The Study of Dividend Policies of Indian Companies

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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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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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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?

39


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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.

40


41/76

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

41


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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.

42


43/76

(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

43


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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

44


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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

45


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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

47


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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

49


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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)

51


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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

52


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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

57


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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

58


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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

61


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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.

The Study of Dividend Policies of Indian Companies

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