Submitted By :

Ajay Yadav

Amit Srivastava

Dhrubaji Mandal

28/06/2013

(MDI APRIL 2013 PTPGM)

Project Report On Dividend Policy &Its impact on Market Price

ABSTRACT

Dividend policy has been an issue of interest in financial literature since Joint Stock Companies came into existence. Dividends are commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy, which managers pursue in deciding the size and pattern of cash distribution to shareholders over time. Managements’ primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving the shareholders a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still a debatable issue.

Dividend policy is one of the most complex aspects in finance. Three decades ago, Black (1976) in his study on dividend wrote, “The harder we look at the dividend picture the more it seems like a puzzle, with pieces that just don’t fit together”. Why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered.

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INDEX

S. No. Content Page No.

1 Introduction 4

2 Content 5

3 Corelation With Market 6

4 Scope 9

5 The Study 10

5aNational Thermal Power Corporation

Ltd11

5bNational Hydroelectric Power

Corporation Ltd14

5c TATA Power 17

5dpower grid corporation of India

limited20

5e Torrent 23

6 Analysis as a Whole 26

7 Conclusion & References 27

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INTRODUCTION

In the words of Ezra Salomon, “In an uncertain world where verbal statement can be misinterpreted or ignored, dividend speaks louder than 1000 words.”

What is Dividend?Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.

What are different kinds of dividend?1. Cash Dividends: This is the most common form of dividend. Cash dividends are those dividends when simply cash is paid out of the profits.2. Share Repurchases: The Company repurchases the stock. Shareholders pay tax only on the capital gains portion.3. Stock Split: It increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.4. Bonus Issue: It is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company.5. Right Issue: With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.

What is Dividend Policy?

Dividend policy is concerned with taking an implicit or explicit decision of the Board of Directors regarding paying cash dividend in the present or paying an increased dividend at a later stage to the shareholders.

The policy a company uses to decide how much it will pay out to shareholders in dividends from PAT and this decision is considered a financing decision

What are the different dividend policies?Dividend policy can be of two types: managed and residual. 1. Managed dividend policy: distribution is pre-decided whether the company will be paying same dividend per share over the time or it will be increasing dividend per share year by year. 2. Residual dividend policy: the amount of dividend is simply the cash left after the firm makes desirable investments using NPV rule. The rule is- if the company does not have any positive NPV projects to invest in, then it should pay shareholders dividend.

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Concept

Dividends paid by the firms are viewed positively both by the investors and the firms. The firms which do not pay dividends are rated in oppositely by investors thus affecting the share price.

Dividend policy is challenging for the directors and financial manager of a company, because different investors have different views on present cash dividends and future capital gains. And also regarding the extent of effect of these dividends on the share price. Due to this controversial nature of a dividend policy it is often called the dividend Puzzle.

Most common type of dividend Measure

Level of dividends often measured by dividend yield:

Dividend yield = P

D

pricestock

dividendannual

Measures % return earned by investor from dividends alone

Firm’s dividend policy can also be measured by payout ratio:

Payout ratio = EPS

D

shareperearnings

dividendannual

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Correlation with Market Price

Two important models supporting dividend Correlation are given by Walter and Gordon.

1. Walter Model Walter's model: Dividends paid to the shareholders are reinvested by the shareholder further, to get higher returns Mathematically it’s given by

Where, P = Market price of the share D = Dividend per share r = Rate of return on the firm's investmentske = Cost of equity E = Earnings per share‘Therefore, from above the market value of a share is the result of expected dividends and capital gains according to Walter

2. Gordon Model Investors are risk averse and believe that incomes from dividends are certain rather than incomes from future capital gainsAccording to which the market prices of the share is calculated as follows

Where,P = Market price of the shareE = Earnings per shareb = Retention ratio (1 - payout ratio)r = Rate of return on the firm's investmentske = Cost of equitybr = Growth rate of the firm (g)

Therefore, the model shows a relationship between the payout ratio, rate of return, cost of capital and the market price of the share.

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Normally, the amount of dividend is highly variable. If the manager believes dividend policy is important to their investors and it positively influences share price valuation, they will adopt managed dividend policy. Firms generally adopt dividend policies that suit the stage of life cycle they are in. For instance, high- growth firms with larger cash flows and fewer projects tend to pay more of their earnings out as dividends. The dividend policies of firms may follow several interesting patterns adding further to the complexity of such decisions. Also, there are distinct differences in dividend policy over the life cycle of a firm, resulting from changes in growth rates, cash flows, and project investments in hand. Shareholders wealth is represented in the market price of the company’s common stock, which, in turn, is the function of the company’s investment, financing and dividend decisions. Among the most crucial decisions to be taken for efficient performance and attainment of objectives in any organization are the decisions relating to dividend. Dividend decisions are recognized as centrally important because of increasingly significant role of the finances in the firm’s overall growth strategy. The objective of the finance manager should be to find out an optimal dividend policy that will enhance value of the firm. Like other important policy decisions dividend policy too has a signaling effect on the firms share prices. Generally, announcements of dividend increases generate abnormal positive security returns, and announcements of dividend decreases generate abnormal negative security returns. This is due to the fact that the company’s management has access to private and superior information about future prospects and choose a dividend level to signal that private information. Such a calculation, on the part of the management of the firm may lead to a stable dividend payout ratio.

Dividend policy of a firm has implications for investors, managers and lenders and other stakeholders, specifically the claimholders. For investors, dividends – whether declared today or accumulated and provided at a later date are not only a means of regular income, but also an important input in valuation of a firm. Similarly, managers’ flexibility to invest in projects is also dependent on the amount of dividend that they can offer to shareholders as more dividends may mean fewer funds available for future investments. Lenders may also have interest in the amount of dividends a firm declares, as more the dividend paid less would be the amount available for servicing and redemption of their claims. The dividend payments present an example of the classic agency situation as its impact is borne by various claimholders. Accordingly dividend policy can be used as a mechanism to reduce agency costs. The payment of dividends reduces the discretionary funds available with the management for perquisite consumption and investment opportunities and requires them to seek financing in capital markets. This monitoring by the external capital markets compels the managers to be more disciplined and act in owners’ best interest.

Companies generally prefer a stable dividend payout ratio because the shareholders expect it and reveal a preference for it. Shareholders may want a stable rate of dividend payment for a variety of reasons. Risk-averse shareholders would be willing to invest only in those companies which pay high current returns on shares. Similarly, educational institutions and charity firms prefer

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stable dividends, because they will not be able to carry on their current operations otherwise. Such investors would therefore, prefer companies, which pay a regular dividend every year. This clustering of stockholders in companies with dividend policies that match their preference is called clientele effect.

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SCOPE

1. Study of the annual reports of different power sector companies:I. . National Thermal Power Corporation (NTPC Limited)

II. National Hydroelectric Power Corporation Ltd(NHPC)III. TATA PowerIV. power grid corporation of India limitedV. Torrent

2. For each company, annual reports are taken from the year 2009 to 2012 (2009-12).

3. The scope of the study of report is limited to the establishment of Dividend Payout Pattern and the factors necessary for such establishment

4. Following ratios have been worked out:I. Scale of firm's operation by taking Natural Log of Net Sales

II. Dividend YieldIII. Dividend Payout RatioIV. Dividend Ratio

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THE STUDY

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COMPANY – 1

Name: National Thermal Power Corporation (NTPC Limited)

Type State-owned enterprise Public company

Traded as BSE: 532555

NSE: NTPC; BSE SENSEX Constituent

Industry Electric utility

Founded 1975

Headquarters New Delhi, India

Key people Arup Roy Choudhury

Products electrical power, natural gas

Services Electricity generation and distribution

Natural gas exploration, production, transportation and distribution

Revenue Increase INR690.36 billion (US$12 billion) (2011–12)[2]

Net income Increase INR98.14 billion (US$1.7 billion)(2011–12)[2]

Employees 26,000 (2012)

Website www.ntpc.co.in

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YEAR Div.paid PAT(Crores_) no.of shares DPS(D/N) EPS(PAT/N)PAY OUT

RATIO

2010 3133.2 8728.2 82454.64 3.8 10.59 35.88

2011 3133.26 9102.59 82454.64 3.8 11.04 34.42

2012 3298.73 9223.73 82454.64 4 11.19 35.74

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NTPC DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant. For the two years 2010 & 2011 the Dividend paid is constant and thus DPS (dividend per share) is same for these two years. For year 2012 there is increase in Dividend paid and thus increase in the DPS. To increase in DPS means that the company is wooing their shareholders by giving more dividend to them in the year 2012. As PAT (profit after tax) is increases continuously from 2010 to 2012 and therefore EPS is also increasing.

This is a very good sign for a company because the numbers of shares are constant and PAT is increasing. This means that the company is doing well in terms of making profit. Next comes the PAYOUT Ratio i.e. an indication that what the company is doing with their earnings. It implies that how much share of PAT the company is giving as a Dividend and how much of it the company is reserved as its surplus i.e. for its expansion mode. From the graph it is evident that the PayOut ratio is almost constant for all the three years. . Lower is the PayOut Ratio of a company higher secure the payment of the dividend.

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COMPANY – 2

Type Public company

(BSE: 533098, NSE: NHPC)

Industry Electric utility

Founded 1975

Headquarters Faridabad, India

Key people G.Sai.Prasad

Products Electricity generation, energy trading

Revenue $1.1 billion (2010)

Net income $485 million (2010)

Website nhpcindia.com

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YEAR Div.paid PAT(Crores) No.of shares DPS(D/N) EPS(PAT/N)PAY OUT

RATIO

2010 676.54 2090.5 123007.43 0.55 1.7 32.35

2011 738.04 2166.67 123007.43 0.6 1.76 34.09

2012 861.06 2771.77 123007.43 0.7 2.25 31.11

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NHPC DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant. For all the three years 2010, 2011 & 2012 the Dividend paid is increasing continuously and thus DPS (dividend per share) is increasing for these three years. To increase in DPS means that the company is wooing their shareholders by giving more dividend to them in all the three years. As PAT (profit after tax) is slightly increases from 2010 to 2011 and thus the EPS is almost constant for these two years.

In the year 2012 there is much increase in PAT and thus EPS is very high because the numbers of shares is constant. A very good sign for a company because the number of shares is constant and PAT is increasing. This means that the company is doing well in terms of making profit. Next comes the PAYOUT Ratio i.e. an indication that what the company is doing with their earnings. It implies that how much share of PAT the company is giving as a Dividend and how much of it the company is reserved as its surplus i.e. for its expansion mode. From the graph it is evident that the Payout ratio is increasing from year 2010 to 2011 which means that the dividend paying security is decreasing. In 2012 the Payout ratio is increasing.

COMPANY – 3

Lighting up Lives!

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Type Public

Traded as BSE: 500400

BSE SENSEX Constituent

Industry Electric utility

Founded 1911

Founder(s) Dorabji Tata

Headquarters Mumbai, Maharastra, India

Key people Cyrus Pallonji Mistry

Products Electrical power, Natural gas

Services Electricity generation and distribution Natural gas exploration, production, transportation and distribution

Revenue IncreaseINR194.5076 billion (US$3.3 billion) (2011)[1]

Net income Increase INR21.4753 billion (US$370 million)(2009-2010)[1]

Employees 3,809 (2010)

Website www.tatapower.com

Year Div.paid PAT(Crores No.of shares DPS(D/N) EPS(PAT/N)

PAY OUT RATIO

2010 285.05 947.65 2373.07 12 39.93 30.052011 296.92 941.49 2373.07 12.5 39.67 31.52012 296.92 1169.7 23730.72 1.25 4.93 25.35

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TATA POWER DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant. From year 2010 to 2011 the Dividend paid is increasing and thus DPS (dividend per share) is increasing for these

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two years. For year 2012 the Dividend paid is not increasing and thus DPS is same for the two years but here Stock split took place thus increasing the numbers of shares and consequently the DPS. As PAT (profit after tax) is slightly decreasing from 2010 to 2011 and therefore EPS is also decreasing. But PAT is increasing from 2011 to 2012 .This is a very good sign for a company because the numbers of shares are constant and PAT is increasing. This means that the company is doing well in terms of making profit. But here also Stock Split took place and thus the EPS is decreasing because the numbers of shares increasing.

Next comes the PAYOUT Ratio i.e. an indication that what the company is doing with their earnings. It implies that how much share of PAT the company is giving as a Dividend and how much of it the company is reserved as its surplus i.e. for its expansion mode. From the graph it is evident that the Payout ratio is increasing from year 2010 to 2011 but it is increasing from year 2011 to 2012 considerably. No effect on Payout Ratio of Stock Split. Lower is the Payout Ratio of a company higher securing the payment of the dividend.

COMPANY – 4

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Type State-owned enterprise

Public

Traded as NSE: POWERGRID

BSE: 532898

Industry Electric utility

Founded 23 October 1992

Headquarters Gurgaon, India

Area served India

Key people Shri R.N. Nayak (Chairman & MD)

Products transmission and distribution; energy trading

Revenue IncreaseINR13,329 crore (US$2.3 billion)(2012-13)[1]

Net income IncreaseINR4,234 crore (US$730 million)(2012-13)[2]

Employees 10,000 (2012)

Website: www.Powergridindia.com

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Year Div.paid PAT(Crores) No.of shares DPS(D/N)EPS(PAT/

N)PAY OUT

RATIO

2010 631.34 2040.94 46297.3 1.5 4.85 30.922011 810.23 2696.89 46297.3 1.75 5.83 30.022012 976.89 3254.95 46297.3 2.11 7.03 30.02

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TATA POWER DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant. From year 2010 to 2011 the Dividend paid is increasing and thus DPS (dividend per share) is increasing for these two years. For year 2012 the Dividend paid is not increasing and thus DPS is same for the two years but here Stock split took place thus increasing the numbers of shares and consequently the DPS. As PAT (profit after tax) is slightly decreasing from 2010 to 2011 and therefore EPS is also decreasing. But PAT is increasing from 2011 to 2012.

This is a very good sign for a company because the numbers of shares are constant and PAT is increasing. This means that the company is doing well in terms of making profit. But here also Stock Split took place and thus the EPS is decreasing because the numbers of shares increasing. Next comes the PAYOUT Ratio i.e. an indication that what the company is doing with their earnings. It implies that how much share of PAT the company is giving as a Dividend and how much of it the company is reserved as its surplus i.e. for its expansion mode. From the graph it is evident that the Payout ratio is increasing from year 2010 to 2011 but it is increasing from year 2011 to 2012 considerably. No effect on Payout Ratio of Stock Split. Lower is the Payout Ratio of a company higher securing the payment of the dividend.

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COMPANY – 5

Type Public

Traded as BSE: 532779

NSE: TORNTPOWR

Industry Energy

Founded 1996

Headquarters Ahmedabad, India

Products Natural gas production, sale and distribution,

Electricity generation and distribution,

Hydroelectricity, wind power, energy trading

Revenue Increase INR 23 billion (2006)

Net income Increase INR 1.2 billion (2006)

Employees 4000

Parent Torrent Group

Website torrentpower.com

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Data for Torrent Power:

Year Div.paid PAT(Crores) no.of shares DPS(D/N) EPS(PAT/N)PAY OUT

RATIO

2010 141.73 836.55 4724.48 3 17.71 16.932011 259.85 1065.72 4724.48 5.5 22.56 24.372012 307.08 1237.46 4724.48 6.5 26.19 24.81

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TORRENT POWER DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant. For all the three years the Dividend paid is increasing and thus DPS (dividend per share) is increasing for these three years. To increase in DPS means that the company is wooing their shareho lders by giving more dividend to them in all the three years. As PAT (profit after tax) is increases continuously from 2010 to 2012 and therefore EPS is also increasing. This is a very good sign for a company because the numbers of shares are constant and PAT is increasing. This means that the company is doing well in terms of making profit. Next comes the PAYOUT Ratio i.e. an indication that what the company is doing with their earnings. It implies that how much share of PAT the company is giving as a Dividend and how much of it the company is reserved as its surplus i.e. for its expansion mode. From the graph it is evident that the PayOut ratio is considerably increasing from year 2010 to 2011 and slightly increasing from year 2011 to 2012.

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ANALYSIS AS A WHOLE

CONCLUSION:

There is no fixed pattern in the distribution of Dividend of the Automobile Industry. But pattern could be worked out for different Companies.

For Shareholders: From the Shareholders’ point of view the company which is giving more Dividend is good for the shareholders’. So companies should try to increase their DPS (dividend per share) to woo the shareholders’ to invest more and more in them.

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For Organizations: The companies which have higher EPS (earning per share) is good because higher the EPS higher is the PAT. So companies should try to increase their PAT so that their EPS will increase.

Regarding Payout Ratio: From the analysis of all the five companies we found that their Payout Ratios are in the range of 25 -35 which is considered a very good ratio. The companies are distributed their almost 1/3rd as their Dividend and rest are retained as surplus.

References :

1. https://en.wikipedia.org/wiki/NTPC_Limited

2. http://en.wikipedia.org/wiki/NHPC_Limited

3. http://en.wikipedia.org/wiki/Tata_Power

4. https://en.wikipedia.org/wiki/PowerGrid_Corporation_of_India

5. http://en.wikipedia.org/wiki/Torrent_Power

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