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  • 1. STUDY OF DIVIDEND PAYOUTPATTERN Benu Singhal MSIL, Gurgaon 2/29/2012

2. ABSTRACTDividend policy has been an issue of interest in financial literature since Joint Stock Companiescame into existence. Dividends are commonly defined as the distribution of earnings (past orpresent) 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 andpattern of cash distribution to shareholders over time. Managements primary goal isshareholders wealth maximization, which translates into maximizing the value of the companyas measured by the price of the companys common stock. This goal can be achieved by givingthe shareholders a fair payment on their investments. However, the impact of firms dividendpolicy 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 seemslike a puzzle, with pieces that just dont fit together. Why shareholders like dividends and whythey reward managers who pay regular increasing dividends is still unanswered.2|Page 3. INDEXS. No. Content Page No.1Introduction42Scope 63The Study 73a Maruti Suzuki India Ltd 83b Mahindra & Mahindra 113c Tata Motors 153d Hyundai Motor Company 193e Volkswagen AG 224Analysis as a Whole 255Conclusion263|Page 4. INTRODUCTIONIn the words of Ezra Salomon, In an uncertain world where verbal statement can bemisinterpreted 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 ofcorporate 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 thosedividends when simply cash is paid out of the profits.2. Share Repurchases: The Company repurchases the stock. Shareholders pay tax only on thecapital gains portion.3. Stock Split: It increases the number of shares in a public company. The price is adjusted suchthat the before and after market capitalization of the company remains the sameand dilution does not occur.4. Bonus Issue: It is a free share of stock given to current shareholders in a company, basedupon the number of shares that the shareholder already owns. While the issue of bonus sharesincreases the total number of shares issued and owned, it does not change the value of thecompany.5. Right Issue: With the issued rights, existing shareholders have the privilege to buy a specifiednumber of new shares from the firm at a specified price within a specified time.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 payingsame 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 makesdesirable investments using NPV rule. The rule is- if the company does not have any positiveNPV projects to invest in, then it should pay shareholders dividend.Normally, the amount of dividend is highly variable. If the manager believes dividend policy isimportant to their investors and it positively influences share price valuation, they will adoptmanaged dividend policy. Firms generally adopt dividend policies that suit the stage of life cyclethey are in. For instance, high- growth firms with larger cash flows and fewer projects tend topay more of their earnings out as dividends. The dividend policies of firms may follow severalinteresting patterns adding further to the complexity of such decisions. Also, there are distinctdifferences in dividend policy over the life cycle of a firm, resulting from changes in growthrates, cash flows, and project investments in hand. Shareholders wealth is represented in themarket price of the companys common stock, which, in turn, is the function of the companysinvestment, financing and dividend decisions. Among the most crucial decisions to be taken for4|Page 5. efficient performance and attainment of objectives in any organization are the decisions relatingto dividend. Dividend decisions are recognized as centrally important because of increasinglysignificant role of the finances in the firms overall growth strategy. The objective of the financemanager 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 firmsshare prices. Generally, announcements of dividend increases generate abnormal positivesecurity returns, and announcements of dividend decreases generate abnormal negative securityreturns. This is due to the fact that the companys management has access to private and superiorinformation 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 dividendpayout ratio.Dividend policy of a firm has implications for investors, managers and lenders and otherstakeholders, specifically the claimholders. For investors, dividends whether declared today oraccumulated and provided at a later date are not only a means of regular income, but also animportant input in valuation of a firm. Similarly, managers flexibility to invest in projects is alsodependent on the amount of dividend that they can offer to shareholders as more dividends maymean fewer funds available for future investments. Lenders may also have interest in the amountof dividends a firm declares, as more the dividend paid less would be the amount available forservicing and redemption of their claims. The dividend payments present an example of theclassic agency situation as its impact is borne by various claimholders. Accordingly dividendpolicy can be used as a mechanism to reduce agency costs. The payment of dividends reducesthe discretionary funds available with the management for perquisite consumption andinvestment opportunities and requires them to seek financing in capital markets. This monitoringby the external capital markets compels the managers to be more disciplined and act in ownersbest interest.Companies generally prefer a stable dividend payout ratio because the shareholders expect it andreveal a preference for it. Shareholders may want a stable rate of dividend payment for a varietyof reasons. Risk-averse shareholders would be willing to invest only in those companies whichpay high current returns on shares. Similarly, educational institutions and charity firms preferstable 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. Thisclustering of stockholders in companies with dividend policies that match their preference iscalled clientele effect.5|Page 6. SCOPE1. Study of the annual reports of different automobile companies: I. Maruti Suzuki India Ltd.II. Mahindra & Mahindra III. Tata Motors IV.Hyundai Motor CompanyV.Volkswagen AG2. For each company, annual reports are taken from the year 2006 (2006-07) to 2010 (2010- 11).3. The scope of the study of annual report is limited to the establishment of Dividend Payout Pattern and the factors necessary for such establishment. These are:I.Sales II.ProfitIII.Interest chargesIV. Earnings per share V. Total number of issued sharesVI. Dividend proposed VII. Cash & Cash equivalents VIII.Market prices of shareIX. Face value of share X. Bonus IssueXI. Right Issue XII. Stock Repurchase XIII.Stock-Split4. Following ratios have been worked out: I. Scale of firms operation by taking Natural Log of Net SalesII. Profit as a %age of sales III. Dividend Yield IV.Dividend Payout RatioV.Dividend Ratio VI.Debt Equity Ratio6|Page 7. THE STUDY7|Page 8. COMPANY 1Name: Maruti Suzuki India LtdBusiness: Manufacturing of Passenger CarsHead Office: New Delhi, IndiaEstablishment: 1981Sales in year 2010-11: Rs 36128 croresProfits in year 2010-11: Rs 2288 croresDividend proposed in year 2010-11: Rs 7.5 per shareCurrency: Rupees8|Page 9. Data for Cash Dividend:ProfitYear/VariablesScale % of Dividend Dividend Dividend DebtSalesYieldpayout RatioEquity2010-11 (2010)12.79741 6.33% 0.47%9.47% 150.00%2.00%2009-10 (2009)12.61552 8.29% 0.25%6.94% 120.00%7.00%2008-09 (2008)12.22383 5.99% 0.65%8.30% 70.00% 7.00%2007-08 (2007)12.09292 9.69% 0.54%8.07% 100.00% 11.00%2006-07 (2006)11.89083 10.70%0.43%8.32% 90.00% 9.00% Maruti Suzki 160.00% 140.00% 120.00% 100.00%%age80.00%Dividend RatioDividend payout60.00%40.00%20.00% 0.00% 2006-07 2007-08 2008-09 2009-102010-11(2006)(2007)(2008)(2009) (2010)9|Page 10. Dividend & Earnings per Share100 90 80 70 60 in INR 50DPS EPS 40 30 20 1002006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)Interpretations:1. Since there is no Stock-Split in last 5 years, therefore, the shape of the graphs of Dividend Ratio and Dividend per Share is same.2. Dividend Payout ratio, which is Dividend per share divided by Earning per share, has shown minor variation over the period of 5 years. It ranges from 6.94% to 9.47%.3. Dividend ratio, which is Dividend per share divided by Face-Value/Par-Value of the share, has seen uphill trend except the year 2008-09. Year 2008-09 saw recessionary conditions throughout the world. Although the net sales had increased by 13.98% in 2008-09, but profits had declined by 29.58%. This decline was responded by decline in dividend ratio.Other forms of Dividend:1. Bonus Issue: It never issued Bonus Shares.2. Stock Repurchases: It never announced Stock-Repurchases.3. Right Issue: Maruti Suzuki India ltd. never came out with its 2nd IPO. So it never had Right Issue.4. Stock-Split