Kas

hm

ir

Univ

ersi

ty

CORPORATE DIVIDEND BEHAVIOR

AND

IT`S IMPACT ON MARKET VALUE OF FIRM

(AN ALYTICAL STUDY)

SUBMITTED TO

DR Bashir Ahmad joo

Professor,

THE BUSINESS SCHOOL-KU

1

Kas

hm

ir

Univ

ersi

ty

CORPORATE DIVIDEND BEHAVIOR

AND

IT`S IMPACT ON MARKET VALUE OF FIRM

(AN ALYTICAL STUDY)

SUBMITTED BY

ABID REYAZ SHAH NUZHAT WANI

Roll NO: 256 Roll No: 233

MOHSIN EJAZ NASTI TAHIR AHMAD WANI

ROLL NO: 241 Roll NO: 205

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INDEX

S.no Topic Page No

1. Abstract 4

2. Introduction 4

3. Theories of Dividend Pay-outs 6

4. Review Of Literature: 8

5 Theoretical Framework 15

6. Industry Profile 15

7. Companies Profile 16

8. Methodology 21

9. Findings 34

10 Conclusion 35

11. References 36

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TITLE OF STUDY:

CORPORATE DIVIDEND BEHAVIOR AND

IT`S IMPACT ON MARKET VALUE OF FIRM

(AN ANALYTICAL STUDY)

1. ABSTRACT:

This paper attempts to explore the possible links between dividend policy and stock price

behavior in Indian corporate sector. A sample of 5 listed companies of steel from BSE is

examined for the previous seven years. Dividend policy has always been a source of

controversy despite years of theoretical and empirical research both in developed countries

and emerging economies. The present paper features a panel data approach to analyze the

relationship between dividend-payout and stock-price behavior while controlling the

variables like size and long-term debt-equity ratio of the firm. The sample is taken for steel

industry sector in order to get homogeneous results. Although the results are not robust

enough as in the case of developed markets but shades some more interesting facets to the

existing corporate finance literature on dividend policy in India.

2. INTRODUCTION: Dividend policy decision is one of the important decisions of financial management because

it affects the financial structure, the flow of funds, corporate liquidating and investors‘

attitudes. The main aspect of dividend policy is to determine the amount of earning to be

distributed to the shareholder and the amount to be retained in the firm. Divined policy

involves the decision to pay out earning versus retaining them for reinvestment in the

firm.The financial manager must understand the various conflicting factors which influence

the dividend policy before deciding the allocation of its company‘s earnings into dividends

and retain earnings.

Pandy (1979) defines dividend as that portion of a company‘s net earnings which the

directors recommend to be distributed to shareholders in proportion to their share holdings in

the company. It is usually expressed as a percentage of nominal value of the company‘s

ordinary share capital or as a fixed amount per share.

Dividends are usually paid out of the current year‘s profit and sometimes out of general

reserves. They are normally paid in cash, and this form of dividend payment is known as cash

dividend. Another option available to a company for the distribution of earnings is by stock

dividend (bonus issue) which is supplementary to cash dividend. When cash dividend is paid

to shareholders, it has an adverse effect on the liquidity position and the reserves of the firm

as it tends to reduce both of them (cash and reserves). Unlike cash lend, stock dividend does

not affect the total net worth of the firm, as it is a capitalization of owners‘ equity portion.

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A company may in the annual general meeting, declare dividend only on the

recommendation of the Directors. The Company may from time to time pay to the members

such interim dividends as appear to the directors to be justified by the profits of the company.

The general meetings shall have power to decrease the amount of dividend recommended by

the directors, but shall have no power to increase the amount recommended

According to Van Home (1971) dividend policy entails the division of earnings between

shareholders and reinvestment in the firm. Retained earnings are a significant source of funds

for financing corporate growth, but dividend constitutes the cash flows that accrue to

shareholders. There exist two divergent schools of thought with regards to these, the dividend

policy and the retained earning policy.

Dividend policy suggests a positive attitude for, it is a deliberate policy to maintain or

increase dividend at a certain level with the ultimate aim of sustaining the price of the

ordinary shares on the stock exchange. This is because capital markets are not perfect,

although shareholders are indifferent between dividend and retained earnings due to market

imperfections and uncertainty, but they give a higher value to the current year dividend than

the future dividend and capital gains. Thus the payment of dividend has a strong influence on

the market price of the shares. Management might maintain a dividend level even at the

expense of liquidity or forced into borrowing to do so. With this approach it holds that

dividends, on the other hand, are desirable from the shareholders point of view, as increasing

their current wealth and consequently dividend level determines share price as well as

indicates the prospect of profitability of the firm.

On the other hand, profit retention policy tends to suggest a more passive residual attitude

towards dividend, that is, a passive attitude towards retention. Dividend payout reduces the

amount of earnings to be retained in the firm and affect the total amount of internal financing.

When dividends are treated as a financing decision, the net earnings of the firm may be

viewed as a significant source of financing the growth of the firm. Dividends paid to

shareholders represent a distribution of earnings that cannot be profitably reinvested by the

firm. The approach to dividend is viewed merely as a residual decision. This theory is known

as the residual theory of dividend and was first proposed by Miller and Modigliani in 1961.

Investor prefer to have the firm retain and reinvest earnings rather than pay them out in

dividend if the return on the investment earnings exceeds the rate of return the investors

could themselves obtain on other comparative investment. Otherwise, the investors prefer

dividend.

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3. THEORIES OF DIVIDEND PAY-OUTS:

Lintner (1956) was the first to systematically assess the dividend policies of corporations.

His interviews with senior managers at 28 firm‘s document that most managers

believestockholdersprefer a stable rate of dividends, and will place a premium on companies

that candeliver stable dividends. He finds behaviour of dividend-smoothing by managers

(Lintner (1956, p. 99)): ―most management sought to avoid making changes in their dividend

ratesthat might have to be reversed within a year or so.‖

In contrast to the theories that have been developed in an academic setting, there arevarious

―rules of thumb‖ developed in the popular financial press. Graham (1985) in TheIntelligent

Investor advises: ―stockholders should demand of their managements a normalpay-out

ofearnings — on the order, say, of two-thirds — or else a clear-cut demonstration thatthe

reinvested profits have produced a satisfactory increase in per-share earnings.‖ Wayman

(2003) believes that a firm‘s dividend policy is most definitely not neutral: ―there is

adividend hierarchy. A company that has a history of paying a consistently growing dividend

is better than one that pays a consistent, but steady dividend. And the consistent but

flatdividend is better than a company who has had to cut its dividend.‖

The information signalling models of Bhattacharya (1979), Miller and Rock (1985), and

John and Williams (1985) suggest that firms will use dividend changes to signal the

futureprospects of the firm. An unanticipated rise in dividends is good news for the

shareholders, and should be accompanied by a rise in the share price, whereas a fall in the

dividend conveysbad news to shareholders. For these signalling models to hold in

equilibrium, dividendchanges should be followed by earnings changes in the same direction.

The quality of informationpresent in published accounts, and public statements of company

officials during thistime in the India is arguably limited when compared to present day

standards.

Agency models recognize that a firm is comprised of at least three different stakeholders:

Management, shareholders, and bondholders, and the three groups‘ interests may diverge.

Shareholders in a struggling company may like to pay themselves such large dividends

thatbondholders will miss out on their scheduled payments. Management may be tempted to

usethe firm‘s resources in a way that is not in the best interests of the shareholders. In

thewords of Allen and Michael (2001 p. 62): ―these activities can range from lavish

expenseson corporate jets to unjustifiable acquisitions and expansions.‖ Solutions to the

conflict ofinterest problem that management face have been suggested by Grossman and Hart

(1980), Easterbrook (1984) and Jensen (1986). Management should be constrained in how

much readily accessible cash they have access to. The less cash available to management, the

harderit is for them to spend it in wasteful pursuits. By paying out cash as dividends it

reduces thecash at the disposal of management, and can increase the value of the firm. An

extensionof the agency model by Lang and Litzenberger (1989) is that wasteful uses of cash

is likelyto be more pronounced in stable, cash-rich companies in mature industries without

manygrowth opportunities. Therefore, an increase in dividends should have a greater

(positive) price impact for firms that have few investment opportunities than for firms that

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have many investment opportunities. Taken to the extreme, if a firmhas many positive net

present valueprojects, then increasing the cash distributed to shareholders as dividends may

decrease thevalue of the firm.

Baker and Wurgler (2004) develop a catering theory to explain thepayment of dividends.

Investors may have an uninformed, perhaps time-varying, demandfor dividend paying

equities. Risk aversion by arbitrageurs prevents the prices of dividendpayingand non-paying

stocks from converging; therefore managers cater to the demand fordividend-paying equities.

A test of catering theories of dividends is not possible with ourdata set, due to the relatively

short time series. Graham and Kumar (2006) empirically demonstrate that dividend clientele

theories exist. They find that older investors and lowerincomeinvestors prefer equities with a

high dividend yield.

Aside from tax issues, the remaining Miller and Modigliani (1961) assumptions, complete

contracting, no transaction costs, and complete markets were clearly not satisfied in India.

Securities markets in the early twentieth century. However, it is arguable that violations of

these assumptions were no worse than they are today. Managers were forced to hold stock in

their own companies, and their salary was voted on at the AGM. Although managers could be

voted out of office, complete contracts could not be written that would have preventedthe

scandals that did occur from time to time.

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4. REVIEW OF LITERATURE:

1.Title of Paper Dividend Policy and Stock Price Behavior in Indian Corporate

Sector:

Name of Researcher Upananda Pani

Research Scholar, Department of Humanities and Social

Sciences, IIT , Kharagpur-721302.

Research

Methodology

Data Sources and Sample Design

The study mainly relies on the Prowess database of the CMIE

(centre for monitoring on Indian economy) in India in order to

mitigate the above noted objectives. Stock return estimation by

calculation of a number of ratios was done on the collected data.

Findings The exclusive tests of different model allow us to go for the use of

panel-data modeling. As we have given six different industry

classifications for the study, we have tested the proposed model for

each industry separately with different combination of variables. The

results display statistical significance and linearity when the industry

classifications are given. The regression on aggregate data remains

in significant. .However, the direction of relationship between the

dependent variable is as per prior expectation. In other words

dividend retention ratio is positively related with the stock-returns.

In case of aggregate data which consists of all firms above from

industry classifications, the regression lacks statistical significance,

the null hypothesis that there is no relationship between the

dependent variable and independent variable cannot be rejected.

2.Title of Paper Impact Of Dividend Policy On Shareholders’ Value: A Study Of

Indian Firms

Name of Researcher Sujata Kapoor

Jaypee Institute of Information Technology, Noida

Research

Methodology

THE DATA AND SAMPLE

The study is focused on three sectors IT, FMCG and Service sector.

THE DATA

The research is analytical and empirical in nature and makes use of

secondary data. The data has been sourced from Prowess database of

Centre for Monitoring Indian Economy (CMIE).

MODELS AND TECHNIQUES

Lintner Model, Factor Analysis, Quadratic Polynomial Regression

Analysis Using Panel Data, Event Study

Findings Out of the chosen sectors Lintner model fits well in the FMCG

sector signifying dividend signaling and smoothing effects are

present in this sector. Thus these firms follow stable dividend

payments year on year basis, even though earnings might change

dramatically.

The findings in the FMCG sector are in alignment with Brave et.al

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that mangers are very reluctant to cut dividends once they are

initiated. This reluctance leads to dividends that are sticky, smoothed

from year to year and tied to long run profitability of the firm

However IT sector and service sector demonstrate a pattern, which is

seen in emerging economies like Tunisia, Zimbabwe and Turkey.

3.Title of Paper Payout Policy

Name of Researcher Franklin Allen

Roni Michaely

The Wharton Financial Institutions Center

Research

Methodology

A Literature Review

Findings 1. Following the example of the last decade, repurchases should be

used much more frequently than they have been. Investment and

repurchase policies should be coordinated to avoid the transaction

costs of financing. When there are positive NPV investments,

repurchases should be avoided. In years where NPV investment

opportunities are low, unneeded cash should be paid out by

repurchasing shares.

2. To the greatest extent possible, firms that have a high degree of

information asymmetry and large growth opportunities should avoid

paying dividends. The significant costs associated with raising

equity capital for these firms makes payment of dividends even more

costly. Stated differently, in periods when a firm faces many good

investment opportunities, a dividend reduction might not be such a

bad idea.

4.Title of Paper The Effect of Dividend Policy on Market Value UK

Empirical Study

Name of Researcher SALIH, ALAA,A,

Durham University

Research

Methodology

This research investigates three main issues in the UK context: 1)

the impact of dividends policy on market value; 2) the extent to

which companies follow a Residual Dividends Policy; and 3) the

main factors that have to be taken into account when financial

managers/directors set a company‗s dividends policy.

Findings The results of the study can be summarized as follows:

1. There is a relationship between dividends policy (cash and

repurchase), the earnings and investment policy (retained earnings)

and the market value of companies in the UK.

In addition, the result suggests that dividends policy, earnings and

investment policy act jointly and simultaneously in influencing the

market value of a company.

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2. The results indicate that there is no effect of a shares dividend

policy on the market value of a company in UK.

3. The study found that UK companies in general do not follow a

residual dividends policy—further the companies in UK do not

prefer investment policy to dividends policy.

5Title of Paper Corporate Dividend Policy And Behavior: The Malaysian

Evidence

Name of Researcher I. M. Pandey

Indian Institute of Management

Ahmedabad, India

Research

Methodology

We used the financial data of 248 companies listed on the KLSE

Main Board as at 31 December 2000. The criteria for sample

selection are as follows: First, financial, trusts and closed-end funds

companies are excluded. These companies have very high leverage

and they are generally governed by different rules and practices with

regard to earnings management. Second, we used a balanced sample

of companies for eight years, i.e., from 1993 to 2000. In the first

stage of our analysis, we examined if dividend payout ratios of the

KLSE companies differ across sectors. We next examined how

firms' decisions to change dividend payments are affected by

changes in earnings. In the third stage of our analysis, we used

Lintner's model to study the stability of dividend. Following Fama

and Babiak (1968), we used earnings per share (EPS) and dividends

per share (DPS) rather than total earnings and dividends for testing

the dividend stability of the KLSE firms.

Findings Our results show that a large number of Malaysian firms increase

payment of dividends when their earnings increase. They are

reluctant to skip dividends when earnings fall. But Malaysian firms

tend to omit dividends when they suffer losses. A formal analysis

employing the multinomial logit technique reveals that the dividend

actions of the Corporate dividend policy and behaviour.

Malaysian firms are very sensitive to earnings changes. There is a

high probability of dividend increase when earnings increase.

Similarly, the chances are high that dividends will be reduced if

earnings fall. There is a very high probability of dividend omission

when the Malaysian firms face negative earning

5.Title of Paper Dividends and Dividend Policy: History, Trends, and

Determinants

Name of Researcher H. KENT BAKER

University Professor of Finance, American University

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Research

Methodology

A Literature Review

Findings The work represents a radical departure from previous views of

dividend policy and is one of the first to use analytically rigorous

techniques to address a finance issue. In addition, the influence of

dividend irrelevance theory on finance research has been profound.

6.Title of Paper Dividend Behavior of Indian Companies Under Monetary Policy

Restrictions

Name of Researcher I. M. Pandey

Professor

Indian Institute of Management Ahmedabad

Research

Methodology

We shall draw from Oliner and Rudebusch (1996) to show the

implications of the monetary policy restrictions on the dividend

payout policy. The source of the data used in the study is the CMIE

(Centre for the Monitoring of the Indian Economy) Prowess

database. The sample includes all firms in the manufacturing sector

for which the annualized data for all the years starting from 1989 to

1997 were available.

Findings Our results establish the validity of the Lintner model in the

emerging Indian market, and prove the underlying dynamic

relationship between current dividends as dependent variable and

current earnings and past dividends as independent variables.

Further, our results also show that the Indian firms have lower target

ratios and higher adjustment factors. This points the low smoothing

and instability of dividend policies in India.

7.Title of Paper Dividend Policy and Stock Price Volatility In Pakistan

Name of Researcher Dr. Mohammed Nishat

Professor and Chairman

Department of Economics and Finance

Institute of Business Administration

Research

Methodology

THE DATA AND SAMPLE

All the firms that are continuously listed on the Karachi Stock

Exchange from 1981 to 2000 have been taken for the purpose.

MODELS AND TECHNIQUES

Price volatility (PV), Dividend yield (DY), Earning volatility (EV),

Payout Ratio (POR), Size (SZ), Long-term Debt (DA), Growth in

Assets.

The analysis utilized cross-sectional generalized least squares

regression. The most basic test involved regressing the dependent

variable PV against the two independent variables DY and POR.

This provided a crude test of the relationship between common stock

volatility and dividend policy.

Findings The study suggests that dividend policy affects stock price volatility

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and it provides evidence supporting the arbitrage realization effect,

duration effect and information effect in Pakistan. The

responsiveness of the dividend yield to stock price volatility

increased during reform period (1991-2000). Whereas payout ratio

measure is having significant impact only at lower level of

significance. In overall period the size and leverage have positive

and significant impact on stock price volatility. The size effect is

negative during pre reform period (1981-1990) but positive during

reform period. The earnings volatility impact is negative and

significant only during reform period

8.Title of Paper An Empirical Analysis Of Reactions To Dividend Policy

Changes For Nasdaq Firms

Name of Researcher Patricia A. Ryan, Scott Besley and Hei Wai Lee

Research

Methodology

Cross Sectional Regression, Computation of Tobin‘s Q, and Event

Study Methodology. All NASDAQ dividend initiations and

omissions were pulled from the CRSP NASDAQ daily files between

1976 and 1991. From there, we eliminate those dividend initiating

companies that paid a dividend in the past five years.

Findings While there is very strong support for signaling arguments in the

explanation of dividend changes for NASDAQ firms, one cannot

rule out free cash flow arguments as a partial complement to the

general signaling hypothesis.

Cross-sectional weighted least squares regression analysis found

strong support for the dividend signaling hypothesis, and limited

support for the free cash flow argument

9.Title of Paper Dividend Clientele, New Insights, And New Questions: The

Brazilian Case

Name of Researcher Laser Procianoy, Jairo; Verdi, Rodrigo S.

Research

Methodology

DATA AND METHODOLOGY:

We collect stock prices and financial data from the

ECONOMATICA database. We include companies whose stocks

were traded on the São Paulo Stock Exchange between January 1,

1996 and December

31, 2000, and that paid at least one dividend in the period We follow

Procianoy and Verdi (2003) to estimate the ex-dividend stock price.

P1 = P0 – D * (1 - Idiv) / (1 - Icapg)

Where P1 is the first ex-dividend stock price; P0 is the last cum-

dividend stock price; D is the dividend paid on each stock; Idiv is

the dividend tax; and Icapg is the capital gains tax. Then Multiple

Regressions where used to determine the results. Event study was

also done.

Findings Using a sample of 394 dividend distributions from 119 companies

during 1996 to 2000 we find, like Procianoy and Verdi (2003), that

on the first ex-dividend day the actual stock price is on average 1.8%

higher than the price expected by the dividend clientele model and

results in an abnormal return of 1.5%, which is significant at the 1%

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level. Dividends announced via a BDM are priced 0.9% higher than

dividends announced via the SGM (significant at the 5% level).

However, even with dividends that are previously announced via the

SGM the stock prices are higher than expected. This suggests that

the findings in Procianoy and Verdi (2003) are not purely driven by

the information content of the dividends announced via a BDM.

Finally, we find evidence of a positive abnormal volume around the

dividend payments via a BDM, which is consistent with the

signalling hypothesis, but we do not find abnormal trading volumes

around the ex-dividend date for dividends previously announced via

the SGM.

10.Title of Paper Signaling Power of Dividend on Firms’ Future Profits

Name of Researcher PURMESSUR Rajshree Deeptee

The University of Nottingham

Nottingham University Business School (NUBS)

Research

Methodology

A Literature Review

Findings The signaling effect and share repurchasing gives an Indication on

the future strategies of the company. If an investor is able to

understand the signals, he will eventually be able to maximize his

returns. Dividend payout, for several reasons, is very important to

investors as well as shareholders to assist them in making their

investment decisions.

11.Title of Paper The Effect Of Dividend Policy On The Market Price Of Shares

In Nigeria: Case Study Of Fifteen Quoted Companies

Name of Researcher Dr. J. J. Adefila

Department of Accountancy, University of Maiduguri,

Dr. J. A. Oladipo and J.O Adeoti,

Research

Methodology

This study fundamentally falls under the ex post factor design type

because there is no experiment involved, but rather is designed to

test an event that has already taken place.

Therefore it deals with historical facts about dividend policy and its

effects on the value of Nigerian firms.

The primary data were collected through personal interviews with a

stockbroker, bankers and the members of staff of the Nigerian stock

exchange, Kaduna branch. This was to enable a thorough

complementary presentation with the secondary data since; the data

used in this study is mainly secondary data being document analysis

and reappraisal. For the analysis, Person‘s Product Moment

Correlation was used.

Findings The study revealed that dividends affect the demand for share price

and subsequently the value of the firms. However, the dividend

policy per se do not affect the value of firms currently as share price

fixing in regulated by the Security and Exchange Commission

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(S.E.C) in respect of the quoted companies.

12.Title of Paper Dividend Policy And Its Impact On Share Price

(Analysis Of Selected “A” Class Listed Companies)

Name of Researcher Bijendra Bahadur Malla,

Apex College, Pokhara University

Research

Methodology

For the analysis of the cash dividends payments of the ―A‖ class

financial institutions of Nepal as categorized by NEPSE, analytical

as well as descriptive designs are applied to achieve the objective of

the research. Our sample is selected from firms listed on the NEPSE.

This study focuses on the ―A‖ class financial institutions of Nepal.

At present, there are 157 companies are listed at NEPSE out of

which 78 are categorized as ―A‖ class financial institutions.

This research is based on secondary data. Required data is collected

from NEPSE, SEBON, previous thesis and various articles published

by various people and organizations.

METHODS AND TOOLS USED:

Arithmetic Mean (A.M), Coefficient of Variation (CV), F-

statistics, T-statistics.

Findings 1. The no. of cash dividend paying companies listed at NEPSE is

seen almost the same in context of total listed companies since last

five fiscal year except 2004/05 in which it comprise of 20.80 % of

total listed companies.

2. There is the low degree of positive correlation between the total

number of listed companies and the number of cash dividend paying

listed companies.

3. Large amount of cash dividend paying ―A‖ class commercial bank

of the sample is seen SCBNL. The average payment of cash

dividend by SCBNL was Rs.110 per share. Being an ―A‖ class

financial institution SBI has not been able to declare cash dividend

to its shareholders.

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5. THEORETICAL FRAMEWORK: 1) CONTROLLED VARIABLES:

Share price volatility should be related to the basic risks encountered in the firm's product

markets. Market risk may also have impact on the firm's dividend policy. We therefore

include a control variable to account for the variability in the firm's earnings stream. Given

operating risk, there should be a direct link between stock price volatility and leverage. To

make our study a correct one we assume that certain market forces which are there in the

market remain constant, e.g. size of firm, market risk, socio-political environment, economic

environment, growth opportunities etc. These variables have been taken constant (controlled)

in order to give better insights of the study and to give robust results.

2) DATA & DATA SOURCE

A sample of 10 Indian steel and steel related companies has been taken. Focus was on only

one industry i.e. steel industry in order to obtain homogeneous and robust results. A drill

down study of previous seven years data was done and regress studies were conducted. We

know a sample of just 10 companies is too small for study of dividend behavior but we gave

it our best shot. Most of the data has been taken from www.moneycontrol.com, and

www.indiantimes.economictimes.com.

6. INDUSTRY PROFILE:

Indian steel industry plays a significant role in the country‘s economic growth. The major

contribution directs the attention that steel is having a stronghold in the traditional sectors,

such as infrastructure & constructions, automobile, transportation, industrial applications etc.

Moreover, steel variant stainless steel is finding innovative applications due to its corrosion

resistive property. India is the fifth largest steel producer at the global front and struggling to

become the second largest producer in the coming years.

The country has acquired a central position on the global steel map with its giant steel mills,

acquisition of global scale capacities by players, continuous modernization & up gradation of

old plants, improving energy efficiency, and backward integration into global raw material

sources. Global steel giants from across the world have shown interest in the industry due to

its phenomenal performance. For instance - the crude steel production in India registered a

year-on-year growth of 6.4% in 2010 and reached 66.8 Million Metric Tons.

India is currently the fifth largest steel-producing nation in the world with production

of over 54 million tonnes (MT). However, it has a very low per capita consumption of

steel of around 46 kgs as against an average of 198 kgs of the world. This wide gap in

relative steel consumption indicates that the potential ahead for India to raise its steel

consumption is high.

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Being a core sector, steel industry tracks the overall economic growth in the long

term. Also, steel demand, being derived from other sectors like automobiles,

consumer durables and infrastructure, its fortune is dependent on the growth of these

user industries.

The Indian steel sector enjoys advantages of domestic availability of raw materials

and cheap labour. Iron ore is also available in abundant quantities. This provides

major cost advantage to the domestic steel industry, with companies like Tata Steel

being one of the lowest cost producers in the world

However, Indian steel companies have to bear additional costs pertaining to capital

equipment, power and inefficiencies (low per employee productivity). This has

resulted in the erosion of the edge they would have otherwise enjoyed due to

availability of cheap labour and raw materials.

The government has reinstated basic customs duty on steel imports in order to protect

India from dumping of cheap steel products. It has also provided series of benefits to

auto, housing and real estate sector in order to counter the slowdown in the economy.

7. COMPANIES PROFILE:

STEEL AUTHORITY OF INDIA LIMITED- A MAHARATNA

Steel Authority of India Limited (SAIL) is the leading steel-making

company in India. It is a fully integrated iron and steel maker, producing

both basic and special steels for domestic construction, engineering, power,

railway, automotive and defence industries and for sale in export markets.

SAIL is also among the five Maharatnas of the country's Central Public Sector Enterprises.

SAIL manufactures and sells a broad range of steel products, including hot and cold rolled

sheets and coils, galvanised sheets, electrical sheets, structural, railway products, plates, bars

and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated

plants and three special steel plants, located principally in the eastern and central regions of

India and situated close to domestic sources of raw materials, including the Company's iron

ore, limestone and dolomite mines. The company has the distinction of being India‘s second

largest producer of iron ore and of having the country‘s second largest mines network. This

gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and

dolomite which are inputs for steel making.

Ownership and Management

The Government of India owns about 86% of SAIL's equity and retains voting control of the

Company. However, SAIL, by virtue of its ‗Maharatna‘ status, enjoys significant operational

and financial autonomy

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TATA STEEL:

Tata Steel has always believed that the principle of mutual benefit - between

countries, corporations, customers, employees and communities - is the

most effective route to profitable and sustainable growth.

Established in 1907, Tata Steel is among the top ten global steel companies with an annual

crude steel capacity of over 28 million tonnes per annum (mtpa). It is now one of the world's

most geographically-diversified steel producers, with operations in 26 countries and a

commercial presence in over 50 countries.

The Tata Steel Group, with a turnover of US$ 22.8 billion in FY '10, has over 80,000

employees across five continents and is a Fortune 500 company.

Tata Steel‘s vision is to be the world‘s steel industry benchmark through the excellence of its

people, its innovative approach and overall conduct. Underpinning this vision is a

performance culture committed to aspiration targets, safety and social responsibility,

continuous improvement, openness and transparency.

Tata Steel‘s larger production facilities include those in India, the UK, the Netherlands,

Thailand, Singapore, China and Australia. Operating companies within the Group include

Tata Steel Limited (India), Tata Steel Europe Limited (formerly Corus), NatSteel, and Tata

Steel Thailand (formerly Millennium Steel).

BHUSHAN STEEL:

Bhushan Steel Ltd formerly known as Bhushan Steel & Strips Ltd. is a globally renowned

one of the leading prominent player in Steel Industry. Backed by more than two decades, of

experience in Steel making, Bhushan Steel is now India‘s 3rd largest Secondary Steel

Producer Company with an existing steel production capacity of 2 million tons per annum‘s

(approx.). It was the vision of the founder; Brij Bhushan Singal, that the first stake was

driven into the soil of Sahibabad (Uttar Pradesh) in 1987. His vision helped BSL overcome

several periods of adversity and strive to improve against all odds. The company has three

manufacturing units in the state of Uttar Pradesh (Sahibabad Unit), Maharashtra (Khopoli

unit), and Orissa Plant (Meramandali unit) in India and sales network is across many

countries. The company is a source for vivid variety of products such as Cold Rolled Closed

Annealed, Galvanized Coil and Sheet, High Tensile Steel Strapping, Colour Coated Coils ,

Galume Sheets and Coils, Hardened & Tempered Steel Strips , Billets, Sponge Iron,

Precision Tubes and Wire Rod. As one of the prime movers of the technological revolutions

in Indian Cold Rolled Steel Industry, BSL has emerged as the country‘s largest and the only

Cold Rolled Steel Plant with an independent line for manufacturing Cold Rolled Coil and

Sheet up to a width of 1700mm, as well as Galvanized Coil and Sheet up to a width of 1350

mm.

18

JINDAL STEEL:

Jindal Steel and Power Limited (JSPL) is one of India‘s

major steel producers with a significant presence in sectors

like Mining, Power Generation and Infrastructure.

With an annual turnover of over US $2.9 billion, JSPL is a

part of the about US $ 15 billion diversified O. P. Jindal

Group and is consistently tapping new opportunities by

increasing production capacity, diversifying investments,

and leveraging its core capabilities to venture into new

businesses. The company has committed investments exceeding US$ 30 billion in the future

and has several business initiatives running simultaneously across continents.

From the widest flat products to a whole range of long products, JSPL today sports a product

portfolio that caters to varied needs in the steel market. The company also has the distinction

of producing the world‘s longest 121 metre rails and introducing large size parallel flange

And the recognition it has received only further lends credence to this. JSPL has recently

been rated as the second highest value creator in the world by Boston Consulting Group; 11th

fastest growing company in India by Business World; included in one of the Fab 50

Companies by Forbes Asia, 2009 and 2010; one of the Best Blue Chip companies as well as

the Highest Wealth Creator by the Dalal Street Journal. It has also been ranked fourth as per

Total Income in the Iron and Steel sector by Dun & Bradstreet.

MAHINDRA UGINE STEEL:

Mahindra Ugine Steel Co. Ltd. (MUSCO), under SYSTECH sector, belonging to the

Mahindra Group is the pioneer & well known manufacturers of alloy steel in the country.

MUSCO is the most trusted brand when alloy steel is referred to. The company also has three

stampings division to manufacture pressed sheet metal components and assemblies, one at

Kanhe about 1.5Km off Mumbai-Pune Highway, a major automobile manufacturing center in

the country, second at Nasik catering to all auto products of M & M & RENAULT of

France,& the third unit has successfully started commercial production from October 2007 ,

from the modern state-of-art new plant along with paint shop in Rudrapur(Uttarakhand State)

for many new products of customers in North India.. Mr.Keshub Mahindra is the Chairman

&Mr.Anand Mahindra is the Vice-Chairman of MUSCO.

JSW STEEL LTD

JSW is part of US $10 billion O.P.Jindal Group. It has grown to

US$ 5 billion in little over a decade and has presence across

various sectors – Steel, Energy, Minerals, Port & Infrastructure,

Cement, Aluminium and IT.

19

JSW Steel, the flagship company of the JSW Group, is today an integrated steel

manufacturer. JSW Steel is the largest private sector steel manufacturer in terms of installed

capacity.

The Group set up its first steel plant in 1982 at Vasind near Mumbai. Soon after, it acquired

Piramal Steel Ltd., which operated a mini steel mill at Tarapur in Maharashtra. The Jindals,

who had wide experience in the steel industry, renamed it as Jindal Iron and Steel Co. Ltd.

(JISCO). JSW Steel is one of the lowest cost steel producers in the world. By 2020, the

Company aims to produce 34 million tons of steel annually with Greenfield integrated steel

plants coming up in West Bengal and Jharkhand.

JSL STAINLESS

A part of the O P Jindal group, JSL Stainless Ltd. (Formerly

JSL LIMITED) is India's largest and the only fully integrated

Stainless Steel manufacturer. JSL Stainless Ltd. has grown

from an indigenous single-unit Stainless Steel plant in Hisar, Haryana, to the present multi-

location and multi-product conglomerate.

JSL Stainless Ltd. is a globally recognized producer of stainless steel flat products in

Austenitic, Ferritic, Martensitic and Duplex grades. The product range includes Ferro Alloys,

Stainless Steel Slabs & Blooms, Hot Rolled Coils, Plates, Cold Rolled Coils and specialty

products such as razor blade steel, precision strips and coin blanks.

JSL Stainless Ltd. has initiated strategic growth plans in both domestic and international

markets and has made investments towards capacity expansions through forward and

backward integration.

KALYANI STEELS LTD

Kalyani Steels Ltd, is a part of the over $2.1 billion Kalyani Group.

Established in 1973, Kalyani Steels Ltd is a leading manufacturer of

forging and engineering quality carbon & alloy steels using the Blast

Furnace route.

With its corporate headquarters in Pune, Kalyani Steels Ltd. was set up to fulfil the in-house

requirements of forging quality steel of the Kalyani Group.

In 1997, the Kalyani Group set up a new plant to manufacture steel using the less power

intensive mini-blast furnace route. The new facility is at Ginigera in the Hospet-Bellary

region of Karnataka state, where iron ore is abundantly available. This integrated steel

complex has capacity of 400,000 tpa of carbon and alloy steels, which is being expanded to

650,000 tpa.

Over the years, Kalyani Steels has been continuously upgrading its technology and

infrastructure. The facilities at KSL are at par with any sophisticated steel manufacturers in

the world. KSL has earned the status of preferred steel supplier for engineering, automotive,

seamless tube and primary aluminium industry.

20

STEEL STRIPS WHEELS

We manufacture automotive steel wheels since 1991.

Our product range comprises wheels for Passenger cars,

Multi utility vehicles, Tractors, Trucks, OTR Vehicles

as well as Two and Three Wheelers.

We currently have three production facilities: we produce mainly passenger car wheels in

Dappar (near Chandigarh) and Oragadam (near Chennai) and truck wheels in Jamshedpur.

Our total capacity amounts to 9 million wheels in Dappar, 6 million wheels in Oragadam and

1 million truck wheels in Jamshedpur. Our total capacity is 16 million wheels.

STEEL EXCHANGE INDIA LTD.

―Steelexchangeindia.com is India‘s first online steel e-

commerce portal established in 1999 and is dedicated to

INDIAN STEEL INDUSTRY specifically and to STEEL as a

whole‖

―OUR MISSION - Steel Exchange India aims to be a global gateway to Indian Steel

Community and to Steel. We shall persevere to innovate through information technology to

provide steel customers an efficient and transparent market place and to take the Indian Steel

Industry to a new threshold of Glory‖

This platform is conceptualized and developed by PYXIS TECHNOLOGY SOLUTIONS

LTD and VIZAG PROFILES GROUP. It is associated to Visakhapatnam Steel Plant under a

MOU for maintaining its site www.vizagsteel.com and the two sites are linked and exchange

data.

Steelexchangeindia.com has also signed an MOU with STEELNEXT an Associate company

of RELIANCE INFOCOMM for furthering online steel trade in INDIA

21

8. METHODOLOGY A sample of 7 years dividend data of 10 steel related companies was taken. Then every time

whenever the company had either announced or paid-out the dividend, calculations were

done as:

The percentage of dividend to stock price was made based on the face value of the stock. The

price-change percentages were calculated using the key date‘s closing price divided by the

prior day‘s closing price. All percentages were rounded to two decimal places. Then it was

estimated whether the stock (share) price has increased or decreased on the day of

announcement and pay-out of dividends. (Note: Only final dividend announcement dates and

pay-out dates have been taken into consideration except in case JSL Stainless wherein interim

dividends were also considered.) After these studies we moved a bit forward by taking into

consideration the market value trend line of the firms whenever there was a dividend pay-out.

Only data of one prior and post quarter was taken into consideration including the month of

payout. Then the data was carefully studied to arrive at the results.

TATA STEEL Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

26/05/2011 101.9 I 04/07/2011 99.14 D 120%

27/05/2010 101.7 I 12/07/2010 10.28 I 80%

25/06/2009 97.8 D 06/07/2009 90.45 D 160%

26/06/2008 101.9 I 18/07/2008 97.57 D 160%

17/05/2007 101.51 I 08/06/2007 95.2 D 155%

15/05/2006 90.93 D 26/05/2006 104.87 I 130%

19/05/2005 99.9 D 07/06/2005 97.0 D 130%

SAIL Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

24/06/2011 108.4 I 10/08/2011 - - 12%

28/05/2010 101.0 I 29/07/2010 98 D 17%

28/05/2009 106.5 I 30/07/2009 103.2 I 13%

16/05/2008 107.3 I 31/07/2008 103.4 I 18%

21/05/2007 104.2 I 08/08/2007 102.6 I 15%

25/05/2006 103.4 I 10/08/2006 101.6 I 7.5%

26/05/2005 99.0 D 11/08/2005 99.3 D 18%

BHUSHAN STEEL Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

27/7/11 101.0 I - - 25%

2/8/10 100.2 I 21/9/10 97.0 D 25%

30/7/09 104.0 I 17/9/09 98.0 D 25%

29/07/08 100.1 I 17/9/08 99.0 D 25%

4/5/07 99.0 D 11/9.07 100.2 I 25%

2/5/06 102.0 I 14/9/06 101.0 I 25%

2/5/05 101.0 I 8/9/05 99.0 D 25%

22

JINDAL POWER AND STEEL Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

21/04/2011 102.0 I - 150%

05-04-2010 98.0 D 13/9/10 100.3 I 125%

27/05/2009 102.0 I 14/09/2009 102.3 I 550%

27/05/2008 95.0 D 09-12-2008 95.00 D 250%

21/05/2007 98.0 D 09-06-2007 98.00 D 240%

06/07/2006 88.00 D 14/09/2006 102.0 I 200%

05/12/2005 100.2 I 07/07/2005 99.00 D 200%

MAHINDRA UGINE STEEL Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

29/4/10 105.8 I 12/7/10 100.3 - 10%

29/4/08 99.00 D 9/7/08 96.00 I 30%

30/4/07 96.00 D 11/7/07 99.00 I 25%

25/4/06 109.0 I 12/7/06 96.00 D 45

22/4/05 102.0 I 14/7/05 96.00 D 30

2/8/02 102.0 I 7/8/02 100.5 I NA

KALYANI STEEL Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

25/05/2011 104.7 I 04/08/2011 - - 40%

24/05/2010 103.7 I 12/08/2010 100.8 I 25%

10/06/2008 104.6 I 13/08/2008 101.9 I 40%

29/05/2007 97.7 D 02/08/2007 99.6 D 40%

06/07/2006 95.9 D 17/08/2006 100.5 I 30%

30/06/2005 102.9 I 10/08/2005 100.7 I 15%

24/07/2004 88.8 D 05/08/2004 100.9 I 5%

STEEL EXCHANGE INDIA LTD.

Announcement

Date

Change in

price %ge

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

01/07/2009 95.04 D 24/09/2009 97 D 10%

03/07/2008 112.3 I 18/09/2008 97 D 10%

03/07/2007 95 D 06/12/2007 101.8 I 10%

05/07/2006 101.5 I 21/09/2006 94.2 D 10%

05/09/2005 102.04 I 23/09/2005 118.6 I 10%

23

STEEL STRIPS WHEELS Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

22/06/2010 99.8 D 17/09/2010 99.8 D 10%

18/07/2008 96.4 D 18/09/2008 114.6 I 16%

20/06/2007 98.5 D 13/09/2007 98.6 D 16%

29/06/2006 97.3 D 14/09/2006 100.7 I 16%

18/05/2005 96.08 D 12/08/2005 97.45 D 16%

20/04/2004 96.3 D 15/06/2004 100.4 I 10%

30/06/2003 109.4 I 17/09/2003 100.6 I 10%

JSL STAINLESS Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

24/07/2008 99.1 D 13/08/2008 98.2 D 100%

28/05/2007 98.4 D 02/08/2007 98.5 D 20%

21/08/2006 96.9 D 07/09/2006 99.5 D 80%

15/04/2005 97.7 D 28/04/2005 97.0 D 60%

27/12/2004 101.2 I 19/01/2005 99.5 D 60%

08/04/2004 100.1 I 22/04/2004 99.9 D 40%

29/11/2003 102.6 I 12/12/2003 100.6 I 60%

JSW STEEL LTD. Announcement

Date

Change in

price %age

Increase or

decrease

Effective

Date

Change in

price %age

Increase or

decrease

Dividend

(%)

16/05/2011 98.4 D 11/07/2011 96.03 D 122.5%

03/05/2010 99.4 D 14/06/2010 100.48 I 95%

07/05/2009 112.7 I 29/06/2009 101.4 I 10%

05/05/2008 98.1 D 21/05/2008 99.00 D 140%

19/04/2006 96.6 D 15/06/2006 109.4 I 80%

18/04/2005 100.9 I 29/04/2005 101.6 I 50%

12/05/2003 100.7 I 13/06/2003 102.4 I N.A.%

24

TATA STEEL MARKET LINE OVER A PERIOD OF 7 YEARS AT DIVIDEND PAYOUTS

25

SAIL MARKET LINE OVER A PERIOD OF 6 YEARS AT DIVIDEND PAYOUTS

26

BHUSHAN STEEL MARKET LINE OVER A PERIOD OF 7 YEARS AT DIVIDEND PAYOUT

27

JINDAL STEEL MARKET LINE OVER A PERIOD OF 7 YEARS AT DIVIDEND PAYOUT

28

MAHINDRA UGINE MARKET LINE OVER A PERIOD OF 6 YEARS AT DIVIDEND PAYOUT

29

KALYANI STEEL MARKET LINE OVER A PERIOD OF 6 YEARS AT DIVIDEND PAYOUT

30

STEEL EXCHANGE MARKET LINE OVER A PERIOD OF 5 YEARS AT DIVIDEND PAYOUT

31

STEEL STRIP MARKET LINE OVER A PERIOD OF 7 YEARS AT DIVIDEND PAYOUT

32

JSL STAINLESS MARKET LINE OVER A PERIOD OF 7 YEARS AT DIVIDEND PAYOUT

33

JSW STEEL MARKET LINE OVER A PERIOD OF 7 YEARS AT DIVIDEND PAYOUT

34

9. FINDINGS:

As you can see from the table and charts, stock prices do not ―adjust‖ by the amount of the

dividend when the dividend is paid out. This limited sample of 10 companies suggests that

sometimes the price goes up, sometimes it goes down. What is happening is that the myriad

factors that go into determining the price of every stock are operating. The dividend pay-out

is just one of those factors, and apparently not a very important one at that. Some important

findings of the can be summed up as:

1. Out of 68 cases, the market price increased in 37 cases only when dividend was

declared (54.4%)

2. Out of 64 cases, the market price increased in 29 cases only when dividend became

effective (45.3%)

3. Whenever dividend rate was higher than 100%, i.e. in 19 cases of dividend

declaration 14 times market share price went increasing (73%)

4. Whenever dividend rate was higher than 100%, i.e. in 17 cases when dividend became

effective only 6 times market share price went up (35%)

5. Whenever dividend rate was below than 100%, i.e. in 43 cases of dividend declaration

23 times market share price went increasing (53.4%)

6. Whenever dividend rate was lower than 100%, i.e. in 41 cases when dividend became

effective 25 times market share price went increasing (60.09%)

7. From the charts it is clear that dividend behaviour of a firm doesn‘t show any

common pattern, may be momentarily there might be a drop in market value of the

firm but it can‘t be determined or explained with the graphs studied.

35

10. CONCLUSION:

From time to time, one runs across a statement such as the following:

And don't be fooled into thinking that relying on the dividend rather than selling [shares]

leaves you with the original investment intact. It doesn't. When stocks pay out their

dividends, the share price adjusts downward to compensate for the pay-out.

This quote was taken from a recent Market Watch article written by a Wall Street Journal

writer who should know better.

Share prices do not adjust downward to reflect the dividend being paid out. To believe that is

to make the fundamental error of confusing book value with stock price. If companies

recomputed book value minute-by-minute, it is true that the book value would drop by the

amount of cash paid out in dividends at the moment the cash went out the door. It is also true

that the company‘s book value would rise by some amount every time it sold a product. Book

value is constantly changing by miniscule amounts every minute of every day. Companies

report it once per quarter.

The share price, on the other hand, is not determined by book value, it is determined by the

market. Over long periods of time, it is true that share prices roughly correlate with book

value per share. But the correlation is inconsistent and subject to thousands of other factors

that go into the ―price discovery‖ that takes place every day that the markets are open.

As you can see from the tables and charts, stock prices do not ―adjust‖ by the amount of the

dividend when the dividend is paid out, sometimes the price goes up, and sometimes it goes

down. What is happening is that the uncountable factors that go into determining the price of

every stock are operating. The dividend pay-out is just one of those factors, and apparently

not a very important one at that.

One other interesting note from the table is that the stock prices usually went up on the day of

the dividend announcement. While we would not draw any general conclusions from this

limited sample, that price rise makes sense to us: A dividend announcement is usually good

news.

36

11. REFRENCES

Financial Management, by I.M Panday

Management Accounting by Gupta and Sharma

Securities Analysis and Portfolio Management by Dr. Rana Singh

Security Analysis and Portfolio Management by Donald E. Fischer, Ronald J. Jordan

Basic Financial Management By Khan, M.Y. Jain

www.google.com

www.yahoofinance.com

www.moneycontrol.com

www.indiantimes.economictimes.com

www.wikipedia.com

www.investopedia.com

http://www.onemint.com

www.money.rediff.com

Class room notes and lectures.