company might lead to increase in the
market price of share as it has happened in the case of NTC.

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NTC has not offered any bonus shares as dividends which makes the number of
outstanding shares constant at 150,000,000 shares. If NTC has issued bonus shares, the number
of outstanding shares would have increased while the market price of share would have been
negatively affected along with the increased liquidity of its shares in the market. While for the
shareholders of NTC, bonus shares will only lead to an increase in the number of shares each
shareholders have with them while the overall value of the shares held by each investors will
remain the same.

Dividend Policy of NLIC (Nepal Life Insurance Company)

Fiscal Year Bonus Share % Cash Dividend % Total Dividend Earnings per Share
2070/2071 60 8 68 56.67
2071/2072 25 1.31 26.31 30.42
2072/2073 25 1.31 26.31 41.83
The total paid up value of NLIC is NPR 3,096, 428, 600 since the total outstanding shares of
NLIC is 30964286 shares. Over the three years, NLIC has been distributing both cash and bonus
shares to its shareholders. The table shows a decreasing trend of dividend distribution. In
addition to this, the market price of the share is also declining. Over the three years, the share
price has declined from NPR 4100 to NPR 2800. Currently, the market price of the share is NPR
2140.

From the above information, we can see that NLIC had decreased its cash dividend payment
from 8% in FY 2070/2071 to 1.31% in FY 2071/2072 and it is consistent in FY 2072/2073. Due
to the initial decline, the share might have been less attractive to those investors who benefit
from the dividend payments. This decline might have led the investors to think that the company
is not bearing a lesser profit than that of the previous year.

In reality, the decline in the dividend paid was an aftermath of the earthquake that affected the
economy of the country and consequently, it had a bad effect on the companys net profit as well.
Hence, NLIC had to decrease the dividend paid in FY 2071/2072.

NLIC has been offering bonus shares as dividend over the three year period which has resulted
increasing number of outstanding shares. This may be the cause for the declining market price of
the share since increasing number of outstanding shares must have increased the liquidity of its

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shares. Moreover, with the distribution of bonus shares, the shareholders of NLIC now hold
more number of shares although the value of the total shares remains the same.

Comparing dividend of last three years

Year NTC Dividend in % NLIC Dividend in %
2070/71 47 68
2071/72 50 26.31
2072/73 51 26.31

We can see that NTC has given 47% dividend in the first year and later in two years the
percentage rose by 3% and 1% respectively. Though there is no consistency in the dividend
percentage, there is a rise in the figure which is a good sign. Dividends, those cash distributions
that many companies pay out regularly to shareholders from earnings, send a clear, powerful
message about future prospects and performance. A company's willingness and ability to pay
steady dividends over time - and its power to increase them - provide good clues about its
fundamentals. So this figure depicts the strength in the financial position of NTC. . There are
two primary causes for increases in a companys dividend per share payout. The first is simply an
increase in the company's net profits out of which dividends are paid. The second is a shift in the
companys growth strategy that leads the company to decide to expend less of its earnings in
seeking growth and expansion, thus leaving a larger share of profits available to be returned to
equity investors in the form of dividends.

Similarly, when we look at the figures of NIBL, in the first year the percentage is 68% which is
much greater than what NTC paid in the first year. But in the next year it has drastically fallen
down. By the third year it has been able to maintain the figure which shows steadiness. But when
we compare the 1st year with 2nd or 3rd so many negative conclusions can be drawn from it. The
decrease in dividend happens because of the companys poor operation or the company could
have focused on debt reduction and reinvestments. In case of NIBL, it is not that the company
has focused on reinvesting the profits for growth or has made an attempt to debt reduction. The
dividend has fallen due to decrease in profit after the massive earthquake hit Nepal in 2072.
Being an insurance company, it is obvious that its profit declines during such adverse conditions.
By only looking at the data we cannot say that it is not doing well. The amounts may rise again.

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John D. Rockefeller once said "The only thing that gives me pleasure is to see my dividend
coming in." That is what the investors think .The investors are more interested in a company that
pays stable dividends. This assures them of a reliable source of earnings, even if the market price
of the share dips. The shareholders prefer the certainty of dividends in comparison to the
possibility of higher capital gains in future. Investors prefer companies that have a track record
of paying dividends as it reflects positively on its stability. This indicates predictable earnings to
investors and thus, makes the company a good investment. Investors invested in dividend-paying
stocks do not have to sell their shares to participate in the growth of the stock. They reap the
monetary benefits without selling the stock. A mature company may not have attractive venues to
reinvest the cash or may have fewer expenses related to R&D and expansion. In such a scenario,
investors prefer that a company distributes the excess cash so that they can reinvest the money
for higher returns. When a company announces the dividend payments, it gives a strong signal
about the future prospects of the company. Companies can also take advantage of the additional
publicity they get during this time

Looking at the dividends investors evaluate the return on their investments. Seeing a stable
dividend payment keeps them secured. So as a investor looking at the above data its better that
we invest in NTC. Earthquake hit entire Nepal not only NIBL. Even in such situation, NTC has
shown its capacity of adjusting in adverse situations. The risk adjustment is higher than that of
NIBL. Slowly the conditions of NIBL may improve but looking at the available data and
situations it will be wise if the investment is made in NTC.

Conclusion
Nepal Telecom is a renowned and leading company in the telecommunication sector from
decades has been providing world class services in Nepal throughout the country covering all the
75 districts and covering all the VDCs. It has been providing best services regarding telephony
and internet access to the willing customers. Its subscriber has been increasing day by day

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NTC has been providing a satisfactory level of dividend to its shareholder comparing with other
companies in Nepal. After analyzing past three year data we found that they had been increasing
their total dividend by remarkable percentage in year 2070/71 it was 47%, 2071/72 it was 50%
and finally in year 2072/73 it was 51%. This profile is self-explanatory that their market share
has been increasing day by day. Currently their share is traded at 685 NRP per share.

After analyzing their profile we found that many investors are enthusiastically waiting to invest
in NTC. They consider this company as a secure because it is public limited company back up by
government and as well it is number one leading company in telecom business. It covers about
4.5% of the national revenue and is playing major role in the infrastructure development by
revenue. It has been recognizing itself as the largest tax payer to the government and has been
leading the nation by revenue.

Being a service provider it is facing a lot of challenges. The monopoly market has no longer
existed between the organizations. The competitors are giving a heavy challenge to them; the
competitors mainly Spice Nepal working under the management of Telaia Sonera, a famous
European multinational company, Ncell, Smart telecom and Nepal Satellite company limited are
too involved in the race. Beyond these services it has been implementing new technologies for
fulfilling the desire of the customers.

Though the services provided to the customers are satisfactory till now but a lot of improvement
and a regular cope-up is to be made to hold the existing customers and to attract new customers
from the competitive market as well.

Recommendation
Improvement in the customer care: any organization, usually the service based should always
give first priority to the customers. Holding the existing customer is more important than
planning for inviting new ones because an unsatisfied customer can stop ten new willing
customers from joining the organization.

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Distribution of versatile services: due to changing needs of customer they want different service
at different time they want frequently new services so that they couldnt think of shifting to
competitors. So RnD team should continuously focus on changing need of customer.

Bonus share dividend policy: NTC has not given bonus share dividend yet due to which their
market share is constant so they need to focus on providing bonus share dividend so that on one
side market share will increase and on other side investor will be satisfied because this will
increase their holding number of share and financial instrument is consider as a encouraging
dividend policy by investor and employee.

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