DESSERTATION REPORT ON THE STUDY OF DIVIDEND POLICIES OF INDIAN COMPANIES
Submitted in Partial Fulfillment of the Requirement for the Degree of Bachelor of Business Administration from Amity School of Business, Amity University, Noida
FACULTY GUIDE MS.NISHU SINGHLA Sr. Lecturer, Amity School Of Business, .
Amity University, Sec-125, Noida.
SUBMITTED BY: KUSHAAL CHAUDHARY BBA -GENERAL (2008-2011) Roll No. : A3906408252
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ACKNOWLEDGEMENT I express my sincere gratitude to my mentor Ms. Nishu Singhla for her continuous continuous support support and cooperati cooperation on throughout throughout my project, project, without without which the present work would not have been possible. I would also like to thank her for assigning me a project on so enriching a topic, and her unwaver unwavering ing guidance guidance,, wholehe wholeheart arted ed support support,, compli complimen mentary tary assistance and placid criticism throughout the project. Lastly, I must not forget to thank my family and friends for their constant support and understanding during the work.
Kushaal Chaudhary
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TABLE OF CONTENTS
Chapter No.
Subject
Ch.-1.0
Executive Summary
1.1 Ch.-2.0
Introduction 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 Ch.-7.0 7.1
References Annexure Tables
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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 • identified and developed opportunities that have returns greater than the return on working capital Distribute it to shareholders. • This research is intended to empirically Analyze the Dividend Policies o f companies. This report answers various questions like: How and Why Do Companies Pay Dividends? • What should be the Company’s dividend policy? • How Do Firms View Dividend Policy? • What factors should be considered when a company de cides on its • dividend policy? Wh haa t a r e t h e a lt l t er e r na n a t iv iv e s t ha h a t a c o mp mp a ny n y h a s o t he he r t ha h a n p a yi yi ng ng • dividends? B e fo f o r e w e b e g in in d e s cr c r i bi b i n g t h e v a r io io u s p o li l i c ie i e s t h at a t c o mp m p a n ie ie s u s e t o d e te te rm r m in i n e h o w m uc u c h t o p a y, y, l et e t 's ' s l oo o o k a t d if i f fe f e re r e n t a rg r g u me me n ts ts f or or a n d against dividends policies. First, some financial analysts feel that the consideration p olicy lic y is irrelevant because investors have the ability to o f a s dividend po create homemade dividends. This is done by adjusting a personal portfolio to reflect the investor's own preferences. The second argument suggests that little 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 . T h e a r g um um e n t a g a i n st s t d i v id id e n ds d s i s b a s ed ed o n t h e b e l i e f that a firm who reinvests funds (rather than pays it out as 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 are the f o ll l l o wi w i n g : u n d er e r t ak a k i n g m o re r e p r o je je c t s, s, r e pu p u r c ha h a s in i n g t h e c o m pa p a n y' y' s o w n shares, acquiring acquiri ng new companies and profitable profitable assets, and reinvesting reinvesting in financial assets.
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In opposition to these two arguments is the idea that a high dividend payout is more important for investors because the p r in c i pl e b e h in d t h e a t tr a ct i v en e s s o f a c o m pa n y 's a b i li t y t o p a y h i g h d i v i d en d s i s t h at i t p r o vi d e s c e r t ai n ty a b o ut t h e c o m pa n y' s f i na n c ia l w e ll b e i ng . D i v id e n ds a r e a l so a t tr a c ti v e f o r i n v es t or s 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: • • •
Residual Stability Hybrid of the above two.
So, we can say that, there are many reasons for paying dividends and there a r e m a n y r e a s o n s f o r n o t p a y i n g a n y d i v i d e n d s . A s a r e s u l t , `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 • identified and developed opportunities 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 a n d c a sh d i vi de n ds . L a rg e r r e te n ti on s , l es s er d i vi de n ds a n d s ma ll e r r e t en t io n s , l a r ge r d i vi d e nd s. T hu s, the a ltern ativ e use s o f the n et e ar nin gs :- di vid en ds a nd r eta in ed e ar nin gs - a re c om pe ti ti ve a nd conflicting. The term "dividend" usually refers to a cash distribution of earnings. If it comes from other sources, it is called "liquidating dividend". It mainly has the following types: R eg ul ar : R eg ul ar d iv id en ds a re t ho se t he c om pa ny e xp ec ts t o • m ai nt a in , p a id q u ar te rl y ( so me ti me s m o nt h ly , s em ia n nu a ll y o r 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 proce dure for paying dividends is as follows: Declara tio n Date: D a t e a t w h i c h t h e c o m p a n y a n n o u n c e s i t w i l l p a y a dividend. Holder-of-Recor d Date: Date at which the list of shareholders who will receive the dividend is made. Ex-Dividend Date: T he c on ve nt io n i s t ha t t he r ig ht t o t he d iv id en d 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 t o c h a ng e s i n e a r ni n gs . I t h a s b e e n o b s er v e d t h a t m o re " c o ns e r va t iv e " companies are generally slower to adjust to the tar get payout if earnings increased. Given the objective of financial management of maximizing present v al ue s, t he f ir m s ho ul d b e g ui de d b y t he c on si de ra ti on a s t o w hi ch alternative use is consistent with the goal of wealth maximization. i.e., the firm would be well 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 p ro g ra ms . t he r e la ti o ns h ip b e tw e en d iv id e nd s a n d v a lu e o f t he f ir m should, therefore, be the decision criterion. T h e re a r e h o w ev e r c o n fl i ct i ng o p i ni o ns r e ga r d in g t h e i m pa c t o f d iv id e nd s o n t he v a lu a ti on s o f t he f ir m. A c co rd in g t o o n e s ch o ol o f thought, dividends are irrelevant, so that the amount of the dividends paid h a s n o e ff ec t o n t he v a lu a ti on o f t h e f i r m. o n t he o t he r h a nd c e rt ai n 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)
D iv id en d P ayo ut (D /P ) r at io :
A major aspect of the dividend policy of a firm is its 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 reference to two basic objectives:• •
Maximizing the wealth of the firm’s owners and, Providing sufficient funds to finance growth.
T h e se o b je c t iv e s a r e n o t m u tu a ll y e x c lu s iv e , b u t i n te r r el a te d . I n 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 effect the price of a share; a low D/P Ratio may
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cause a decline in share prices, while a high ratio may lead to a rise in the m a rk e t p r i ce o f t h e s h a re . M a ki n g a s u ff i ci e n t p r o v i si o n f o r f i n a n ci n g growth can be considered a secondary objective of dividend policy. The firm must forecast its 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 e a rn i n gs a v a il a bl e a f te r t h e m i ni m um d i v id e n ds h a v e b e e n p a i d . T h u s, d iv id en d p ay me nt s s ho ul d n ot b e v ie we d a s a r es id ua l, b ut r at he r a required outlay after which any remaining funds can be reinvested in the firm.
(2)
Stability of dividends:
The term dividend stability refers to the consistency or to the lack of variability in the stream of dividends.in more precise terms, it means t h at a c e r ta i n m i n i m um a m o un t o f d i vi d e nd i s p a id o u t r e g u l ar l y. T h e stability of dividends can take any of the following 3 forms: (i) Co nsta nt div ide nd s p er sh are , ( ii ) C on sta nt / st ab le D /P Ra tio , an d ( i ii ) C o n st a nt d iv i d en d s p e r s h ar e pl u s e x t ra d iv i d en d . Constant dividend per share:
According to this form of stable dividend policy, 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 fixed amount of, say Rs. 2.50 as dividend. This amo unt will be paid year a fte r y ea r, i rr es pe cti ve o f th e l ev el o f e ar ni ng s. I n o th er w or ds , fluctuations in earnings would not 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 firm increase and it is expected that the new level of earnings can be maintained.
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Fig: Stable Dividend Policy of Constant Rupee Dividends.
It can, thus, be seen that while the earnings may fluctuate from yea r to year. The dividend per share is constant. Constant payout Ratio:
W it h c on st an t / p ay ou t r at io , a f ir m p ay s a c on st an t % o f n et earnings as dividend to the shareholders. In other words, a stable Dividend payout Ratio implies that the percentage of earnin gs paid out per year is c o n st a n t. A c c or d in g l y, d i vi d e nd w o u ld f l uc t u at e p r o po r ti o n at e ly w i th e ar ni ng s a n d a re l ik el y t o b e h i gh ly v ol at il e i n t h e w a ke o f w id e fluctuations in the earnings of the company. As a result, when the earning of a firm decline substantially or there is a loss in given period, th e 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:
U n de r t h is p o li cy t he f ir m u su a ll y p a ys a f ix e d d iv id e nd t o t he s ha re h ol de rs a n d i n y ea rs o f m ar k ed p ro s pe ri ty ; a d di ti on a l o r e x tr a dividend is paid over and above the regular dividend. As soon as, normal conditions return, the firm cuts the extra dividend and pays the normal dividend per share. Reasons to prefer stable dividend policy: •
•
•
D e si re f o r c u rr e nt i nc o me b y i nv e st o rs l ik e r et ir ed p e rs on a n d widows. They would place a positive utility on stable dividends. Informational contents regarding the changes in the dividends that will be paid by the firm in the near or far future. R eq ui re me nt s o f i ns ti tu ti on al i nv es to rs l ik e L if e I ns ur an ce C o r po r a ti o n o f I n d ia a n d G e n er a l I n su r a nc e C o r po r at i on o f I n d ia and Unit Trust of India (mutual funds). These compa nies have the legal obligation to invest its money in only those firms which have a record of continuous and stable dividend.
Lintner’s model came in support of this stable dividend policy.
A “Sticky Dividend Policy” or the Lintner Model
I n g e ne ra l, t he re e x is ts a l o ng - te rm t ar ge t d iv id e nd payout ratio which is high for mature firms with stable earnings and low for young growth firms with unstable
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e ar ni ng s, b ut t hi s i s n ot t he f oc us o f t he d iv id en d policy.
At a certain point in the firm’s life cycle, it is time to start paying dividends, at this 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 d i vi de n ds o r d iv id e nd p a yo u t r at io s ( ta r ge ts ) b u t o n changes to the existing level of dividends.
Management is reluctant to make significant changes in t he d iv id en d p a id . T he f oc us i s t o a v oi d c u tt in g d i vi de n ds a n d s en d in g a n u n fa v or a bl e s ig n al t o t he market. Therefore, significant dividends increases only occur when management is confident of being able to m ai nt ai n t h e i n cr ea se i n t h e f u tu re . S ig ni fi ca nt d iv id en d c ha ng es o nl y f ol lo w s hi fts i n lo ng -r un s us ta in ab le e ar nin gs o r d iv id en ds p ay me nt s a re “smoothed”.
Bottom Line: What this means in practice is no dividends are paid until management believes that positive free cash flow is likely to continue on a regular basis in the future. Initially, dividend levels are set extremely low o r c o n s er v a ti v el y a n d t h e n a r e g r a du a l ly r a i s e d e a c h p e r io d . D i v id e n d cuts are a last resort. Empirical evidence suggests:
1 . A n no u nc e me n ts o f u n ex p ec te d d iv id e nd i nc r ea se s a r e v ie w ed favorably by the market (positive abnormal returns over the 3day announcement period); 2. That earnings increase significantly after dividends are initiated; 3 . A n no u nc e me n ts o f u n ex p ec t ed d iv i de n d d e cr ea s es o r d iv id e nd o mi ss io ns a re v ie we d u nf av or ab ly b y t he m ar ke t ( ne ga ti ve abnormal returns over the 3-day announcement period).
(3) Legal, restrictions
contractual
and
internal
constraints
and
T h e l eg a l f ac t or s s te m f ro m c e rt a in s ta tu to r y r eq u ir em e nt s, t he contractual restrictions arise from certain loan covenants and the internal constrains are the result of the firm’s liquidity position.
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L e g al R e q ui r em e n ts : L eg al s ti pu la ti on s d o n ot r eq ui re a d iv id en d declaration but they specify the conditions under which dividend must be paid. Such con ditions pertain to (i) Capital impairment, (ii) Net profits and (iii) Insolvency.
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 its lenders. The rationale of this rule lies in protecting the claims of the preference shareholders and credi tors on the firm’s a s s et s b y p r o vi d in g s u f fi c ie n t e q u it y b a s e s i n c e t h e c r ed i to r s h a v e 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 b il ls . I f t he f ir m i s c ur re nt ly i ns ol ve nt i n e it he r s en se , i t i s prohibited from paying dividends. Similarly a firm would not pay dividends, if such a payment leads to the insolvency of the firm of either type
T h e i m po r ta n t p r o vi s io n s o f c o m pa n y l a w p e r ta i ni n g t o d i v id e n ds a r e described below. 1 . C o m pa n i es c a n p a y o n l y c a s h d i vi d e nd ( w i t h t h e e x ce p t io n o f b o n u s shares). 2 . D i vi d e nd c a n b e p a i d o u t o f t h e p r o f it s e a rn e d d u r in g t h e f i n an c i al y ea r a f te r p ro v id in g t h e d e pr ec ia ti on a n d a ft er t ra n sf er ri ng t o reserves such percentage of profits as prescribed by the law. The Companies (transfer to reserve) Rules, 1975, provid es that before d i v id e n d d e c la r at i on , a p e r ce n ta g e o f p r o fi t s a s s p ec i fi e d b e l ow should be transferred to the reserves of the company.
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DIVIDEND PROPOSED
AMOUNT TO BE TRANSFERRED TO THE RESERVES
•
E x ce ed s 1 0 % b u t n o t 1 2 .5 % of the paid up capital.
•
Should not be less then 2.5% of the current profits.
•
E x ce ed s 1 2 .5 % b u t n o t 1 5 %o f 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%.
•
S h o ul d n o t b e l e ss t h e n 1 0 % o f the current profits.
3 . D u e t o i n a de q u ac y o r a b s e nc e o f p r o f it s i n a n y y e ar , d i v id e n d m a y be paid out of accumulated profits of the previous years. In this context, the following conditions, as stipulated by the companies (Declaration of Dividend out of Reserves) Rules, 19 75, have to be satisfied. ( a ) T h e r a t e o f d e c la r e d d i v i de n d s h o u l d n o t e x c e e d t h e a v e ra g e o f t he r at es a t w hi ch t he d iv id en d w as d ec la re d b y t he company in 5 years immediately preceding that year or 10% of its paid up capital whichever is less. (b) T h e t o t a l a m o u n t t o b e d r aw n f r om t h e a c c u m ul a t ed p r o fi t s e ar ne d i n p re vi ou s y ea rs a nd t ra ns fe rr ed t o t he r es er ve s should not exceed an amount equal to 1/10t h of the sum of the paid up capital 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. Contrac tual require ments: Important restrictions on the payment of the dividends may be accepted by a company when obtaini ng external capital e it he r b y a l oa n a g re e me n t, a d e be n tu r e i nd e nt u re , a p r ef er e nc e s h ar e agreement, or a lease contract. such restrictions may cause the firms to restrict the payment of cash dividends until a certain level of earnings have been achieved or limits the amount of dividend paid to a certain
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amount or % of earnings. Since the payment of dividends involves a cash outflow, firms are enforced to reinvest the retained earnings within the firm. The restrictions of dividends may take 3 forms: I n t he fi rs t p la ce , t he fi rm s m ay b e p ro hib ite d f ro m p ayi ng dividends in excess of a certain percentage, say, 12 %. Alternatively, a c ei li ng i n t er ms o f m a xi mu m a m ou n t o f p r of it s t ha t m ay b e u s ed f o r dividend payment may be laid down, say not more than 60% of the net p ro fi ts , o r a g iv en a bs ol ut e a mo un t o f s uc h p ro fi ts c an b e p ai d a s d iv id en d. F in al ly d iv id en ds m us t b e r es tr ic te d b y i ns is ti ng u po n 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. Internal (i) (ii) ( ii i) ( iv ) (v) (vi)
constraints: Such factors are unique to a firm and include Liquid assets, Growth prospects, F in an ci al r eq ui re me nt s, A va ila bi li ty o f f un ds Earning stability and Control.
Liquid ass ets: O nc e t he p aym en t o f d iv id en d is p er mi ss ib le o n l eg al a nd contractual grounds, the next step is to ascertain whether the firm has sufficient cash to pay cash dividends. It may well be possible that firm’s 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 a s 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 f in a nc ia l r is k e s pe c ia ll y w h en t h ei r e x is ti ng l ev e ra g e r a ti o i s a l re a d y v e r y h i g h. M o re o v er , t h e l e n d e r s m a y b e r e lu c ta n t t o l e n d the money for dividend payments since they produce no tangible or operating benefits that 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: A n ot h er s et o f f ac to r s w h ic h c a n i nf lu e nc e t h e d iv id e nd p o li cy relates to the firm’s growth prospects. The firm is required to make plans for financing its expansion programmes. In this context, the availability of e xte rn al f un ds a nd it s a ss oc ia te d c os t to ge th er w ith t he n ee d f or
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investment funds would have a significant bearing on the firm’s dividend policy. Financial Requirements: F in an ci al r eq ui re me nts o f a f ir m a re d ir ec tl y r ela te d t o it s investment needs. The firm should formulate its dividend policy on the b as is o f i ts f or es ee ab le i nv es tm en t n ee ds . I f a f ir m h as a bu nd an t investment opportunities, it should prefer a low payout ratio, as it can r ei nv es t t he e ar ni ng s a t t he h ig he r r at es t ha n t he s ha re ho ld er c an . Moreover, the retention of money provides the base upon which the firm can borrow some additional funds. Therefore, it provides flexibility in the c o mp a ni es c ap i ta l s tr u ct ur e , t ha t i s, i t m ak e s r oo m f o r u n us e d d e bt capacity.
Availability of funds: The dividend policy is also constrained by the availability of funds a nd t he n ee d f or a dd it io na l i nv es tm en t. I n e va lu at in g i ts f in an ci al position, the firm should consider not only its ability to raise funds but a l so t h e c o s t i n v ol v ed i n i t a n d p r o mp t n es s w i t h w h ic h f i na n c in g c a n b e obtained. I n g e ne r al , l ar g e, m at u re f ir ms h a ve g r ea te r a c ce s s t o n e w sources for raising funds than firms which are grow ing rapidly. For this reason alone, the availability of external funds to the growing funds may n o t b e s u f fi c ie n t t o f i na n c e a l a rg e n u m be r o f a c c ep t a bl e i n v es t me n t s p ro je c ts . O bv io u sl y s uc h f ir ms w il l h a ve t o d e pe n d o n t h ei r r e ta in e d e ar n in g s s o a s t o a mo u nt o f m ax i mu m n u mb e r o f a v ai la b le p r of it ab le projects. Therefore, large retentions are necessary for such firms. Earnings stability: T h e s ta b il it y o f e ar n in g s h a ve a ls o a s ig n if ic a nt b e ar in g o n t he dividend decisions of a firm. Generally, more stabl e the income stream, th e h ig he r i s t he p ay ou t r at io . Su ch f ir ms a re m or e c on fid en t o f m a in t a in i n g a h i g he r p a y ou t r a ti o . p u b li c u t il i ty c o m pa n ie s a r e c l as s ic e x a mp l e o f f i rm s t h at h a v e r e l a ti v e ly s t ab l e e a r n i ng s p a t te r n a n d h i g h dividend payout ratio. Control: Divid en d p olicies may a lso b e stron gly influe nc ed b y th e s ha re h ol de rs o r t h e m an a ge me n t’ s c o nt ro l o b je c ti v es . T h at i s t o s ay , s om et im es t he m an a ge me n t e mp l oy s d iv id e nd p o li c y a s a n e ff ec ti v e i ns tr um en t t o m ai nt ai n i ts p os it io n o f c om ma nd a nd c on tr ol . T he management, in order to retain control of the compa ny in its own hands, may be reluctant to pay substantial dividends and would prefer a small dividend payout ratio. This will particularly hold good for the companies which require funds to finance profitable investment opportunities when an outside group is seeking to gain control of the firm. Added to this, if a 15
c o nt ro ll in g g ro u p o f s ha r eh o ld e rs e it he r c a n n o t o r d o es n o t w is h t o purchase a new shares of equity, under such circumstances, by the issue of a d d it i on a l s h ar e s t o f i na n c e t h e i n ve s tm e n t o p p or t u ni t ie s , m a n ag e me n t may loose its existing control.
( 4)
O wn er’ s c on sid erat ion s:
The dividend policy is also likely to be effected by the owner’s 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 owner’s wealth. The firm must aim at a dividen d policy which has a beneficial effect on the wealth of a majority of the shareholders. Taxes: The dividend policy of a firm may be dictated by the income tax status of its shareholders. If a firm has large percentage of owners who are in the high tax brackets, its dividend policy should seek to have higher retentions. Such a policy will provide its owners with income in the form o f c a pi ta l g a in s a s a g ai ns t d iv i de n ds . S in c e c a pi ta l g a in s a re t ax e d a t l ow e r r a te s t he n d iv id e nd s, t he y a re w o rt h m or e, a ft er t ax e s, t o t he individuals in the high tax brackets. On the other hand, if a firm has majority 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 a n d t h e g r e a t e r c e r t a i n i t y a s s o c i a t e d w i t h r e c e i v i n g t h e 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. S u c h a p o l i c y w o u l d obviously be detrimental to the interest shareholders. However, the firm should evaluate the rate of return obtainable from external investments in the firms belonging to the same risk class. If the evaluation shows that the owners have better opportunities outside, the firm should opt for higher D / P Ratio. On the other hand, if the firm’s 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:
16
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 h ol de rs . D il ut io n i n e ar ni ng s r es ul ts b ec au se l ow r et en ti on s m ay n e ce ss it at es t he i ss u e o f n e w e q ui ty s h ar e s i n t h e f ut u re , c a us in g a n i nc re a se i n t he n u mb e r o f e q ui ty s ha re s o u ts ta n di ng a n d u l ti ma te l y lowering EPS and their price in the market. By retaining a high percentage o f i ts e a rn in g s, t he f ir m c a n m in im iz e t he p os si bi li ty o f d il ut io n o f earnings. Although the ultimate dividend policy depends on numerous factors, the avoidance of shareholders’ discontent is important. If the shareholder becomes dissatisfied with the existing dividend policy, they may sell their shares, increasing the possibility that control of the firm will be seized by some outside groups. The “takeover” of a firm by an outsider is more l i ke l y w h en o w n er s a r e d i ss a ti s fi e d w i t h i t s d i v i d en d p o l ic y . I t i s t h e f in a nc ia l m a na g er ’s r e sp o ns ib il i ty t o k e ep i n t o uc h w it h t he o w ne rs ’ general attitude towards dividends.
( 5)
C ap it al m ar ke t c on si de ra ti on s:
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 ir m h as a n e as y a cc es s t o t he c ap it al m ar ke t, e it he r b ec au se i t i s financially strong or large in size, it can follow a liberal dividend policy. However, if a firm has limited access to the capital market, it is likely to adopt a low dividend payout ratio. Such firms are more likely to rely more heavily on retained earnings as a source of financing their investments.
(6)
Inflation:
Finally, inflation is another factor which effects the firm’s dividend decisions. With rising prices, the funds generated from deprec iation may be inadequate to replace obsolete equipments. T h e s e f i r m s h a v e t o r e l y upon retained earnings as a source of funds to make up the shortfall. This aspect becomes all the more important if 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 C o m pa n i es u s i ng t h e r e s id u a l d i v i d en d p o l ic y c h o o se t o r e ly o n internally generated equity t o f in a nc e a n y n e w p ro je c ts . A s a r es u lt , dividend payment can only come out of the residual or leftover equity •
17
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 only if there is enough money leftover after all operating and expansion expenses are met. Stability T he f lu ctu at io n o f d iv id en ds c re ate d b y th e re sid ua l p ol ic y significantly contrasts the certainty of the dividend stability policy The f lu c tu a ti on o f d iv id e nd s c re a te d b y t he r es id u al p o li cy s ig n if ic a nt ly contrasts the certainty of the dividend stability policy . With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or they may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In e ith er c as e, t he a im o f t he d iv id en d s ta bil ity p ol ic y is t o r ed uc e uncertainty for investors and to provide them with income. •
Hybrid of the above two. The final approach is a combination between the residual d iv id en d p ol ic y. U si ng t hi s a pp ro ac h, c om pa ni es t en d t o debt/equity ratio as a long-term rather than a shor t-term goal. ma rk ets , t his a pp ro ac h i s c om mo nly u se d b y c om pa ni es dividends. •
and stable v ie w t he In today's t ha t p ay
(2) Research Methodology for Analysis of Trends T o a n al yz e t he t re n ds i n d iv id e nd p a ym en t p a tt e rn , n u mb e r o f companies paying dividend as percentage of total firms, average dividend paid, dividend per share, payout ratio, and divide nd yield are computed for the period 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 p er share for company j i n y ea r t ; D i vi de n d( j, t) r e fe rs t o a mo u nt o f d i vi d en d p a id by c o mp a ny j i n y ea r t ; a n d E QC a p( j, t) r e fe rs t o p a id - up e q ui ty capital for firm j in year t. Equity capital is employed instea d of the u su al n um be r o f o ut st an di ng s ha re s i n t he d en om in at or a s i t facilitates 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)
18
W h er e , P R (j , t) i s d i v id e n d p a y ou t r a t io , D i v id e n d( j ,t ) r e f er s t o amount of dividend p aid by company j in year t; and PAT(j,t) refer s to net profit or profit after tax for firm 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 firms that have paid dividend in t he current year, where as non payers have not paid dividend in the current year. P ay er s a re f ur th e r c la ss if ie d i n to r eg u la r p a ye rs , i ni ti at or s a n d 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 s o me p r e vi o u s p o i n t h a d p a id d i v id e n ds . C u r re n t n o n -p a y er s a r e t h o se firms which are recently listed and that they are neither 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 Company’s dividend policy?
How Do Firms View Dividend Policy?
What factors should be considered when a company de cides on its dividend policy?
W ha t a r e t h e a lt er na t iv e s t ha t a c o mp a ny h a s o t he r t ha n p a yi ng dividends?
Does losses leads to dividend reductions?
19
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, other than paying dividends?
Approach to the Problem:
While deciding the dividend policies what are the factors that company should take care of? D o t he y h av e s om e s pe ci al s tr at eg y? T he se w er e s om e o f t he 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. T he se p ro bl em s c an b e s tu di ed b y f in di ng o ut t he u nd er ly in g d i vi d e nd p o l ic i es o f d i ff e re n t f i r m s a n d w h a t i s t h e r e a s o n b e h i n d t h e selection of such a policy. I tried to keep my study in conjugation with the financial theories that were taught to me in the class. What you see inside is a theoretical and comparative study.
Limitations: •
• •
Non-availability of latest database of Dividend Paying firms. Scale of research is small. The present study has considered only cash dividends a nd n ot s ha re r ep ur ch as es . S ha re r ep ur ch as es o r buyback has been permitted in the Indian context only r ec en tl y a nd t hi s m ay w ell h av e i nfl ue nc ed t he dividend behavior of Indian companies, as some firms w o ul d h a ve s ub st it u te d s h ar e r ep u rc h as e s f or c a sh dividends
20
•
•
I n t he p re s en t s tu d y o n ly f in a l c a sh d iv id e nd s a r e considered and the stock dividends by firms are not c o ns id e re d w hi ch m ay l im it g e ne r al iz a ti on s o f t he findings Further, the present study has not considered the stock m ar ke t r ea ct io ns t o d iv id en d e ve nt s a nd h as n ot e x a mi n e d a t g r e at d e p th t h e i n te r re l a ti o n s b e t we e n dividend and other corporate finance decisions
21
(4) DATA
DATA COLLECTION: 1 ) S e co n da r y S o ur c e Websites. • Books, Newspapers, Fact Sheets of different firms. •
22
( 5) Fi ndi ngs and A nal ysi s Trends in Dividends and Influence of Changes in Tax Regime
Average profit after tax (PAT) has increased from R s. 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 refle cting the changes in Indian economy. In the early phases of economic reform, many firms had to restructure as the economy was opened upw and st ructural adjustments were undertaken resulting in a reduction in PAT. Th e 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 D es pi te f lu ct ua ti on s i n P AT , t he a ve ra ge a gg re ga te d iv id en d payments have steadily increased from Rs. 0.99 crore in 1990 to Rs. 2.93 c r o r e i n 2 0 0 0 a n d R s . 4 . 1 9 c r o r e i n 2 0 0 1 . Further, compared to PAT the dividend payments have exhibited a smooth trend implying that dividend smoothening is occurring in the Indian context .
23
Table Trend in Dividends and PAT During Year Nu mb er Averag e of firms dividend(Rs. Crore) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Common firms
1707 2184 2505 3097 4020 5115 5600 5855 5980 6248 6225 4766 871
0.99 0.98 1.11 1.11 1.27 1.56 1.85 2.05 2.26 2.39 2.93 4.19
1990-2001 SD of Averag e dividend(Rs. PAT(Rs. Crore) Crore)
SD of PAT(Rs. Crore)
3.92 3.79 4.54 4.85 6.19 8.42 10. 80 13. 91 17. 18 22. 14 26. 46 44. 71
48. 45 37. 88 40. 45 46. 76 51. 41 57. 55 62. 92 65. 65 103.52 88. 19 103.54 134.39
4.68 4.05 4.19 3.06 4.15 6.96 7.19 6.38 5.69 5.09 6.11 9.36
Trends in Average Dividend an d Average PAT 1990-2001 10 8 e r o r C . s R
6
Average Dividen
4
Average PAT
2 0 0 1 2 3 4 5 6 7 8 9 0 1 9 9 9 9 9 9 9 9 9 9 0 0 9 9 9 9 9 9 9 9 9 9 0 0 1 1 1 1 1 1 1 1 1 1 2 2
years
24
Number of firms paid dividend during the study period have shown a n u p tr en d ti ll 1 99 5 a nd h av e f al le n s ub se qu en tly , w he re a s th e percentage of companies paying dividends has declined from 60.5 percent i n 1 9 9 0 t o 3 2 . 1 p e r c e n t i n 2 0 0 1. T h e f a c t t h a t p e r c e n t a g e o f c o m p a n i e s p a yi n g d i v id e n ds h a v e d e c li n e d w h e re a s t h e a v e ra g e d i vi d e nd p a id h a s increased implies that companies which have been pa ying dividend have p a id h ig h er a m ou n ts i n r ec e nt y ea r s. T o ta l n o n- pa ye r s h a ve s te a di ly i n cr e a se d f r o m 1 9 9 0 t o 2 0 0 0 b e f o r e d e c l i n in g s l ig h t ly i n 2 0 0 1. F i rm s , w h ic h h a ve n e ve r p a id d i vi de n d, c o ns ti tu t ed a s ig n if ic a nt p ro p or ti on through out the sample period – constituting more than 50% from 1991 to 2001 continuously. The number of firms, which at some previous time paid dividend, have increased overtime and reached almost 50% of nonpayers in 2001. Table Trend in Dividend Payments During 1990-2001
Year
Paid Dividend(Number of Firms)
Paid Dividend(% of Firms)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
1033 1272 1533 1 823 2 333 2 775 2 723 2 386 2 101 2 007 1 988 1 531
60. 50 58. 20 61. 20 58. 90 58. 00 54. 30 48. 60 40. 80 35. 10 32. 10 31. 90 32. 10
Not Paid Not Paid Total Dividend(Number Dividend(% Number of Firms) of Firms) of Firms 674 39. 50 1707 912 41. 80 2184 972 38. 80 2505 1274 41. 10 3097 1687 42. 00 4020 2340 45. 70 5115 2877 51. 40 5600 3469 59. 20 5855 3879 64. 90 5980 4241 67. 90 6248 4237 68. 10 6225 3235 67. 90 4766
25
D ividen d B ehaviour of Indian C orpora du ring 1990-2001 80 60
s m r i 40 F f o %20
Payers Non Paye
0 0 9 9 1
1 9 9 1
2 9 9 1
3 9 9 1
4 9 9 1
5 9 9 1
6 9 9 1
7 9 9 1
8 9 9 1
9 9 9 1
0 0 0 2
1 0 0 2
Year
Figure
Total number of firms paying dividend has increased up to 1995 and has registered sustained decline there after. Mirroring these trends firms, w hi ch h av e p ai d d iv id en ds r eg ul ar ly , p ea ke d i n 1 99 5 a nd r ec or de d declines thereafter. Initiators have shown a steady decline from 1991 and have fallen to 5% in 2001. Average dividend paid by payers has increased steadily from Rs. 1.69 crore in 1991 to Rs. 9.16 crore in 2000 and Rs. 13.05 crore in 2001. Regular payers are more in number and have paid higher average dividend compared to that of current payers and initiators. Current payers have paid higher dividend compared to initiators except in the year 2001. The number of initiators have increased up to the year 1995 and have shown a decline thereafter, where as current payers have steadily increased in number up to 2000.
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 constitute popular market indices such as Sensex and Nifty paid more dividends compared to companies in the broad market indices such as BSE 1 00, CNX Mid-Cap, BSE 200, CNX 500, and BSE 500. These observations are on the expected l in e s a s h ig h er d iv i de n d p a ym en t i s o n e o f t he i mp o rt an t c ri te ri a f o r
26
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 firms. 29 out of 30 Sensex f ir ms a nd 4 9 o ut o f 5 0 N if ty f ir ms h av e p ai d d iv id en d i n 2 00 1, t he exception being Tata Engineering and Locomotive Company Ltd(TELCO). Analysis of industry-wise average dividend paid shows that in the early 1990s, firms in the diversified industry have paid more dividends followed by mining firms and electricity firms. However, by the end of 2000 and 2001 firms in the electricity industry have paid more dividend followed by mining and diversified companies. It has also been observed that textile companies have continued to pay low amounts on an average t h ro u g ho u t t h e s a mp l e p e ri o d w h e re a s f i rm s i n t h e f i n a n c ia l s e rv i c es industry have improved their average dividend payme nts over the sample period. The recent high growth firms in the computer 12 hardware and s of tw ar e s eg me nt s, w hi ch a re p ar t o f t he m ac hi ne ry i nd us tr y, h av e generally shown lower dividend payments. In sum, the number of firms paying dividend during the study period have s ho wn a n u p t re nd t il l 1 99 5 a nd h av e f al le n s ub se qu en tl y. F ur th er , compared to PAT the dividend payments have exhibited a smooth trend implying that dividend smoothening is occurring in the Indian context. Regular payers are more in number and have paid higher average dividend compared to that of current payers and initiators. Of the nonpayers, former p ay er s a re g ro wi ng i n n um be rs . I nd ex f ir ms a pp ea r t o p ay h ig he r dividends compared to that of non-index firms. Further, smaller indices appear to have higher average dividend compared to that of larger indices. I nd us tr y t re nd s i nd ic at e t ha t f ir ms i n t he e le ct ri ci ty , m in in g a nd diversified 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.
Table 4.3
27
Average Dividend Paid During 1990-2001 – Industry-wise (in Rs. Crore) Industry
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
FIRMS
Chemicals and plastics Diversified
1.09
0.96
1.05
0.97
1.08
1.38
1.57
1.69
1.92
1.68
2.41
2.46
1138
3.56
3.88
4.24
5.11
6.14
7.72
10.13
10.99
12.86
17.17
22.76
29.55
184
Electricity
1.28
1.14
1.19
2.26
5.85
9.54
13.08
18.31
17.37
26.33
27.24
28.67
58
Financial Services Food and Beverages Machinery
0.67
1.39
1.47
1.38
1.49
2.10
2.46
2.72
3.16
3.20
4.25
5.29
1097
0.88
0.97
0.98
0.89
0.94
1.02
0.80
0.90
1.12
1.13
1.34
1.89
745
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 Mining
0.80
0.90
1.37
1.36
1.72
2.20
2.39
2.14
1.80
1.40
1.72
3.08
555
2.57
2.79
2.97
3.57
2.87
2.94
8.87
17.44
22.23
21.99
26.31
35.36
81
Misc. manufacturing Non-metallic Mineral Pro Other Services
0.39
0.51
0.72
0.62
0.73
0.70
0.75
0.57
0.35
0.56
0.58
1.05
324
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
1.02
0.76
0.86
0.92
1.01
1.07
1.18
1.23
1.34
1.34
1.42
4.07
1264
Textiles
0.48
0.47
0.47
0.53
0.72
0.86
0.82
0.58
0.48
0.48
0.56
0.56
750-
Transport Equipment
1.25
1.17
1.20
1.06
1.39
2.02
2.83
3.58
2.95
2.95
3.44
3.03
225
Dividend Per Share Average dividend per share (DPS) has increased from 14 paisa in 1990 to 26 paisa in 2000 and 15 paisa in 2001. An analysis of distribution o f f ir ms s ho ws t ha t 3 9 p er ce nt h av e p ai d n il D PS i n 1 99 0 a nd t he p e rc e nt ag e h a s i nc re a se d t o 6 7 .7 i n 2 0 01 . P er c en ta g e o f f ir ms i n t he average class i.e., DPS in the range of Rs. 0 to Rs. 0.25 have declined f ro m a h ig h o f 4 5. 9 i n 1 99 0 t o 1 8. 5 i n 2 00 1. T hi s i mp li es t ha t t he increased average DPS over the latter period has mainly been due to a few firms paying larger DPS . F i r m s i n c h e m i c a l s a n d p l a s t i c s i n d u s t r y h a v e steadily improved their DPS from 14 paisa in 1990 to 27 paisa in 2000 and 25 paisa in 2001. Where as textiles firms have shown a decline in DPS from 13 paisa in 1990 to 6 paisa in 2001. Machinery firms have paid a steady 12 to 14 paisa except for the years 1996 and 1997 when they paid marginally more. An analysis of index and non-index firms DPS shows t ha t i nd e x f ir ms o n a n a v er a ge p a id m or e D PS t ha n n o n- in d ex f ir ms . Similarly, narrow indices have high average DPS than broad indices.
28
Table Average Dividend Per Share (DPS) During 1990-2001 (in Rs.) Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Common firms
Nu mb er of firms 1694 2153 2468 3028 3953 5032 5536 5801 5911 6176 6167 4734 866
Minimum DPS 0 0 0 0 0 0 0 0 0 0 0 0
Maximum DPS 12.71 10.58 15.58 51.2 57.5 135. 33 174. 67 222 350. 33 249. 75 266. 38 61.5
Average DPS 0. 1406 0. 1385 0. 1427 0. 1415 0. 1582 0. 1803 0. 2158 0. 198 0. 2337 0. 2544 0. 2571 0. 1538
Std. Deviation 0.3455 0.3009 0.3568 1.0025 1.2983 2.3543 3.3243 3.4834 5.8833 4.8938 4.4156 1.2899
Average Dividend Per Share (DPS) During 1990-2001
Average D ividend per sha re(in R s.) during 2001 0. 3
) . s 0.25 R n 0. 2 I ( S 0.15 P D 0. 1 e g 0.05 a r e 0 v A
Average DP
0 9 9 1
1 9 9 1
2 9 9 1
3 9 9 1
4 9 9 1
5 9 9 1
6 9 9 1
7 9 9 1
8 9 9 1
9 9 9 1
0 0 0 2
1 0 0 2
Year
29
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. A n a na ly si s o f d iv id en d r ed uc ti on s b y f ir ms s ho ws t ha t o nl y f iv e c o mp a n ie s n a m el y M a h in d r a S i nt e re d P r od u c ts L t d , O t is E l ev a t or C o . ( In di a) , B ha ra t E le ct ro ni cs , A mr it la l C he ma ux , a nd C ar bo ru nd um Universal have consistently paid higher dividend per share out of a 330 f i r m s t h a t p a i d d i v i d e n d s i n a l l y e a r s o f t h e sample period . 4 3 f i r m s registered a single instance of dividend per share reduction, where as 68 firms lowered twice, 82 firms lowered thrice etc. On the whole average DPS has shown a steady growth except in the year 20 01. Regular payers have consistently paid more dividend per share compared to other payers, where as initiators have always 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. S im il a rl y, n a rr ow i nd ic e s h a ve h ig h a v er a ge D PS t ha n b r oa d i nd ic e s. F i rm s i n c h e mi c a ls a n d p l as t ic s i n d us t ry h a v e s t ea d i ly i m pr o v ed t h e ir 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 2001 Percentage of Companies in DPS 1990 1991 1992 1993 Rs. 0 39 41 37.9 39.9 Rs. 45.9 43.1 46.2 46.9 00.25 Rs. 13.5 13.7 13.7 11.2 0.250.50 Rs. 0. 9 1. 3 1. 4 0. 9 0.500.75 Rs. 0. 4 0. 5 0. 4 0. 7 0.751 Rs. 0. 2 0. 3 0. 3 0. 2 1-2 Rs. 0. 1 0. 1 0 0. 1 2-5 > 0. 1 0 0 0. 2 Rs. 5
of Dividend Per Share During 1990 – the 1994 41.1 45
Year 1995 1996 44. 9 50. 8 42. 3 35. 8
1997 58. 9 27. 5
1998 64. 5 22. 2
1999 67. 5 19. 5
2000 67. 8 18. 6
2001 67.7 18.5
12.1
10. 6
10. 4
9.8
8.7
7.6
7.4
7. 8
0.7
1.1
1.5
2.3
2.8
2.5
2.6
2. 7
0.8
0.4
0.6
0.6
0.6
1.1
1.2
1. 3
0.2
0.3
0.4
0.6
1
1.1
1.4
1. 4
0.1
0.2
0.2
0.1
0.2
0.3
0.6
0. 4
0.1
0.1
0.2
0.2
0.2
0.3
0.4
0. 5
30
Industry-wise Dividend Per Share (DPS) During 1990-2001 (in Rs.)
In d ustry Chemicals and plastics Diversifie d Electricit y Financial Services F oo d a nd Beverag es Machiner y Metal and Metal Products Min in g Misc. manufact uring Nonmetallic Mineral Pr o Other Services Te xtiles Transport Equipmen t
19 90 0. 1 4
19 91 0.1 5
19 92 0.1 4
19 93 0. 1 2
19 94 0. 1 7
19 95 0.1 5
199 6 0.1 2
199 7 0.1 7
199 8 0.1 7
199 9 0.1 8
200 0 0. 2 7
200 1 0. 2 5
FIRM S 1138
0. 1 9 0. 1 3 0. 0 8 0. 2 0 0. 1 2 0. 1 3
0.2 1 0.1 0 0.1 1 0.2 0 0.1 3 0.1 1
0.2 6 0.1 1 0.1 3 0.1 8 0.1 4 0.1 1
0. 2 0 0. 1 1 0. 3 4 0. 2 3 0. 1 4 0. 0 9
0. 2 0 0. 1 1 0. 2 4 0. 3 1 0. 1 3 0. 1 0
0.1 9 0.1 0 0.2 1 0.4 7 0.1 3 0.1 0
0.2 1 0.1 2 0.2 8 0.4 9 0.1 7 0.1 2
0.2 2 0.0 9 0.1 2 0.5 8 0.1 9 0.0 9
0.2 1 0.1 0 0.1 5 0.8 5 0.1 2 0.0 7
0.2 2 0.1 0 0.1 4 0.2 1 0.1 4 0.0 6
0. 2 7 0. 1 3 0. 1 9 0. 1 6 0. 1 4 0. 0 7
0. 2 1 0. 1 0 0. 1 8 0. 1 3 0. 1 4 0. 0 7
184
0. 0 5 0. 1 2
0.0 7 0.1 2
0.0 6 0.1 4
0. 0 7 0. 1 0
0. 0 9 0. 1 1
0.0 6 0.1 0
0.0 7 0.1 0
0.0 8 0.1 5
0.1 3 0.0 6
0.1 0 0.1 6
0. 1 1 0. 2 1
0. 0 9 0. 3 0
81
0. 1 0
0.1 1
0.1 1
0. 0 9
0. 0 9
0.0 9
0.1 0
0.0 8
0.0 8
0.0 7
0. 0 9
0. 0 9
296
0. 1 7 0. 1 3 0. 1 2
0.1 5 0.1 4 0.1 2
0.1 7 0.1 3 0.1 2
0. 1 5 0. 1 1 0. 1 2
0. 1 3 0. 1 2 0. 1 3
0.2 4 0.0 9 0.1 3
0.3 8 0.0 8 0.1 5
0.2 8 0.0 6 0.1 8
0.4 2 0.0 6 0.1 6
0.8 8 0.0 5 0.1 5
0. 7 3 0. 0 7 0. 2 1
0. 1 2 0. 0 6 0. 1 7
1264
Dividend Payout Ratio
31
58 1097 745 1065 555
324
750 225
A n a n al ys is o f a v er ag e p e rc e nt ag e d iv i de n d p a yo u t ( PR ) d u ri ng 1990 – 2001 shows a volatile trend. Percentage PR i ncreased from 27.39 in 1990 to 32.95 in 1997 and then showed a declining trend till 2000 before reaching the peak average percentage PR of 40.53 in 2001.
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
No. of Avg.% firms payou t 1382 27. 39 1714 25. 19 2022 27. 54 2533 27. 98 3156 28. 19 3770 25. 88 4042 27. 44 4258 32. 95 4335 31. 39 4503 22. 82 4383 21. 6 3387 40. 53
SD
1%T rimmed avg. pay out 37.77 24. 98 41.04 23. 11 48.31 24. 25 37.83 25. 72 61.96 24. 92 38.06 23. 84 88.12 23. 99 139. 85 23. 91 453. 37 18. 64 120. 19 16. 98 67.49 17. 47 1196.96 16. 81
!%trimmed no. of firms 1369 1697 2002 2508 3125 3733 4002 4216 4292 4458 4340 3354
An analysis of distribution of firms by dividend payout percentage shows that as high as 26 percent of firms in 1990 and 56.6 percent in 2001 have paid out nothing. However, more than 10 percent firms have paid d iv id e nd i n e x ce ss o f 7 5 p e rc e nt o f t he ir n e t p ro f it s. A n a n al ys is o f dividend payout recurrence shows that very few firms have maintained the same payout for a longer period of time. For instance, only one firm – H i nd u s ta n L e v e r L i m i te d – h a s p a i d o u t a d i v id e n d i n t h e r a n g e o f 5 0 t o 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 E ng in e er in g L td . , L a ks h mi M ac h in e W or k s L td . , a n d D a lm ia C e me n t (Bharat) Ltd. have paid out in the range of 10 – 20% for 10 of the 12-year sample period.
32
Average % Payout During 1990-2001
A v e ra g e % p a y o u t D u r in g 1 9 9 50 40
% t u 30 o y a p 20 e g a r 10 e v A 0
0 9 9 1
Average % payou 1% Trimm ed Aver % P a y o ut
2 9 9 1
4 9 9 1
6 9 9 1
8 9 9 1
0 0 0 2
Yea
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 1990, have less than 14 percent in 2001. Firms in metals and metal products industry have registered a high degree fall in DPO from 22.84 percent in 1990 to 8.74 percent in 2001.
33
Distribution of Firms’ Payout Percentage During 1990 – 2001
% Dividend payout % 0 0-10 10-20 20-30 30-40 40-50 50-75 75-100 100-200 >200 Firms
199 0 26 6.9 14.5 16.5 12.6 8.2 10.1 3.5 1.2 0.4 138 2
199 1 26.5 9.3 14.1 17.2 12.6 7.1 9 2.9 0.9 0.2 171 4
199 2 25.3 9.2 13.9 16.1 13.3 8.8 8.9 2.7 1.4 0.4 202 2
199 3 28.9 7.2 11.9 13.5 12.3 9.5 10.5 4.6 1.3 0.4 253 3
of 199 4 26.6 8 14.3 15 12.4 7.7 10.2 4.5 0.9 0.3 315 6
Firms 199 5 26.7 6.6 15.6 16.7 12.5 8.7 8.6 3.4 0.9 0.3 377 0
199 6 33.3 5.5 13.6 13.7 10.8 7.3 8.6 5.4 1.4 0.4 404 2
199 7 45.4 3.1 7.9 10.9 8.5 6.4 9.1 5.2 2.1 1.3 425 8
199 8 52.8 3.1 7.6 9.8 7.5 5.4 7.8 3.2 1.6 1 433 5
199 9 57 3.4 6.7 8.2 6.9 5.2 6.7 3.9 1.3 0.7 450 3
200 0 55.8 3.8 6.6 8.9 6.7 5.4 6.5 4.2 1.5 0.7 438 3
2001 56.6 3.8 7.6 7.9 6.9 4.8 7.1 3.2 1.5 0.7 3387
Table 4.9 Industry-wise Dividend Payout During 1990 – 2001 (in %) Industry
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Chemicals and plastics Diversified
23.9 2 25.2 8 17.9 8 23.2 8 24.4 7 23.9 3 22.8 4 10.2 8 18.1 0 19.7 1 20.0 1 16.8 3 19.3 1
20.3 8 20.9 5 16.2 1 27.0 1 23.1 5 20.3 6 21.4 7 7.29
21.5 1 22.7 8 14.1 5 28.5 0 24.1 9 22.8 7 19.8 6 12.2 8 15.6 9 16.9 5 19.2 5 17.2 6 21.6 1
23.3 8 25.4 8 13.3 7 32.1 1 22.1 4 23.4 2 20.6 5 9.56
20.1 4 22.7 4 12.4 8 29.8 7 20.4 0 23.6 7 20.9 2 14.0 4 17.8 7 14.7 8 21.1 5 20.5 4 23.2 6
21.8 8 23.2 3 16.9 8 27.2 5 17.0 1 22.0 7 19.7 6 12.1 0 18.9 1 14.9 2 19.6 0 19.2 0 20.9 9
20.53
18.37
14.76
13.84
14.18
13.71
21.61
23.27
19.34
17.41
17.52
13.59
12.70
16.32
10.42
9.35
12.68
13.08
31.74
29.19
16.12
14.82
16.21
14.30
17.23
16.14
12.73
12.67
12.80
10.22
20.83
19.45
16.23
15.36
15.24
15.15
18.82
16.78
12.56
9.37
9.16
8.74
16.58
14.65
11.50
9.87
11.98
11.76
17.81
15.55
9.84
12.18
12.59
15.09
13.87
13.62
10.78
9.66
8.93
11.29
19.34
17.43
14.00
12.27
12.85
12.54
17.30
13.84
11.29
7.99
9.04
8.02
19.69
22.46
20.96
18.74
20.18
17.29
Electricity Financial Services Food and Beverages Machinery Metal and Metal Products Mining Misc. manufacturing Non-metallic Mineral Pro Other Services Textiles Transport Equipment
18.0 8 17.7 5 21.1 5 15.9 8 19.9 6
17.1 8 16.2 7 19.8 4 20.9 8 21.2 9
Total payers have registered an increase in payout from 31.25% in 1991 to a peak of 43.02% in 1997 and finally paid out 37.64% in 2001. Of
34
the payers, regular payers have consistently paid higher payout compared to t ha t o f c ur re nt p aye rs . Fu rt he r, i nit ia to rs h av e s ho wn h ig he r fluctuations in their payout compared to that of regular payers. In sum, average percentage PR showed a more stable pattern up to 1997 and then h a s s ho w n a d e cl in in g t re n d. A n al ys is o f d iv id e nd p a yo u t r ec u rr e nc e shows that very few firms have maintained the same payout for a longer p e ri o d o f t i me . I n d us t ry - wi s e D P O s h ow s a d e c li n in g t r en d a c r os s a l l industries during the sample period. Of the payers, regular payers have c o ns is te n tl y p a id h i gh e r p a yo u t c o mp a re d t o t h at o f c u rr en t p a ye r s. F ur th er , i ni ti at or s h av e s ho wn h ig he r f lu ct ua ti on s i n t he ir p ay ou t compared to that of regular payers. Dividend Yield Average dividend yield for all companies during the period 1991 to 2 0 01 h a s d e c li ne d f ro m 1 . 73 % i n 1 9 91 t o . 5 5 i n 1 9 93 b e fo re f in a ll y recovering to 1.61 in 1998 and again falling marginally to 1.24% in 2001. On the whole the dividend yield is range bound in the region of 0.5% to 1 . 7 3% . T h e r e a so n f o r t h e f a ll i n 1 9 9 3 c o u ld b e d u e t o h i g h i n c r e as e s i n market capitalizations of a number of stocks in the face or irregularities in the stock market in 1992. Analysis of dividend yield by type of payer s h o ws t h a t i n i t ia t o rs h a v e a l w a y s p a i d h i g he r l e v el s o f d i v id e n d y i e l d compared to that of current payers and regular paye rs. Similarly current payers have paid higher dividend yield compared to that of regular payers. Dividend yields of initiators have declined from 6% in 1991 to 1.51% in 1993 before recovering and reaching an all time high of 10% in 1998. Compared to this current payers yielded about 5% in 1992 before falling to 1.81 in 1993 and have subsequently recovered and reached all time high of 8.12% in 2000. On the other 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 2000.
On the whole dividend yield of aggregate payers shows a significant increase from 1991 to 2001. A v er a ge d iv id e nd y ie l d h a s d if fe re d f ro m i nd u st ry t o i nd u st ry . Diversified firms, followed by firms in electricity, food and beverages and t e xt i le s i n du s t ri e s p a i d h i gh e r d i vi d e nd y i el d s i n 1 9 9 1 w h i le f i na n c ia l services and mining firms paid the lowest. By 2001 diversified firms and electricity continue to pay higher dividend yields where firms in transport industry have improved their dividend yields by 2001. However, food and beverages and textile firms recorded lowered their dividend yield by 2001, w h er e a s f ir ms i n f in a nc ia l s er vi ce s , a n d m in i ng h a ve i mp ro v ed t he ir 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 35
h a ve a lw a ys p a id h ig h er l ev e ls o f d iv i de n d y ie l d c o mp a re d t o t h at o f c u rr e nt p a ye rs a n d r eg u la r p a ye r s. D iv e rs if ie d f ir ms a n d f ir ms i n t he e l ec t r ic i ty i n d us t ry h a v e p a i d h i g he r d i v id e n d y i el d s d u r in g t h e s t ud y period.
Summary of Analysis of Dividend Trends The number of firms paying dividend during the study period has shown an up trend till 1995 and has fallen subsequently. Average DPS on the o th e r h a n d h a s s ho w n a s te ad y g r ow th e x ce p t f or y ea r 2 0 01 . A v er ag e 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 period of time. Of the payers, regular payers have consistently paid higher payout as well as h i gh e r a v e ra g e d i v id e n d c o m pa r ed t o t h a t o f c u r re n t p a y er s . I n it i at o rs h a ve a lw a ys p a id h ig h er l ev e ls o f d iv i de n d y ie l d c o mp a re d t o t h at o f current payers and regular payers. Further, narrower indices appear to have higher dividends compared to t ha t o f b ro ad er i nd ic es . I nd us tr y t re nd s i nd ic at e t ha t f ir ms i n t he electricity, mining and diversified industries have paid higher dividends w he re a s t ex ti le c om pa ni es h av e p ai d l es s d iv id en ds . F ir ms i n t he m ac h in e ry i nd u st ry w h ic h i nc lu d es c o mp u te r h a rd w ar e a n d s o ft wa re segments have shown lower dividends.
Changes in Tax Regime and Dividend Propensity
A na lys is o f i nf lu en ce o f c ha ng e in t ax r eg im e o n d iv id en d propensity shows that total dividend per share has come down from an average of Rs. 0.84 to Rs. 0.71, where as average p ayout percentage has increased from 33.33% to 51.05%. Mimicking the tren ds 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, one year changes show that DPS has more or less remained at the same level, where as payout percentage has come down from 1997 to 1999. In sum, it can be inferred from the present study t hat 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. T a x o n d iv i de n d r a is e d f r o m 1 0 % t o 2 0 % - A d di ti o na l R s 10 b n burde n on corpo rates:
36
The Finance Minister raised tax on dividend from currently 10% to 20% in the year 2000-01. An India Info line analysis of dividend pay out of 863 listed companies has shown that there would be an additional Rs10bn b u rd en o n t he c o rp o ra te s ec to r . T o ta l d iv i de n d p a y o u t o f 8 6 3 l is te d c o mp a ni es f o r 1 9 98 - 99 i s R s1 0 1. 6 bn . T h is i mp li es t ha t t he c o rp o ra te s ec to r p a id R s 10 . 2b n ( 10 % o f t h e 1 0 1. 6 bn ) a s d iv id e nd t ax i n F Y9 9 . Raising dividend tax from 10% to 20% would mean additional Rs10.2bn t ax . C om pa ni es w ho se d iv id en d p ay ou t i s m or e t ha n R s5 00 mn ( 39 companies) accounts 65% of the total pay out of 863 companies. A n i n te r e st i ng p o i n t t o n o t e i s t h at 6 o u t o f t h e t o p 1 0 c o m pa n i es a r e PSUs which anyway pay most of the dividend to the government.
Companies
Total dividend
ONGC
8,705.3
870.5
1,741.1
870.5
Gas Authority of India Ltd
5,919.6
592.0
1,183.9
592.0
Indian Oil Corporation Ltd
5,618.1
561.8
1,123.6
561.8
Hindustan Lever Ltd
4,830.5
483.0
966.1
483.0
Reliance Industries Ltd
4,144.1
414.4
828.8
414.4
ICICI Ltd
3,634.2
363.4
726.8
363.4
HPCL
2,760.7
276.1
552.1
276.1
MTNL
2,097.9
209.8
419.6
209.8
BPCL
2,081.3
208.1
416.3
208.1
Larsen & Toubro Ltd
1,796.2
179.6
359.2
179.6
TISCO
1,632.9
163.3
326.6
163.3
I T C Limited
1,498.3
149.8
299.7
149.8
Max India Ltd
1,292.9
129.3
258.6
129.3
HDFC
1,123.8
112.4
224.8
112.4
Bajaj Auto Ltd
1,060.2
106.0
212.0
106.0
Castrol India Ltd
1,018.9
101.9
203.8
101.9
Tata Chemicals Ltd
1,002.6
100.3
200.5
100.3
Neyveli Lignite Corporation Ltd
997.2
Dividend Tax (10%)
99.7
Dividend Tax (20%) Additional burden
199.4
99.7
37
Procter And Gamble India Ltd
960.8
96.1
192.2
96.1
Digital Equipment India Ltd
871.9
87.2
174.4
87.2
NACL
858.2
85.8
171.6
85.8
Tata Engineering & Locomotive
852.0
85.2
170.4
85.2
Videsh Sanchar Nigam Ltd
843.6
84.4
168.7
84.4
NFC
770.7
77.1
154.1
77.1
Oriental Bank Of Commerce Ltd
748.0
74.8
149.6
74.8
Bank Of India Ltd
709.3
70.9
141.9
70.9
Nestle Ltd
689.4
68.9
137.9
68.9
Bharat Heavy Electricals Ltd
679.2
67.9
135.8
67.9
GESC
638.4
63.8
127.7
63.8
Mahindra & Mahindra Ltd
631.1
63.1
126.2
63.1
Grasim Industries Ltd
626.5
62.7
125.3
62.7
Ranbaxy Laboratories Ltd
616.1
61.6
123.2
61.6
Tata Tea Ltd
593.7
59.4
118.7
59.4
Chambal Fertilisers
570.3
57.0
114.1
57.0
Gujarat Ambuja Cement Ltd
569.8
57.0
114.0
57.0
Punjab Tractors Ltd
562.0
56.2
112.4
56.2
Indo Gulf Corporation Ltd
512.1
51.2
102.4
51.2
Sterlite Industries India Ltd
503.1
50.3
100.6
50.3
Total (39 companies)
65,021
6,502.1
13,004.2
6,502.1
Total (863 companies)
101,630.1
10,163.0
20,326.0
10,163.0
Summary and Conclusion
38
This study examines the dividend behavior of Indian corporate firms over the period 1990 – 2001 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 1995 and has fallen subsequently. Average DPS on the other hand has shown a steady growth except for year 2001. Average percentage PR showed a more stable pattern up to 1997 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 pay ers have consistently paid higher payout as well as higher average dividend compared to that of current payers. Initiators have always paid higher levels of dividend yield compared to that of other payers. Further, smaller indices appear to have higher divi dends compared t o t ha t o f l ar ge r i nd ic es . I nd us tr y t re nd s i nd ic at e t ha t f ir ms i n t he 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 true in the Indian context, as Indian corporate firms on average do not appear to have increased dividend payments despite a tilt in tax regime in favor of more dividends. A n a ly s is o f c h a ra c t er i st i cs o f p a ye r s a n d n o n -p a y er s s h o ws t h a t d iv id en d- pa yi ng c om pa ni es a re m or e p ro fi ta bl e a nd l ar ge i n s iz e. However, growth doesn’t seem to deter Indian firms from 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 initiating 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. F u rt h e r a n a l y si s a l so s h o ws t h a t d i v i d e nd c h a ng e s a r e i m pa c te d more by contemporaneous and lagged earnings performance rather than by future earnings performance. The present study has considered only cash dividends and not share r ep u rc h as e s. S ha re r ep u rc h as es o r b u yb a ck h a s b e en p e rm it te d i n t he I nd ia n c o nt ex t o n ly r ec e nt ly a n d t hi s m ay w e ll h a ve i n fl u en c ed t he d iv id en d b eh av io r o f I nd ia n c om pa ni es , a s s om e f ir ms w ou ld h av e substituted share repurchases for cash dividends. Similarly, in the present 39
study only final cash dividends are considered and the stock dividends by firms are not considered which may limit generaliza tions 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: F ut ur e s tu di es m ay e xa mi ne t he m ar ke t r ea ct io n t o d iv id en d announcements, other possible determinants of dividend behavior such as f lo ta ti o n c o st s, a n d t he r el at io n sh ip s b e tw e en d iv i de n d d e ci si on a n d financing and investment decisions.
40
