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TABLE OF CONTENTS
Chapter No. Subject
Ch.-1.0 Executive Summary
1.1 Introduction
Ch.-2.0 Research Methodology
2.1 Primary Objective(s)
2.2 Problem definition
2.3 Approach to the Problem
2.4 Sample Design
2.5 Limitations
Ch.-3.0 Critical Review of Literature
Ch.-4.0 Data
4.1 Collection
4.2 Primary Data
4.3 Secondary Data
Ch.-5.0 Findings & Analysis
Ch.-6.0 Bibliography
6.1 References
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(1) EXECUTIVE SUMMARY
When a company makes a profit, it has
to decide what to do with this money. Companies have three uses
for its cash.
To fund working capital
To finance investments in the company, where management
have ident if ied and developed opportunit ies that have
returns greater than the return on working capital
Distribute it to shareholders.
This research is intended to empirically Analyze the Dividend
Policies of companies.
This report answers various questions like:
How and Why Do Companies Pay Dividends?
What should be the Companys dividend policy?
How Do Firms View Dividend Policy?
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What factors should be considered when a company decides
on its dividend policy?
What are the alternatives that a company has other than
paying dividends?
Before we begin describing the various policies that companies
use to det ermine how much to pay , l et 's l ook a t d if fe rent
arguments for and against dividends policies.
F ir st , some f inancial ana lys ts fee l t hat t he
considera tion of as dividend policy i s i rrelevant because
investors have the ability to create homemade dividends. This is
done by adjusting a personal portfolio to reflect the investor 's
own preferences.
The second argument suggests that l i t t le to no
dividend payout is more favorable for investors. Supporters of
this policy point out that taxation on a dividend is higher than on
capital gain .
The argument against dividends is based on the
belief that a firm who reinvests funds (rather than pays it out as
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a dividend) will increase the value of the firm as a whole and
consequently increase the market value of the stock.
According to the proponents of the no-dividend
policy, a company's alternatives to paying out excess cash as
dividends a re the fol lowing : under taking more projec ts ,
repurchas ing the company's own shares, acquir ing new
companies and profitable assets, and reinvesting in financial
assets.
In opposition to these two arguments is the idea
that a high dividend payout is more important for investors
because the principle behind the attractiveness of a
company's ability to pay high dividends is that it provides
cer tainty abou t t he company 's f inancial we ll being.
Div idends are a lso a tt ract ive for inves tors looking to
secure current income.
Now, should the company decide to follow
either the high or low dividend method, it would use one of three
main approaches:
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Residual
Stability
Hybrid of the above two.
So, we can say that, there are many reasons for paying dividends
and there are many reasons for not paying any dividends. As a
result, `dividend policy' is controversial .
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INTRODUCTION
When a company makes a profit, it has to decide what to do with
this money. Companies have three uses for its cash.
To fund working capital
To finance investments in the company, where management
have ident if ied and developed opportunit ies that have
returns greater than the return on working capital
Distribute it to shareholders as dividend.
There is, thus, a type of inverse relationship between retained
earnings and cash dividends. Larger retentions, lesser dividends
and smaller retentions, larger dividends . Thus, the alternative
uses of the net earnings:-dividends and retained earnings- are
competitive and conflicting.
The term "dividend" usual ly refers to a cash distr ibution of
earnings. If it comes from other sources, it is called "liquidating
dividend". It mainly has the following types:
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Regular: Regular dividends are those the company expects
to maintain, paid quarterly (sometimes monthly,
semiannually or annually).
Extra: Those that may not be repeated.
Special: Those that are unlikely to be repeated.
Stock Dividend: Paid in shares of stocks. Similar to stock
splits, both increase the number of shares outstanding and
reduce the stock price.
The procedure for paying dividends is as follows:
Declaration Date: Date at which the company announces it will
pay a dividend.
Holder-of-Record Date: Date at which the list of shareholders
who will receive the dividend is made.
Ex-Dividend Date: The convent ion i s tha t the r ight to the
dividend remains with the stock until two business days before
the holder-of-record date. Whoever buys the stock on or after the
ex-dividend date does not receive the dividend.
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How Do Firms View Dividend Policy?
One firm's policy might be to pay out 40% of earnings as
dividends whereas another company might have a target of 50%.
This suggests that dividends change with earnings. Empirically,
dividends are slow to adjust to changes in earnings. It has been
observed that more "conservat ive" companies are generally
slower to adjust to the target payout if earnings increased.
Given the objective of financial management of
maximizing present values, the firm should be guided by the
consideration as to which alternative use is consistent with the
goal of wealth maximizat ion. i .e ., the f irm would be wel l
advised to use the net profits for paying dividends to the share
holders if the payment will lead to the maximization of wealth of
the owners. If not the firm should rather retain them to finance
investment programs. the relationship between dividends and
value of the firm should, therefore, be the decision criterion.
There a re however confl ic ting opinions regarding the
impact of dividends on the valuations of the firm. According to
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one school of thought , d ividends are i rrelevant , so that the
amount of the dividends paid has no effect on the valuation of
the firm.on the other hand certain theories consider the dividend
decision as relevant to the value of the firm measured in terms of
the market price of the shares.
Before discussing the 2 school of thoughts, let us first
understand why a company pays the dividend and in what form.
In other words, what are the factors which helps us in
determining the dividend policy of a company.
These Factors can be classified as follows:
(1) Dividend Payout (D/P) rat io :
A major aspec t o f the d iv idend pol icy of a f irm i s i ts
dividend payout (D/P) Ratio i.e., the % share of the net earnings
distributed to the shareholders as dividends. The D/P Ratio of a
firm should be determined with ref erence to two basic
objectives:-
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Maximizing the wealth of the firms owners and,
Providing sufficient funds to finance growth.
These objectives are not mutually exclusive, but
interrelated. In practice, shareholders have a clear cut preference
for dividends because of uncertainty and imperfect capital
markets. The payment of dividends can, therefore, be expected
to effec t the pr ice of a share ; a low D/P Rat io may cause a
decline in share prices, while a high ratio may lead to a rise in
the market price of the share. Making a sufficient provision for
financing growth can be considered a secondary objective of
dividend pol icy. The f irm must forecast i ts future needs for
funds, and taking in to account the external availability if funds
and certain market considerations, determine both the amount of
retained earnings needed and the amount of retained earnings
available after the minimum dividends have been paid. Thus,
dividend payments should not be viewed as a residual, but rather
a requi red out lay after which any remaining funds can be
reinvested in the firm.
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(2) Stabi li ty of div idends:
The term dividend stability refers to the consistency or to
the lack of variability in the stream of dividends.in more precise
terms, i t means that a certain minimum amount of dividend is
paid out regularly. The stability of dividends can take any of the
following 3 forms:
( i) Constant d iv idends per sha re ,
( ii ) Constan t / stab le D/P Ratio, and
(ii i) Constant dividends per share plus extra dividend.
Constant dividend per share:
According to thi s form of s table d ividend pol icy, a
company follows a policy of paying a certain fixed amount per
share as dividend.
For instance, on a share of face value of Rs. 10, a firm
may pay a f ixed amount of, say Rs. 2 .50 as d iv idend. This
amount will be paid year after year, irrespective of the level of
earnings. In other words, f luctuat ions in earnings would not
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effect the dividend payments. In fact, when a company follows
such a dividend policy, it will pay dividends to its shareholders
even if its suffering losses. A stable dividend policy in terms of
fixed amount of dividend per share does not, however, means
that the amount of dividend is fixed for all the time to come. The
dividend per share is increased over the years when the earnings
of the f i rm increase and i t i s expected that the new level of
earnings can be maintained.
Fig: Stable Dividend Policy of Constant Rupee
Dividends.
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It can, thus, be seen that while the earnings may fluctuate
from year to year. The dividend per share is constant.
Constant payout Ratio:
With constant / payout ratio, a firm pays a constant % of
net earnings as dividend to the shareholders. In other words, a
stable Dividend payout Rat io implies that the percentage of
earnings paid out per year is constant. Accordingly, dividend
would fluctuate proportionately with earnings and are likely to
be highly volatile in the wake of wide fluctuations in the
earnings of the company. As a result, when the earning of a firm
decline substan tial ly or there i s a loss in g iven per iod, the
dividends, according to the target payout ratio, would be low or
nil.
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Fig: Stable Dividend Policy under Target Payout Ratio
Stable Rupee Dividend Plus Extra dividend:
Under this policy the firm usually pays a fixed dividend to
the shareholders and in years of marked prosperity; additional or
extra dividend is paid over and above the regular dividend. As
soon as, normal condi tions return, the f irm cuts the ext ra
dividend and pays the normal dividend per share.
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Reasons to prefer stable dividend policy:
Desire for current income by investors like retired person
and widows. They would place a positive utility on stable
dividends.
Informational conten ts regarding the changes in the
dividends that will be paid by the firm in the near or far
future.
Requirements of institutional investors like Life Insurance
Corporation of India and General Insurance Corporation of
India and Uni t Trust of India (mutual funds ). These
companies have the legal obligation to invest its money in
only those firms which have a record of continuous and
stable dividend.
Lintners model came in support of this stable dividend policy.
A Sticky Dividend Policy or the Lintner Model
In general , t he re exi st s a l ong- te rm t arge t
dividend payout ratio which is high for mature
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f i rms with stable earnings and low for young
growth firms with unstable earnings, but this is
not the focus of the dividend policy.
At a certain point in the firms l ife cycle, i t is
t ime to s ta rt pay ing d iv idends , a t thi s point
firms set dividend payments at a low level and
then attempt to increase them steadily each year
thereafter.
Dividend policy is not focused on the optimal
level of dividends or dividend payout ratios
(targets) but on changes to the existing level of
dividends.
Management is reluctant to make significant
changes in the dividend paid. The focus is to
avoid cutting dividends and sending an
unfavorable signal to the market. Therefore,
significant dividends increases only occur when
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management is conf ident of being able to
maintain the increase in the future. Significant
dividend changes only follow shifts in long-run
sustainable earnings or dividends payments are
smoothed.
Bottom Line: What this means in practice is no dividends are
paid until management believes that positive free cash flow is
l ikely to continue on a regular basis in the future. Init ial ly,
dividend levels are set extremely low or conservatively and then
are gradually raised each period. Dividend cuts are a last resort.
Empirical evidence suggests:
1. Announcements of unexpected dividend increases are
v iewed favorably by the market (posi tive abnormal
returns over the 3-day announcement period);
2. That earnings increase significantly after dividends are
initiated;
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3. Announcements of unexpected dividend decreases or
d iv idend omiss ions are v iewed unfavorably by the
marke t (nega tive abnormal returns ove r the 3 -day
announcement period).
(3) Legal, contractual and internal constraints and
restrictions
The legal factors stem from certain statutory requirements,
the contractual restrictions arise from certain loan covenants and
the internal constrains are the result of the f irms l iquidi ty
position.
Legal Requirements: Legal s ti pu la tions do no t requi re a
dividend declaration but they specify the conditions under which
dividend must be paid. Such conditions pertain to
(i) Capital impairment,
(ii) Net profits and
( ii i) Insolvency .
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Capital Impairment Rules:
Legal enactments limit the amount of cash dividends
that a firm may pay. A firm can not pay dividends out of i ts
paid up capital, otherwise there would be a reduction in the
capital adversely affecting the security of i ts lenders. The
rat ionale of thi s rule l ies in pro tect ing the c la ims of the
preference shareholders and creditors on the firms assets by
providing sufficient equity base since the creditors have
originally relied upon such an equity base while extending
credit. Any dividends that impair capital are illegal and the
directors are personally held reliable for the amount of illegal
dividend.
Insolvency:
A firm is said to be insolvent in two situations: first ,
when the liabilities exceeds the assets and second, when it
is unable to pay its bills. If the firm is currently insolvent
in either sense, i t i s prohibi ted from paying dividends.
S imil ar ly a f irm wou ld no t pay d iv idends, i f such a
payment leads to the insolvency of the firm of either type
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The import an t p rov is ions o f company l aw per ta in ing to
dividends are described below.
1. Companies can pay only cash dividend (with the exception
of bonus shares).
2. Dividend can be paid out of the profits earned during the
financial year after providing the depreciation and after
t ransferr ing to reserves such percentage of profi ts as
prescribed by the law. The Companies (transfer to reserve)
Rules, 1975, provides that before dividend declaration, a
percentage of profits as specified below should be
transferred to the reserves of the company.
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DIVIDEND PROPOSED AMOUNT TO BE
TRANSFERRED TO THE
RESERVES Exceeds 10% but not
12.5%of the paid up capital.
Should not be less then
2.5% of the current profits.
Exceeds 12.5% but not
15%of the paid up capital.
Should not be less then 5%
of the current profits.
Exceeds 15% but not 20%of
the paid up capital.
Should not be less then
7.5% of the current profits. Exceeds 20%. Should not be less then 10%
of the current profits.
3 . Due to inadequacy o r absence of p ro fi ts i n any yea r,
dividend may be paid out of accumulated profi ts of the
previous years. In this context, the following conditions, as
stipulated by the companies (Declaration of Dividend out
of Reserves) Rules, 1975, have to be satisfied.
(a) The rate of declared dividend should not exceed
the average of the rates at which the dividend was
declared by the company in 5 years immedia te ly
preceding that year or 10% of its paid up capital
whichever is less.
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(b) The total amount to be drawn from the
accumulated profits earned in previous years and
t ransferred to the reserves should not exceed an
amount equal to 1/10 th of the sum o f the pa id up
capi tal and free reserves and the amount so drawn
should first be utilized to set off the losses incurred
in the financial year before any dividend in respect
of preference or equity shares is declared.
(c) The balance of the reserves after such
withdrawal should not fall below 15% of its paid up
capital.
4. Dividends can not be declared for the past years for
which the accounts have been closed.
Contractual requirements: Import an t res tr ict ions on the
payment of the dividends may be accepted by a company when
ob ta in ing externa l cap it al e ithe r by a loan agreement , a
debenture indenture, a preference share agreement, or a lease
contract . such restrict ions may cause the firms to restrict the
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payment of cash dividends until a certain level of earnings have
been achieved or limits the amount of dividend paid to a certain
amount or % of earnings. Since the payment of d iv idends
involves a cash outflow, f irms are enforced to reinvest the
retained earnings within the firm. The restrictions of dividends
may take 3 forms:
In the first place, the firms may be prohibited from paying
dividends in excess of a cer tain percentage, say, 12 %.
Alternatively, a ceiling in terms of maximum amount of profits
that may be used for dividend payment may be laid down, say
not more than 60% of the net profits, or a given absolute amount
of such profits can be paid as dividend. Finally dividends must
be restricted by insisting upon a minimum of earnings to be
retained. Reinvestment leads to a lower debt / equity Ratio and,
thus, enhances the margin of cushion (safety) for the lenders.
Interna l const ra in ts : Such fac tors a re unique to a f irm and
include
(i) Liquid assets,
( ii) Growth prospects,
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( i ii ) Financial requirements,
( iv ) Availab il ity of funds
(v) E arning stability and
(vi) Control.
Liquid assets:
Once the payment of dividend is permissible on legal and
contractual grounds, the next step is to ascertain whether the
firm has sufficient cash to pay cash dividends. It may well be
possible that firms earnings are substantial, but the firm may be
short of funds.
This situation is common for companies like
(a) Growing companies
(b) Companies which have to retire the past loans as their
maturity year has come
(c) Companies whose preference shares are to be redeemed.
Such companies may not like to borrow at exorbitant rates
because of financial risk especially when their existing
leverage ratio is already very high. Moreover, the lenders
may be reluctant to lend the money for dividend payments
since they produce no tangible or operating benefits that
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will help the firm to repay the loans. Thus, the firms ability
to pay cash dividends is largely restricted by the level of
its liquid assets.
Growth prospects:
Another set of factors which can influence the dividend
policy relates to the firms growth prospects. The firm is
required to make plans for financing its expansion programmes.
In thi s con text , t he ava il ab il it y o f externa l funds and i ts
associated cost together with the need for investment funds
would have a significant bearing on the firms dividend policy.
Financial Requirements:
Financial requirements of a firm are directly related to its
investment needs. The firm should formulate its dividend policy
on the basis of i ts foreseeable investment needs. If a firm has
abundant investment opportunities, it should prefer a low payout
ratio, as it can reinvest the earnings at the higher rates than the
shareholder can. Moreover, the retention of money provides the
base upon which the firm can borrow some additional funds.
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Therefore , i t p rovides f lexibi li ty in the companies cap ital
structure, that is, it makes room for unused debt capacity.
Availability of funds:
The dividend policy is also constrained by the availability
of funds and the need for additional investment. In evaluating its
financial position, the firm should consider not only its ability to
raise funds but also the cost involved in it and promptness with
which financing can be obtained. In general, large, mature firms
have greater access to new sources for raising funds than firms
which are growing rapidly. For this r eason alone, the availability
of external funds to the growing funds may not be sufficient to
finance a large number of acceptable investments projects.
Obviously such f irms wil l have to depend on their re tained
earnings so as to amount of maximum number of ava ilab le
profitable projects. Therefore, large retentions are necessary for
such firms.
Earnings stability:
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The stability of earnings have also a significant bearing on
the dividend decisions of a f i rm. General ly , more stable the
income stream, the higher is the payout ratio. Such firms are
more confident of maintaining a higher payout ratio. public
ut il it y companies are c la ss ic example of f irms tha t have
relatively stable earnings pattern and high dividend payout ratio.
Control:
Dividend policies may also be strongly influenced by the
shareholders or the managements control objectives. That is to
say, sometimes the management employs dividend policy as an
effective instrument to maintain i ts posit ion of command and
control . The management, in order to retain control o f the
company in its own hands, may be reluctant to pay substantial
dividends and would prefer a small dividend payout ratio. This
wil l part icularly hold good for the companies which require
funds to finance profitable investment opportunit ies when an
outside group is seeking to gain control of the firm. Added to
this, if a controlling group of shareholders either can not or does
no t wi sh to purchase a new sha res of equ ity, under such
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circumstances, by the issue of addit ional shares to finance the
investment opportunit ies, management may loose i ts exist ing
control.
(4) Owners considerat ions:
The dividend pol icy is a lso l ikely to be effected by the
owners considerations of
(a) The tax status of the shareholders,
(b) Their opportunities of investment, and
(c) The dilution of ownership.
It is well-nigh impossible to establish a policy that will
maximize each owners wealth. The firm must aim at a dividend
policy which has a beneficial effect on the wealth of a majority
of the shareholders.
Taxes:
The d iv idend pol icy of a f irm may be d ic ta ted by the
income t ax s ta tus of i ts sha reholde rs . I f a f irm has l arge
percentage of owners who are in the high tax brackets, its
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dividend policy should seek to have higher retentions. Such a
policy will provide its owners with income in the form of capital
gains as against dividends. Since capital gains are taxed at lower
rates then dividends, they are worth more, after taxes, to the
individuals in the high tax brackets. On the other hand, if a firm
has majori ty of low income shareholders who are in low tax
brackets, they would probably favor a higher payout of earnings
because of the need for current income and the greater certainity
associated with receiving the dividend now, instead of the less
certain prospects of capital gains later.
Opportunities:
The firm should not retain funds if the rate of return earned
by it would be less then one which could have been earned by
the investors themselves from external investments of the funds.
Such a policy would obviously be detrimental to the interest
shareholders . However, the f irm should evaluate the rate of
return obtainable f rom externa l i nves tment s in the f irms
belonging to the same risk class. If the evaluation shows that the
owners have better opportunities outside, the firm should opt for
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higher D / P Ratio. On the other hand, if the firms investment
opportunities yield a higher rate than that obtained from similar
external investments, a low D/P is suggested. Therefore, in
formulating a dividend policy, the evaluations of the external
opportunities of the owners is very significant.
Dilution of ownership:
The financial manager should recognize that a high D / P
Ratio may result in the dilution of both control and earnings for
the existing equity holders. Dilution in earnings results because
low retentions may necessitates the issue of new equity shares in
the future, causing an increase in the number of equity shares
outstanding and ultimately lowering EPS and their price in the
market. By retaining a high percentage of its earnings, the firm
can minimize the possibility of dilution of earnings.
Although the ultimate dividend policy depends on
numerous factors, the avoidance of shareholders discontent is
important. If the shareholder becomes dissatisf ied with the
existing dividend policy, they may sell their shares, increasing
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the possibil i ty that control of the firm will be seized by some
outside groups. The takeover of a firm by an outsider is more
likely when owners are dissatisfied with its dividend policy. It is
the financial managers responsibility to keep in touch with the
owners general attitude towards dividends.
(5) Capital market considerations:
Yet another set of factors that can strongly effect dividend
policy is the extent to which the firm has access to the capital
markets . In case the f irm has an easy access to the cap ital
market, either because it is financially strong or large in size, it
can fol low a l iberal dividend pol icy. However, i f a f i rm has
limited access to the capital market, i t is l ikely to adopt a low
dividend payout ratio. Such firms are more l ikely to rely more
heavi ly on retained earnings as a source of f inancing the ir
investments.
(6) Inflation:
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Finally, inflation is another factor which effects the firms
dividend decisions. With rising prices, the funds generated from
depreciation may be inadequate to replace obsolete equipments.
These firms have to rely upon retained earnings as a source of
funds to make up the shortfall. This aspect becomes all the more
important i f the assets are to be replaced in the near future.
Consequently, their dividend payout tend to be low during the
period of inflation.
Now, should the company decide to follow either the high or low
dividend method, it would use one of three main approaches:
Residual
Companies using the residual dividend policy choose to
rely on internally generated equity to finance any new projects.
As a result, dividend payment can only come out of the residual
or leftover equity after all project capital requirements are met.
These company's usually attempt to maintain balance in their
debt/equity ratios before making any dividend distributions,
which demonstrates that such a company decides upon dividends
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only if there is enough money leftover after al l operating and
expansion expenses are met.
Stability
The fluctuation of dividends created by the residual policy
significantly contrasts the certainty of the dividend stabili ty
policy The fluctuation of dividends created by the residual
policy significantly contrasts the certainty of the dividend
stability policy. With the stability policy, companies may choose
a cyclica l pol icy tha t set s d iv idends a t a f ixed f ract ion of
quarterly earnings, or they may choose a stable policy whereby
quarterly dividends are set at a fraction of yearly earnings. In
either case, the aim of the dividend stability policy is to reduce
uncertainty for investors and to provide them with income.
Hybrid of the above two.
The final approach is a combination between the residual
and stable dividend policy. Using this approach, companies tend
to view the debt/equity ratio as a long-term rather than a short-
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term goal. In today's markets, this approach is commonly used
by companies that pay dividends.
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(2) RESEARCH METHODOLOGY
To analyze the trends in dividend payment pattern, number
of companies paying dividend as percentage of total f irms,
average dividend paid, dividend per share, payout ratio, and
div idend y ie ld a re computed for the per iod 1990 to 2001.
Dividend per share (DPS) is calculated as
DPS(j,t) = Dividend(j,t)
EQCap(j,t)
Where, DPS(j ,t ) refers to dividend per share for
company j in year t ; Dividend(j ,t ) refers to amount of
dividend paid by company j in year t ; and EQCap(j ,t )
refers to paid -up equity capital fo r f i rm j i n yea r t .
Equity capital is employed instead of the usual number of
outstanding shares in the denominator as i t faci li ta tes
comparison of rupee dividend paid per share by removing
the impact of different face or par values.
Dividend payout ratio (PR) is computed as
PR(j,t) = Dividend(j,t)
PAT(j,t)
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Where, PR(j ,t ) i s dividend payout ratio , Dividend(j , t)
refers to amount of dividend paid by company j in year t; and
PAT(j,t) refers to net profit or profit after tax for f i rm j in
year t.
Dividend Yield (DY) is computed as
DY(j,t) = DPS(j,t)
Price(j,t-1)
Where, DY(j,t) refers to dividend yield for firm j in year t,
DPS(j,t) refers to dividend per share for firm j in year t , and
Pricej,t-1 is closing price of previous year for firm j.
Further, the entire sample is categorized into payers and
non-payers to examine the trends in dividends across different
subgroups.
Payers are those f irms that have paid dividend in the
current year, where as non payers have not paid dividend in the
current year.
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Payers are further classified into regular payers, initiators
and current payers. Regular payers are those firms that have paid
dividend regularly without ever skipping the payments. Initiators
on the other hand refers to those firms with a maiden dividend,
where as current payers are those firms who are neither regular
payers nor initiators.
Non-payers are further categorized into never paid, former
payers and current non-payers. Never paid firms are those that
have never paid even a single dividend, where as former payers
are those firms which at some previous point had paid dividends.
Current non-payers are those firms which are recently listed and
that they are nei ther former payers nor are in the never paid
category in any of the previous years.
Primary Objectives:
How and Why Do Companies Pay Dividends?
What should be the Companys dividend policy?
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How Do Firms View Dividend Policy?
What factors should be considered when a company decides
on its dividend policy?
What are the alternatives that a company has other than
paying dividends?
Does losses leads to dividend reductions?
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PROBLEM DEFINITION
Management decision problem
How and Why Do
Companies Pay Dividends?
What should be the dividend
policy of a firm?
Does losses leads to
dividend reductions?
Marketing research problem
How Do Firms View
Dividend Policy?
What factors should be
considered when a company
decides on its dividend
policy?
what are the alternatives that
a company has , o ther than
paying dividends?
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APPROACH TO THE PROBLEM:
While deciding the dividend policies what are the factors that
company should take care of?
Do they have some special strategy? These were some of
the questions that struck me. I decide to get into this study to get
answers to these questions and see if I could learn something
from there policies.
These problems can be studied by finding out the
underlying dividend policies of different firms and what is the
reason behind the selection of such a policy.
I t ried to keep my s tudy in conjugation with the f inancial
theories that were taught to me in the class. What you see inside
is a theoretical and comparative study.
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Limitations:
Non-availability of latest database of Dividend
Paying firms.
Scale of research is small.
The present s tudy has considered only cash
dividends and not share repurchases. Share
repurchases or buyback has been permitted in
the Indian context only recently and this may
well have influenced the dividend behavior of
Indian companies, as some firms would have
substituted share repurchases for cash
dividends
In the present study only final cash dividends
are considered and the s tock d iv idends by
f irms a re not conside red which may l imit
generalizations of the findings
Further, the present study has not considered
the stock market reactions to dividend events
and has not examined at gr eat depth the
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interre la tions between d iv idend and o ther
corporate finance decisions
(4) DATA
DATA COLLECTION:
1) Secondary Source
Websites.
Books, Newspapers, Fact Sheets of different
firms.
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(5) FINDINGS AND ANALYSIS
Trends in Dividends and Influence of Changes in Tax Regime
Average profit after tax (PAT) has increased from Rs. 4.68
crore in 1990 to Rs. 6.11 crore in 2000 and Rs. 9.36 crore in
2001. However, there have been several fluctuations in average
PAT reflecting the changes in Indian economy. In the early
phases of economic reform, many firms had to restructure as the
economy was opened upw and s truc tura l adjus tments were
undertaken resulting in a reduction in PAT. The subsequent pick
up in the mid -90s has seen an increase in average PAT. The late
1990s, which marked a significant decline in economic activity,
have had their impact on PAT of firms.
Average Dividend Paid
Despi te f luctua tions in PAT, the average aggrega te
dividend payments have steadily increased from Rs. 0.99 crore
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in 2001 to Rs. 2.93 crore in 2011 and Rs. 4.19 crore in 2012.
Further, compared to PAT the dividend payments have exhibited
a smooth trend implying that dividend smoothening is occurring
in the Indian context
.Table
Trend in Dividends and PAT During 2001-2012
Year Number
of firms
Average
dividend(Rs.Crore)
SD of
dividend(Rs.Crore)
Average
PAT(Rs.Crore)
SD of
PAT(Rs.Crore)
2001 1707 0.99 3.92 4.68 48.45
2002 2184 0.98 3.79 4.05 37.88
2003 2505 1.11 4.54 4.19 40.45
2004 3097 1.11 4.85 3.06 46.76
2005 4020 1.27 6.19 4.15 51.41
2006 5115 1.56 8.42 6.96 57.55
2007 5600 1.85 10.80 7.19 62.92
2008 5855 2.05 13.91 6.38 65.652009 5980 2.26 17.18 5.69 103.52
2010 6248 2.39 22.14 5.09 88.19
2011 6225 2.93 26.46 6.11 103.54
2012 4766 4.19 44.71 9.36 134.39
Common
firms
871
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Trends in Average Dividend and Average PAT during
1990-2001
0
2
4
6
8
10
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
years
Rs.
Crore Average Dividend
Average PAT
Number of firms paid dividend during the study period
have shown an up trend till 1995 and have fallen subsequently,
where as the percentage of companies paying dividends has
declined from 60.5 percent in 1990 to 32.1 percent in 2001. The
fac t tha t percentage of companies paying d iv idends have
declined whereas the average d iv idend paid has increased
implies that companies which have been paying dividend have
paid higher amounts in recent years. Total non-payers have
steadily increased from 1990 to 2011 before declining slightly in
2001. Firms, which have never paid dividend, const ituted a
s ign if ican t p ropor tion through out t he sample period
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constituting more than 50% from 1991 to 2001 continuously. The
number of firms, which at some previous t ime paid dividend,
have increased overtime and reached almost 50% of non-payers
in 2001.
Table
Trend in Dividend Payments During 2001-2012
Year Paid
Dividend(
Number of
Firms)
Paid
Dividend(%
of Firms)
Not Paid
Dividend(Num
ber of Firms)
Not Paid
Dividend(
% of
Firms)
Total
Numbe
r of
Firms
2001 1033 60.50 674 39.50 1707
2002 1272 58.20 912 41.80 2184
2003 1533 61.20 972 38.80 2505
2004 1823 58.90 1274 41.10 3097
2005 2333 58.00 1687 42.00 4020
2006 2775 54.30 2340 45.70 5115
2007 2723 48.60 2877 51.40 5600
2008 2386 40.80 3469 59.20 5855
2009 2101 35.10 3879 64.90 5980
2010 2007 32.10 4241 67.90 6248
2011 1988 31.90 4237 68.10 6225
2012 1531 32.10 3235 67.90 4766
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Dividend Behaviour of Indian Corporate Firms
during 1990-2001
0
20
40
60
80
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Years
%o
fFirms
Payers
Non Payers
Figure
Total number of firms paying dividend has increased up to
1995 and has registered sustained decline there after. Mirroring
these trends firms, which have paid dividends regularly, peaked
in 2006 and recorded declines thereafter. Initiators have shown a
s teady dec line f rom 2002 and have fal len to 5% in 2012.
Average dividend paid by payers has increased steadily from Rs.
1.69 crore in 1991 to Rs. 9.16 crore in 2011 and Rs. 13.05 crore
in 2012. Regular payers a re more in number and have paid
higher average dividend compared to that of current payers and
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initiators. Current payers have paid higher dividend compared to
initiators except in the year 2012. The number of initiators have
inc reased up to the yea r 1995 and have shown a dec line
thereafter, where as current payers have steadily increased in
number up to 2011.
A comparison of index and non-index firms shows that the
former group of companies on average has paid more dividend
than the latter group. Similarly, it is observed that companies,
which const itute popular market indices such as Sensex and
Nifty paid more dividends compared to companies in the broad
market indices such as BSE 100, CNX Mid-Cap, BSE 200, CNX
500, and BSE 500. These observations are on the expected lines
as higher dividend payment is one of the important criteria for
inclusion of stocks into indices. A study of number of
companies, paying dividend also reveals that a significantly
larger proportion of index firms have paid dividend compared to
non-index fi rms. 29 out of 30 Sensex f i rms and 49 out of 50
Nifty firms have paid dividend in 2012, the exception being Tata
Engineering and Locomotive Company Ltd(TELCO).
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Analysis of industry-wise average dividend paid shows that
in the early 2000s, firms in the diversified industry have paid
more dividends followed by mining firms and electricity firms.
However, by the end of 2011 and 2012 firms in the electrici ty
industry have paid more d iv idend fol lowed by mining and
diversified companies. It has also been observed that texti le
companies have continued to pay low amounts on an average
throughout the sample period where as firms in the financial
services indus try have improved the ir ave rage d iv idend
payments over the sample period. The recent high growth firms
in the computer 12 hardware and software segments, which are
part of the machinery industry, have generally shown lower
dividend payments.
In sum, the number of firms paying dividend during the study
period have shown an up trend till 2006 and have fallen
subsequently. Further, compared to PAT the dividend payments
have exhibited a smooth trend implying that dividend
smoothening is occurring in the Indian context. Regular payers
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are more in number and have paid higher average dividend
compared to tha t o f cur rent payers and ini ti ators. Of the
nonpayers, former payers are growing in numbers. Index firms
appear to pay higher dividends compared to that of non-index
firms. Further, smaller indices appear to have higher average
dividend compared to that of larger indices. Industry t rends
indicate that f irms in the electr ic ity, mining and diversif ied
industries have paid more dividend where as textile companies
have paid less dividends. Firms in the machinery industry which
includes computer hardware and software segments have shown
lower dividends.
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Table 4.3
Average Dividend Paid During 1990-2001 Industry-wise (in Rs.
Crore)
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Dividend Per Share
Industry 20
01
20
02
20
03
20
04
20
05
20
06
200
7
200
8
200
9
201
0
201
1
201
2
FIRM
S
Chemicals
and
plastics
1.0
9
0.9
6
1.0
5
0.9
7
1.0
8
1.3
8
1.5
7
1.6
9
1.9
2
1.6
8
2.4
1
2.4
6
1138
Diversifie
d
3.5
6
3.8
8
4.2
4
5.1
1
6.1
4
7.7
2
10.
13
10.
99
12.
86
17.
17
22.
76
29.
55
184
Electricity 1.2
8
1.1
4
1.1
9
2.2
6
5.8
5
9.5
4
13.
08
18.
31
17.
37
26.
33
27.
24
28.
67
58
Financial
Services
0.6
7
1.3
9
1.4
7
1.3
8
1.4
9
2.1
0
2.4
6
2.7
2
3.1
6
3.2
0
4.2
5
5.2
9
1097
Food and
Beverages
0.8
8
0.9
7
0.9
8
0.8
9
0.9
4
1.0
2
0.8
0
0.9
0
1.1
2
1.1
3
1.3
4
1.8
9
745
Machinery 0.70 0.65 0.72 0.73 0.83 0.99 1.11 1.13 1.20 1.34 1.58 2.11 1065
Metal and
Metal
Products
0.8
0
0.9
0
1.3
7
1.3
6
1.7
2
2.2
0
2.3
9
2.1
4
1.8
0
1.4
0
1.7
2
3.0
8
555
Mining 2.5
7
2.7
9
2.9
7
3.5
7
2.8
7
2.9
4
8.8
7
17.
44
22.
23
21.
99
26.
31
35.
36
81
Misc.
manufact
uring
0.3
9
0.5
1
0.7
2
0.6
2
0.7
3
0.7
0
0.7
5
0.5
7
0.3
5
0.5
6
0.5
8
1.0
5
324
Non-metallic
Mineral
Pro
0.50
0.62
0.70
0.64
0.63
0.85
1.18
1.00
0.86
0.90
1.12
1.51
296
Other
Services
1.0
2
0.7
6
0.8
6
0.9
2
1.0
1
1.0
7
1.1
8
1.2
3
1.3
4
1.3
4
1.4
2
4.0
7
1264
Textiles 0.4
8
0.4
7
0.4
7
0.5
3
0.7
2
0.8
6
0.8
2
0.5
8
0.4
8
0.4
8
0.5
6
0.5
6
750-
Transport
Equipment
1.2
5
1.1
7
1.2
0
1.0
6
1.3
9
2.0
2
2.8
3
3.5
8
2.9
5
2.9
5
3.4
4
3.0
3
225
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Average dividend per share (DPS) has increased from 14
paisa in 2001 to 26 paisa in 2011 and 15 paisa in 2012. An
analysis of distribution of firms shows that 39 percent have paid
nil DPS in 2001 and the percentage has increased to 67.7 in
2012. Percentage of firms in the average class i .e. , DPS in the
range of Rs. 0 to Rs. 0.25 have declined from a high of 45.9 in
2001 to 18.5 in 2012. This implies that the increased average
DPS over the lat ter period has mainly been due to a few firms
paying larger DPS. Firms in chemicals and plastics industry have
steadily improved their DPS from 14 paisa in 2001 to 27 paisa in
2011 and 25 paisa in 2012. Where as textiles firms have shown a
decl ine in DPS f rom 13 pai sa in 2001 to 6 pai sa in 2012 .
Machinery firms have paid a steady 12 to 14 paisa except for the
years 2007 and 2008 when they paid margina lly more. An
analysis of index and non-index firms DPS shows that index
f irms on an average paid more DPS than non-index f irms.
Similarly, narrow indices have high average DPS than broad
indices.
Table
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Average Dividend Per Share (DPS) During 2001-2012
(in Rs.)
Year Numberof firms
MinimumDPS
MaximumDPS
AverageDPS
Std.Deviation
2001 1694 0 12.71 0.1406 0.3455
2002 2153 0 10.58 0.1385 0.3009
2003 2468 0 15.58 0.1427 0.3568
2004 3028 0 51.2 0.1415 1.0025
2005 3953 0 57.5 0.1582 1.2983
2006 5032 0 135.33 0.1803 2.3543
2007 5536 0 174.67 0.2158 3.3243
2008 5801 0 222 0.198 3.48342009 5911 0 350.33 0.2337 5.8833
2010 6176 0 249.75 0.2544 4.8938
2011 6167 0 266.38 0.2571 4.4156
2012 4734 0 61.5 0.1538 1.2899
Common
firms
866
Average Dividend Per Share (DPS) During 2001-2012
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An analysis of recurrence of dividend per share group shows that
two firms have consistently paid dividend in the range of 25 to
50 paisa per share for all the 12 years, where as 18 firms have
paid up to 25 paisa.
An analysis of dividend reductions by firms shows that only five
companies namely Mah indra S in tered Product s L td , O ti s
Elevator Co. (India), Bharat Electronics, Amritlal Chemaux, and
Carborundum Universal have consistently paid higher dividend
per share out of a 330 firms that paid dividends in all years of
the sample period. 43 f irms reg is te red a s ingle ins tance of
dividend per share reduction, where as 68 firms lowered twice,
82 f i rms lowered thrice etc . On the whole average DPS has
shown a steady growth except in the year 2001. Regular payers
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have consistently paid more dividend per share compared to
othe r payers, where a s ini ti ators have a lways paid lower
dividend per share. Analysis also shows that only a few firms
have consistently paid same levels of dividend. Index firms on
an average paid more DPS than non-index firms. Similarly ,
narrow indices have high average DPS than broad indices. Firms
in chemicals and plastics industry have steadily improved their
DPS, where as textiles firms have shown a decline in the study
period. Machinery firms have paid a steady DPS.
Distribution of Firms in terms of Dividend Per Share During
2001-2012 Percentage of Companies in the Year
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DPS 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201Rs. 0 39 41 37.9 39.9 41.1 44.9 50.8 58.9 64.5 67.5 67.8 67.7
Rs.
0-
0.25
45.9 43.1 46.2 46.9 45 42.3 35.8 27.5 22.2 19.5 18.6 18.5
Rs.
0.25-
0.50
13.5 13.7 13.7 11.2 12.1 10.6 10.4 9.8 8.7 7.6 7.4 7.8
Rs.
0.50-
0.75
0.9 1.3 1.4 0.9 0.7 1.1 1.5 2.3 2.8 2.5 2.6 2.7
Rs.
0.75-
1
0.4 0.5 0.4 0.7 0.8 0.4 0.6 0.6 0.6 1.1 1.2 1.3
Rs.
1-2
0.2 0.3 0.3 0.2 0.2 0.3 0.4 0.6 1 1.1 1.4 1.4
Rs.
2-5
0.1 0.1 0 0.1 0.1 0.2 0.2 0.1 0.2 0.3 0.6 0.4
>
Rs. 5
0.1 0 0 0.2 0.1 0.1 0.2 0.2 0.2 0.3 0.4 0.5
Industry-wise Dividend Per Share (DPS) During 2001-2012
(in Rs.)
Industry 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
FIR
MS
Chemica
ls and
0.
14
0.
15
0.
14
0.
12
0.
17
0.
15
0.1
2
0.1
7
0.1
7
0.1
8
0.2
7
0.2
5
1138
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plastics
Diversifi
ed
0.
19
0.
21
0.
26
0.
20
0.
20
0.
19
0.2
1
0.2
2
0.2
1
0.2
2
0.2
7
0.2
1
184
Electrici
ty
0.
13
0.
10
0.
11
0.
11
0.
11
0.
10
0.1
2
0.0
9
0.1
0
0.1
0
0.1
3
0.1
0
58
Financia
l
Services
0.
08
0.
11
0.
13
0.
34
0.
24
0.
21
0.2
8
0.1
2
0.1
5
0.1
4
0.1
9
0.1
8
1097
Food
and
Beverage
s
0.
20
0.
20
0.
18
0.
23
0.
31
0.
47
0.4
9
0.5
8
0.8
5
0.2
1
0.1
6
0.1
3
745
Machine
ry
0.
12
0.
13
0.
14
0.
14
0.
13
0.
13
0.1
7
0.1
9
0.1
2
0.1
4
0.1
4
0.1
4
1065
Metal
and
Metal
Products
0.
13
0.
11
0.
11
0.
09
0.
10
0.
10
0.1
2
0.0
9
0.0
7
0.0
6
0.0
7
0.0
7
555
Mining 0.
05
0.
07
0.
06
0.
07
0.
09
0.
06
0.0
7
0.0
8
0.1
3
0.1
0
0.1
1
0.0
9
81
Misc.
manufac
turing
0.
12
0.
12
0.
14
0.
10
0.
11
0.
10
0.1
0
0.1
5
0.0
6
0.1
6
0.2
1
0.3
0
324
Non- 0. 0. 0. 0. 0. 0. 0.1 0.0 0.0 0.0 0.0 0.0 296
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metallic
Mineral
Pro
10 11 11 09 09 09 0 8 8 7 9 9
Other
Services
0.
17
0.
15
0.
17
0.
15
0.
13
0.
24
0.3
8
0.2
8
0.4
2
0.8
8
0.7
3
0.1
2
1264
Textiles 0.
13
0.
14
0.
13
0.
11
0.
12
0.
09
0.0
8
0.0
6
0.0
6
0.0
5
0.0
7
0.0
6
750
Transpo
rt
Equipme
nt
0.
12
0.
12
0.
12
0.
12
0.
13
0.
13
0.1
5
0.1
8
0.1
6
0.1
5
0.2
1
0.1
7
225
Dividend Payout Ratio
An analysis of average percentage dividend payout (PR)
during 2001-2012 shows a volat il e t rend . Percentage PR
increased from 27.39 in 2001 to 32.95 in 2008 and then showed
a declining t rend t il l 2011 before reaching the peak average
percentage PR of 40.53 in 2012.
Year No. of
firms
Avg.%
payout
SD 1%Trimmed
avg. payout
!%trimmed
no. of firms
2001 1382 27.39 37.77 24.98 1369
2002 1714 25.19 41.04 23.11 1697
2003 2022 27.54 48.31 24.25 2002
2004 2533 27.98 37.83 25.72 2508
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2005 3156 28.19 61.96 24.92 3125
2006 3770 25.88 38.06 23.84 3733
2007 4042 27.44 88.12 23.99 4002
2008 4258 32.95 139.85 23.91 4216
2009 4335 31.39 453.37 18.64 42922010 4503 22.82 120.19 16.98 4458
2011 4383 21.6 67.49 17.47 4340
2012 3387 40.53 1196.96 16.81 3354
An analysis of distribution of firms by dividend payout
percentage shows that as high as 26 percent of firms in 2001 and
56.6 percent in 2012 have paid out nothing. However, more than
10 percent firms have paid dividend in excess of 75 percent of
their net profi ts . An analysis of dividend payout recurrence
shows that very few firms have maintained the same payout for a
longer period of time. For instance, only one firm Hindustan
Lever Limited has paid out a dividend in the range of 50 to
75% of its net profit for entire sample period. Similarly another
firm Maharashtra Scooters Limited - maintained a dividend
payout in the range of 10 to 20% for 11 of the 12-year sample
period. Similarly, Kinetic Engineering Ltd., Lakshmi Machine
Works Ltd., and Dalmia Cement (Bharat) Ltd. have paid out in
the range of 10 20% for 10 of the 12-year sample period.
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Average % Payout During 2001-20112
An analysis of industry-wise DPO shows a declining trend
across all industries during the sample period. Diversified firms,
which have a DPO in excess of 25 percent in 2001, have less
than 14 percent in 2012. Firms in metals and metal products
industry have registered a high degree fall in DPO from 22.84
percent in 2001 to 8.74 percent in 2012.
Distribution of Firms Payout Percentage During 2001-2012
% of Firms
Average % payout During 2001-2012
0
10
20
30
40
50
2001
2002
2005
2006
2009
2011
Year
Averagepay
out%
Average % payout
1% Trimmed Average
% Payout
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Dividend
payout
%
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
2012
0 26 26.5 25.3 28.9 26.6 26.7 33.3 45.4 52.8 57 55.8 56.6
0-10 6.9 9.3 9.2 7.2 8 6.6 5.5 3.1 3.1 3.4 3.8 3.8
10-20 14.5 14.1 13.9 11.9 14.3 15.6 13.6 7.9 7.6 6.7 6.6 7.6
20-30 16.5 17.2 16.1 13.5 15 16.7 13.7 10.9 9.8 8.2 8.9 7.9
30-40 12.6 12.6 13.3 12.3 12.4 12.5 10.8 8.5 7.5 6.9 6.7 6.9
40-50 8.2 7.1 8.8 9.5 7.7 8.7 7.3 6.4 5.4 5.2 5.4 4.8
50-75 10.1 9 8.9 10.5 10.2 8.6 8.6 9.1 7.8 6.7 6.5 7.1
75-100 3.5 2.9 2.7 4.6 4.5 3.4 5.4 5.2 3.2 3.9 4.2 3.2
100-200 1.2 0.9 1.4 1.3 0.9 0.9 1.4 2.1 1.6 1.3 1.5 1.5
>200 0.4 0.2 0.4 0.4 0.3 0.3 0.4 1.3 1 0.7 0.7 0.7
Firms 138
2
171
4
202
2
253
3
315
6
377
0
404
2
425
8
433
5
450
3
438
3
3387
Table 4.9
Industry-wise Dividend Payout During 2001-2012 (in %)
Industry 20
01
20
02
20
03
20
04
20
05
20
06
200
7
200
8
200
9
201
0
201
1
201
2
Chemicals
and
plastics
23.
92
20.
38
21.
51
23.
38
20.
14
21.
88
20.
53
18.
37
14.
76
13.
84
14.
18
13.
71
Diversifie
d
25.
28
20.
95
22.
78
25.
48
22.
74
23.
23
21.
61
23.
27
19.
34
17.
41
17.
52
13.
59
Electricity 17. 16. 14. 13. 12. 16. 12. 16. 10. 9.3 12. 13.
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98 21 15 37 48 98 70 32 42 5 68 08
Financial
Services
23.
28
27.
01
28.
50
32.
11
29.
87
27.
25
31.
74
29.
19
16.
12
14.
82
16.
21
14.
30
Food and
Beverages
24.
47
23.
15
24.
19
22.
14
20.
40
17.
01
17.
23
16.
14
12.
73
12.
67
12.
80
10.
22
Machiner
y
23.
93
20.
36
22.
87
23.
42
23.
67
22.
07
20.
83
19.
45
16.
23
15.
36
15.
24
15.
15
Metal and
Metal
Products
22.
84
21.
47
19.
86
20.
65
20.
92
19.
76
18.
82
16.
78
12.
56
9.3
7
9.1
6
8.7
4
Mining 10.
28
7.2
9
12.
28
9.5
6
14.
04
12.
10
16.
58
14.
65
11.
50
9.8
7
11.
98
11.
76
Misc.
manufact
uring
18.
10
18.
08
15.
69
17.
18
17.
87
18.
91
17.
81
15.
55
9.8
4
12.
18
12.
59
15.
09
Non-
metallic
Mineral
Pro
19.
71
17.
75
16.
95
16.
27
14.
78
14.
92
13.
87
13.
62
10.
78
9.6
6
8.9
3
11.
29
Other
Services
20.
01
21.
15
19.
25
19.
84
21.
15
19.
60
19.
34
17.
43
14.
00
12.
27
12.
85
12.
54
Textiles 16.
83
15.
98
17.
26
20.
98
20.
54
19.
20
17.
30
13.
84
11.
29
7.9
9
9.0
4
8.0
2
Transport
Equipmen
19.
31
19.
96
21.
61
21.
29
23.
26
20.
99
19.
69
22.
46
20.
96
18.
74
20.
18
17.
29
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t
Total payers have registered an increase in payout from
31.25% in 2002 to a peak of 43.02% in 2008 and finally paid out
37.64% in 2012. Of the payers, regular payers have consistently
paid higher payout compared to that of current payers. Further,
ini tiators have shown h igher f luctua tions in the ir payout
compared to that of regular payers. In sum, average percentage
PR showed a more stable pattern up to 2008 and then has shown
a declining trend. Analysis of dividend payout recurrence shows
that very few firms have maintained the same payout for a longer
period of time. Industry-wise DPO shows a declining trend
across all industries during the sample period. Of the payers,
regular payers have consistently paid higher payout compared to
that of current payers. Further, ini tiators have shown higher
fluctuations in their payout compared to that of regular payers.
Dividend Yield
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Average dividend yield for all companies during the period
2001 to 2012 has declined from 1.73% in 2001 to .55 in 2004
before finally recovering to 1.61 in 2009 and again falling
marginally to 1.24% in 2012. On the whole the dividend yield is
range bound in the region of 0.5% to 1.73%. The reason for the
fall in 2004 could be due to high increases in market
capitalizations of a number of stocks in the face or irregularities
in the stock market in 2003. Analysis of dividend yield by type
of payer shows that initiators have always paid higher levels of
dividend yield compared to that of current payers and regular
payers. Similarly current payers have paid higher dividend yield
compared to that of regular payers. Dividend yields of initiators
have decl ined f rom 6% in 2001 to 1 .51% in 2004 before
recover ing and reaching an a ll t ime h igh of 10% in 2009.
Compared to this current payers yielded about 5% in 2002 before
fall ing to 1.81 in 2004 and have subsequently recovered and
reached a ll t ime h igh of 8 .12% in 2011. On the o ther hand
regular payers started with a yield of close to 5% but have fallen
to a low of 1.5 in 1993 before reaching an all time high of 7.76%
in 2011.
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On the whole dividend yield of aggregate payers shows a
significant increase from 2001-2012.
Average d iv idend y ie ld has d if fe red f rom industry to
industry. Diversified firms, followed by firms in electricity, food
and beverages and textiles industries paid higher dividend yields
in 2002 while f inancial services and mining f irms paid the
lowest. By 2012 diversified firms and electricity continue to pay
higher dividend yields where firms in transport industry have
improved their dividend yields by 2012. However, food and
beverages and textile firms recorded lowered their dividend
yield by 2012, where as firms in financial services, and mining
have improved their dividend yields.
On the whole the dividend yield is range bound during the
study period. Analysis of dividend yield by type of payer shows
that initiators have always paid higher levels of dividend yield
compared to that of cur rent payers and r egular payer s.
Diversified firms and firms in the electricity industry have paid
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higher dividend yields during the study period.
SUMMARY OF ANALYSIS OF DIVIDEND TRENDS
The number of firms paying dividend during the study period has
shown an up trend till 2006 and has fallen subsequently. Average
DPS on the other hand has shown a steady growth except for
year 2012. Average percentage PR showed a more stable pattern
up to 1997 and then has shown a declining trend. Dividend yield
measure is range bound.
Analysis also shows that only a few firms have consistently paid
same levels of dividend. Analysis of dividend payout recurrence
shows that very few firms have maintained the same payout for a
longer per iod of t ime. Of the payers, regular payers have
consisten tly paid h igher payout as wel l as h igher average
dividend compared to that of current payers. Ini tiators have
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always paid higher levels of dividend yield compared to that of
current payers and regular payers.
Fur ther , narrower ind ices appear to have h igher d iv idends
compared to that of broader indices. Industry trends indicate that
firms in the electricity, mining and diversified industries have
paid higher dividends where as textile companies have paid less
dividends. Firms in the machinery industry which includes
computer hardware and software segments have shown lower
dividends.
Changes in Tax Regime and Dividend Propensity
Analysis of influence of change in tax regime on dividend
propensity shows that total dividend per share has come down
from an average of Rs. 0.84 to Rs. 0.71, where as average payout
percentage has increased from 33.33% to 51.05%. Mimicking the
trends for total firms, regular payers have registered lower DPS
and higher payout percentage. As opposed to these changes over
sub-periods of 3 years before and after the change in tax regime,
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one year changes show that DPS has more or less remained at
the same level, where as payout percentage has come down from
2008-2010.
In sum, it can be inferred from the present study that tax regime
changes have not really influenced the dividend behavior of
Indian corporate firms and that the tradeoff theory does not hold
true in the Indian context.
Tax on dividend raised from 10% to 20% - Additional
Rs10bn burden on corporates:
The Finance Minister raised tax on dividend from currently 10%
to 20% in the year 2011-2012. An India Info l ine analysis of
dividend pay out of 863 listed companies has shown that there
would be an additional Rs10bn burden on the corporate sector.
Total dividend pay out of 863 listed companies for 2009-2010 is
Rs101.6bn. This implies that the corporate sector paid Rs10.2bn
(10% of the 101.6bn) as dividend tax in FY10. Raising dividend
tax from 10% to 20% would mean addit ional Rs10.2bn tax.
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Companies whose dividend payout is more than Rs500mn (39
companies) accounts 65% of the total pay out of 863 companies.
An inter esting point to note is that 6 out of the top 10
companies are PSUs which anyway pay most of the dividend to
the government.
Summary and Conclusion
This study examines the dividend behavior of Indian corporate
firms over the period 2001-2012 and attempts to explain the
observed behavior.
Trends indicate that the number of firms paying dividend
during the study period has shown an up trend till 2006 and has
fallen subsequently. Average DPS on the other hand has shown a
steady growth except for year 2012. Average percentage PR
showed a more stable pattern up to 2008 and then has shown a
declining trend.
Analysis also shows that only a few firms have consistently
paid same levels of dividend. Of the payers, regular payers have
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consisten tly paid h igher payout as wel l as h igher average
dividend compared to that of current payers. Ini tiators have
always paid higher levels of dividend yield compared to that of
other payers.
Further, smaller indices appear to have higher dividends
compared to that of larger indices. Industry trends indicate that
firms in the electricity, mining and diversified industries have
paid higher dividends where as textile companies have paid less
dividends.
Analysis of influence of tax regime changes shows that the
tradeoff theory does not hold t rue in the Indian context , as
Ind ian corporat e f irms on ave rage do not appea r to have
increased dividend payments despite a tilt in tax regime in favor
of more dividends.
Analysis of characteristics of payers and non-payers shows
that dividend-paying companies are more profitable and large in
size. However, growth doesnt seem to deter Indian firms from
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paying higher dividends. Further, firms appear to prefer the
pecking order of funds in building their larger asset base.
An analysis of shows that average earnings of dividend omitting
firms have shown significant difference over the past 3 and next
3 years, where as init iat ing firms have exhibited a contrasting
trend.
An analysis of other non-extreme dividend events such as
dividend reductions and non-reductions shows that current losses
are an important determinant of dividend reductions for firms
with established track record.
Further analysis a lso shows that dividend changes are
impac ted more by con temporaneous and l agged earnings
performance rather than by future earnings performance.
The present study has considered only cash dividends and
not share repurchases. Share repurchases or buyback has been
permitted in the Indian context only recently and this may well
have influenced the dividend behavior of Indian companies, as
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some firms would have substi tuted share repurchases for cash
div idends . Similar ly , in the present s tudy only f inal cash
dividends are considered and the stock dividends by firms are
not considered which may limit generalizations of the findings.
Further, the present study has not considered the stock market
reactions to dividend events and has not examined at great depth
the interrelations between dividend and other corporate finance
decisions.
FUTURE SCOPE
Future studies may examine the market reaction to dividend
announcemen ts , o the r poss ib le det erminant s o f dividend
behavior such as flotation costs, and the relationships between
dividend decision and financing and investment decisions.
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(6) BIBLIOGRAPHY
Fundamentals of corporate finance by Ross
WesterField Jordan, 6 t h edition, Tata McGraw Hills, New
Delhi, pg no. 623-629
Corporate Finance by M.Y. Khan and P.K. Jain,2000 t h
edition, Tata McGraw Hills, New Delhi, pg no. 13.3-13.25
and 14.1- 14.17.
Does Dividend Policy Matter? by Stern, J.M. and D.H.
Chew (eds.),Revolution in Corporate Finance, 2nd edition,
Blackwell Publishers Inc.
Dividend Decision: A Study of Managers Perceptions
by Bhat R. and I.M. Pande, Vol. 21, chapter 1 & 2.
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Dividend Pol ic ies of SoEs in India An Analysis ,
F inance India , Vol . X, by Mishra, C. and V. Narender
(1996), pg no. 633-645.