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DIVIDEND POLICIES OF INDIAN COMPANIES

20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

Background and Introduction


Do you know the only thing that gives me pleasure? Its to see my dividends coming in.
--- John D Rockfeller, 1901
The focus of this paper is to examine the dividend behavior of listed firms in India - an emerging market
in Asia. In emerging markets, including India, the central banks frequently use monetary policies as a
control mechanism. Sometimes they follow highly restrictive policies, which affect the liquidity position in
the economy. Here in this study, we focus on the on the dividend policies of Indian firms and the findings
of intensive research conducted in this area. The analysis and indicators provide evidence that listed
Indian firms follow less stable dividend policies and their dividend payments are significantly affected by
the dividends of previous periods and current year earnings.
Profitable companies regularly face two important questions;
How much of its free cash flow should be passed on to the shareholders?
Should it maintain a stable, consistent payment policy, or should it let the
payments vary as conditions change?
Here we discuss many of the issues that affect a firms cash distribution policy and the practices in vogue. Most
firms establish a policy that takes into consideration their forecasted cash flows and forecasted capital
expenditure and then try to adhere to it. The policy can be changed but this can cause problems as such changes
inconvenience the shareholders, send unintended signals, and convey the impression of dividend instability, all
of which have negative implications for stock prices. However at times the economic and operational factors
change and firms are occasionally required to step out of their comfort zone and tweak their policy.
An Example of market sentiments for change in Dividend:
One of the most striking example of a dividend policy change occurred in May 1994, when FPL group, a utility
holding company whose primary subsidiary is Florida Power and Light, announced a cut in its quarterly
dividend from USD 0.62 / share to USD 0.42 / share. At the same time FPL stated that it would buy back 10
million of its common shares over the next three years to bolster its stock price.
The following is the text of the letter to the shareholders in which FPL announced the changes;
(We have only incorporated parts relating to Dividend)
Dear shareholders
Over the past several years, we have been working hard to enhance shareholder value by aligning our strategy
with a rapidly changing business environment.
Our dividend payout ratio of 90% is far too high for a growth company. It is well above industry average and it
has limited the growth in the price of our stock. To meet the challenges of this competitive marketplace and to
ensure financial strength and flexibility, the Board of Directors have announced a change in our financial
strategy that includes the following milestones:

A new dividend policy that provides for paying out 60 to 65% of prior year earnings. This means a
reduction on the quarterly dividend from USD 0.62 to USD 0.42 / share.
The authorization to repurchase 10 million share of common stock over the next three years.
An earlier dividend evaluation beginning in February to more closely link dividend rates to annual
earnings.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

We believe this financial strategy will enhance long term share value and dividend growth to about 5% per year
over the next several years.
What did the market think about FPLs Dividend policy change?
The companys stock price fell by 14% the day the announcement was made. In the past, hundreds of dividend
cuts followed by sharply lower earnings had conditioned the investors to expect worst when the dividends are
slashed this is the signaling hypothesis.
Stock that pay dividends are often favored over stocks that dont pay dividends by investors who desire the
extra income. Theres nothing wrong with that. After all a cheque in the mail always comes in handy, even for
tycoons like John Rockfeller.
Why should the company dividend:
The basic conflict between corporate directors and shareholders over dividends is similar to the conflict and
disagreements between children and parents. The children always prefer a quick distribution, and the parents
prefer to control the money for the childrens benefit.

One strong argument in favor of companies that pay dividend is that, companies that dont pay
dividends have a sorry history of blowing the money in a string of stupid diversifications. It has
happened enough number of times to believe in the Bladder Theory of Corporate Finance, as
propounded by Hugh Liedtke of Penzoil. The more cash that builds up in the treasury, the greater is the
pressure to piss it away.

Another argument in favor of dividend paying stocks is that the presence of dividend can keep the
stock price volatility in check. In the wipeout of 1987 which happened in the United States, the high
dividend payers fared better than the non dividend payers and suffered less than half the decline of the
general market.

The precursor for investing in a security only for dividend


If one plans to buy a stock for its dividend find out if the company is going to be able to pay it during recession
and bad times.
How about Fleet Norstar, formerly Industrial National Bank, which has paid uninterrupted dividends since
1791.
A company with a 20 or 30 year record of regularly raising the dividend is the best bet.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

DIVIDEND POLICIES OF INDIAN COMPANIES


1. What is Dividend The Prologue
2. After all Less is MORE
3. I Like my Coffee cold, what about you
and by the way, how much is the optimum sugar
mix
4. The US and European Trend
5. Did we forget Lintner and his gospels
6. The Indian Story so far
7. We believe in doing it --- The Indian Way :
Underlying factors and assumptions :
(Past Research for future answers)
How much you got , How much I Paid (Average
Dividend Paid)
How many eggs per chicken (The DPS Factor)
Hey! I just paid you but HOW MUCH (The
Dividend Payout Ratio)
8. What the Biggies are doing
9. The final word ( The world is watching you)

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

1. What is Dividend The Prologue


A simple and compact answer is yet to be found, but we can find many acceptable understandings on the subject
of dividend.
The beauty of such topics is that they never come in One size fits all. It needs to be customized and toned
down to fit each scenario.
Some Basics Revisited
Dividend : It is the distribution of a portion of a company's earnings, decided by the board of directors, to a
class of its shareholders. The dividend is most often quoted in terms of the amount each share receives (i.e.
dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred
to as dividend yield.
Dividend Payout : measures the percentage of earnings that the company pays in dividends.
The study of corporate dividend behavior has been a key research area in finance.
Yet we still do not have an acceptable explanation for the observed dividend behavior of companies and the
dividend puzzle still remains unsolved as coined by Black).
Does Dividend Matter

Under the assumption that capital markets are perfect, finance researchers have shown that dividends
are irrelevant, and that they have no influence on the share price (Miller and Modigliani).

When capital markets are imperfect, some researchers have argued that dividends do matter and firms
pursue an appropriate dividend policy. (Walter and Gordon)

However, several empirical surveys indicate that both managers and investors favor payment of dividends.
Lintner (1956) was the first to point out that US companies distributed a large part of their earnings as
dividends, and they also attempted to maintain stability of dividend. These findings have been vindicated in
different countries and in different time periods.
Radical Theory
The salient features for this theory is as under:

Remember the TAX factor (the BIG Daddy is always watching you)
Add to above, dont forget that dividends and capital gains are subject to different - tax rates, tax
shields and exemptions.

The above theory propounds that the return to a shareholder can be in the form of dividends or capital gains.
The investor is interested in what comes into his pocket after considering all effects of tax and other economic
factors.
Hence in the cases of tax regimes where dividend are taxed higher than capital gains, the company should favor
the capital gains way to fill the pockets of the shareholders.
Vice versa, in cases where the dividend is taxed lower than capital gains, the company should opt the dividend
way to reward the shareholders.
Hence the dividend policy of a company is also driven by the tax regime and structure in which it
operates. Investors will favor stocks that give a higher after tax return (the mode is irrelevant).

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

2. After all Less is MORE


The payout conundrum
The idea that Market price of a share is the present value of future dividends, mean that, one must distribute all
the earnings.
Surprisingly the answer is Not Necessarily so. Now heres why
The investors return consists of two components ;
Dividends
Capital Gains
A dividend policy affects both these components. An early lower dividend can actually translate into a higher
later dividend since the retained earnings too earn returns leading to a growth in the earnings. The story of LPO
and HPO tells us how.
LPO (in Lacs) growth = 17.5%

HPO (in Lacs) growth = 7.5%

Years
Net
Worth

Earnings

Dividend
30%

RE
70%

Net
Worth

Earnings

Dividend
70%

RE
30%

1,000

250

75

175

1,000

250

175

75

1,175

294

88

206

1,075

269

188

81

1,381

345

104

242

1,156

289

202

87

1,622

406

122

284

1,242

311

217

93

1,906

477

143

334

1,335

334

234

100

2,240

560

168

392

1,436

359

251

108

2,632

658

197

461

1,543

386

270

116

3,092

773

232

541

1,659

415

290

124

3,633

908

272

636

1,783

446

312

134

10

4,269

1,067

320

747

1,917

479

336

144

11

5,016

1,254

376

878

2,061

515

361

155

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

As the above table shows, HPO pays out more dividends initially, but sometimes in the 11 th year LPOs
Dividend payment outstrips that of HPOs. This happens because LPO retains more than HPO and consequently
the growth in its earnings, dividends and net worth is faster than that of HPO.
Slow and Steady wins the race

Implications of Payout Conundrum


Implication 1
A low payout means less current dividends, more retained earnings and an accelerated earnings growth.
A high payout means more current dividends, less retained earnings and a slower earnings growth.
Implication 2
Whether a higher growth rate would automatically translate into higher market price is debatable. Similarly
whether a lower growth rate will by itself lead to a lower market price is uncertain.
Share price is a function of myriad parameters and not just dividends.
Implication 3
The dividend decision is in a way related to investment decision and financing decision. If a company has
capital expenditure plan, to that extent money available for dividend will be less. If there is not enough money
to pay dividends, to that extent the firm will have to raise funds by issuing new shares. In this case the dividend
decision drives the financing decision and vice versa.
Hence Dividend is a trade off between retaining money for capital expenditure and issuing new shares.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

3. I like MY Coffee COLD, what about you


and by the way, how much is the optimum sugar mix
The Common Sense Approach to Dividends
How much dividend should we declare?? and What is the trade off???
Should it maintain a stable, consistent payment policy, or should it let the payments vary
as conditions change?
The common sense approach answers the above, in a very subtle way.
This approach offers the link amongst Cost of equity, Rate of return and Payout Ratio.
An investor expects a certain rate of return. For him, it is his opportunity cost and for the company it is the cost
of equity ( denoted as Ke ). The rate of return that the company earns on its investment is ascertained by
computing the IRR (Internal Rate of Return) of the investments ( notated as r)
The optimum dividend payout depends on the relation between Ke and r.
Growth Company
If what the investor expects (Ke) is less than what the company earns r, the investor would obviously be better
off by letting his money lie with the company.
In that case he would expect the company not to declare dividends. Hence when Ke is less than r, the optimum
payout ratio is 0%. Such companies are called growth companies.
Declining Company
If what the investor expects ( Ke) is greater than what the company earns r, the investor would naturally be
better off by taking his money from the company.
In that case he would expect the company to distribute the entire profits as dividends. Hence when Ke is greater
than r, the optimum payout ratio is 100%. Such companies are called declining companies.
This approach is also referred to as ALL or NOTHING Approach, since either all the profits are distributed as
dividends or nothing.
Is it true that companies that dont distribute dividends would not command a good price.
Microsoft, the worlds most happening and adored software company, has not declared a penny of dividend till
date. Yet Microsoft is the darling of the Wall Street.
The rationale is simple. Investors make investments not on the basis of actual dividends received but on the
basis of expectations of future dividends. The money retained and invested to earn more and more big bucks,
will some day in the future be handed back to the shareholders in the form of cash dividends.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

4. The US Trend
Dividends are both pervasive and perplexing. They are pervasive in that companies have
been paying regular cash dividends since the dawn of the modern limited liability
company over three centuries ago, and publicly traded companies in all market
economies have been paying out large fractions of their earnings ever since.
Dividends are perplexing (especially to financial economists) because it is not obvious
why investors should demand cash dividends. Since the seminal paper by Miller and
Modigliani, a vast literature has examined the payout policies of U.S. companies.
The understanding of US practices is all the more relevant as India today is US of 1980s The Booming and
strong economy which the world looks up to. Sooner or latter, we will also hit the plateau and become a stable
economy similar to US and hence the past and present policies of US call for an introspection and add to this is
the effect of globalization and open trade.

Manufactured in US, Followed around the World --- Dividend


Policy of US Companies
Recently published research on dividend payments in the United States has documented
five important new results.
N

First, Fama and French show that the fraction of U.S. industrial firms paying cash
dividends has dropped sharply over the past three decades, from 66.5 percent of
listed firms in 1978 (and over 80 percent during the 1950s) to 20.8 percent in
1999. Fama and French show this dramatic decline is due to two influences:
changing firm characteristics and
a declining propensity to pay

N Second, Grullon and Ikenberry document a massive increase in the number of U.S.

industrial firms repurchasing their own shares since 1982. This method of
distributing corporate cash to shareholders is both tax-favored and far more
flexible than paying regular cash dividends.
N The third, seemingly aberrant major recent finding is that the total payout of cash

dividends paid by U.S corporations has been rising inexorably for several decades,
and now often approaches 100 percent of aggregate corporate profits. Weston and
Siu document that the U.S. 5 corporate sectors cash dividend payout ratio
increased from 40 percent in 1971 to around 60 percent in 1990where it
remained throughout the 1990s--and finally to 81 percent in 2001.

N The fourth major dividend policy finding essentially squared the circle, explaining

how the three results cited above declining fractions of listed companies paying
dividends, increasing propensities to repurchase by companies paying dividends,
and rising aggregate dividends payout could all occur simultaneously.
N

Finally, there is some evidence that dividends may be reappearing. Julio and
Ikenberry document a small, but significant, five percentage point increase in the
fraction of U.S. industrial firms paying cash dividends since 2001. They also
describe a greater tendency for large firms to pay dividends since 1999. This
rebound in dividend payments is partly accounted for by the 2003 Bush Tax Cut,
and partly due to the natural maturation of IPO firms that went public during the
1990s. It is unclear whether the dividend reappearance Julio and Ikenberry
document is permanent or temporary.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

5. Did we forget Lintner and his gospels


Lintner's Model
A model stating that dividend policy has two parameters:
(1) the target payout ratio and
(2) the speed at which current dividends adjust to the target.
In 1956 John Lintner developed this theory based on two important things that he observed about dividend
policy:

Companies tend to set long-run target dividends-to-earnings ratios according to the amount of positive
net-present-value (NPV) projects they have available.

Earnings increases are not always sustainable. As a result, dividend policy is not changed until
managers can see that new earnings levels are sustainable.

Lintners seminal work on dividend payout practices (1956) finds that managers believe that stockholders prefer
stable dividends and that the market puts a premium on such stability. He hypothesizes that differences among
firms in target payout ratios reflect judgments based on factors such as prospects for growth of the industry and
the individual firm, cyclical movements of investment opportunities, and earnings prospects for the firm.
Lintner also suggests that dividend policies have industry effects. While an industry effect may reflect
correlation of factors such as investment opportunities, earnings stability, and internal funds availability among
firms within the same industry. In an earlier paper Lintner cites the oil industry as an example of dividend
leadership at work. He states that the dividend policy of a company is related to dividend payout of similar
companies in then same industry, but on occasion may be concerned with maintaining some sort of correlation
to other companies whose securities are, investment-wise, close substitutes for the companys own securities,
even though the other companies are in entirely different industries.
In finance literature several theoretical constructs have been proposed to explain the dividend policy of a
company. Several empirical studies have been conducted to test these theories. Very few attempts have been
made to understand the perceptions and attitudes of managers about the factors they think are important in
determining dividend policy.
A study similar to Lintner has been carried out in India and seeks to answer the following questions:
1. What factors do managers consider important in deciding their companies dividend policy?
2. Do managers perceive a relationship between their companies dividend policy and the value of the share?
3. Do managers consider last years dividend policy relevant in deciding the current dividend policy?
4. Do managers think tax status of their shareholders as an important determinant of dividend policy?
5. Do managers use dividend policy as a signal for indicating the companys future prospects to shareholders?
6. Do managers consider dividend payment merely as a residue?

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

The questionnaire was sent to the Economic Times 250 top companies and was addressed to finance directors of
these companies. This study reveals a number of interesting conclusions.

Management Beliefs about Dividend Policy

First, it is shown that payment of dividend depends on current and expected earnings as well as the
pattern of past dividends. This vindicates Lintners findings in U.S.A. about forty years ago. It is also
pertinent to note that managers of companies in India would like their companies to continuously
maintain payment of dividend. They do not consider liquidity to be a significant consideration in
dividend policy.

Second, managers consider that there s a positive relationship between payment of dividends and share
price. However, it is surprising to find that they do not consider the purpose of dividend policy as
maintaining or increasing share price. They strongly believe that companies should strive to maintain
an uninterrupted record of dividend payments, and they should avoid making changes in dividend
policy that might have to be reversed.

Third, managers seem to prefer payment of dividend even if companies have profitable investment
opportunities. Thus, they do not provide any support to dividend residual hypothesis. This is in tone
with their perception that the dividend must be paid consistently and continuously.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

6. The Indian Story so far


Analysis of dividend trends for a large sample of stocks traded on the NSE and BSE indicate that the percentage
of companies paying dividends has declined from 60.5 percent in 1990 to 32.1 percent in 2001 and that only a
few firms have consistently paid the same levels of dividends which is in line with the fifth proposition in the
US findings. Further, dividend-paying companies are more profitable, large in size and growth doesnt seem to
deter Indian firms from paying higher dividends.
Here we examine the dividend behavior of Indian corporate firms and attempt to explain the observed behavior
with the help of trade-off theory, and signaling hypothesis.

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 Payout Ratio 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 payers 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.

Industry trends indicate that firms in the electricity, mining and diversified industries have paid higher
dividends whereas 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. ( The Opposite of Radical Theory)

Analysis of characteristics of payers and non-payers shows that dividend-paying companies are more
profitable and large in size.. Further, firms appear to prefer the pecking order of funds in building their
larger asset base.

Now it is time to let the numbers speak for themselves Time to move to on to next lap

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

7. We believe in doing it --- The Indian Way :


Underlying factors and assumptions :
(Past Research for future answers)

Kevin analyzes the dividend distribution pattern of 650 non-financial companies and net sales income of
one crore rupees or more. He finds evidence for a sticky dividend policy (Lintner Model) and concludes
that a change in profitability is of minor importance.

Mahapatra and Sahu analyze the determinants of dividend policy using the models developed by Lintner for
a sample of 90 companies. They find that cash flow is a major determinant of dividend followed by net
earnings. Further, their analysis shows that past dividend and not past earnings is a significant factor in
influencing the dividend decision of firms (again Lintner Model).

Bhat and Pandey study the managers perceptions of dividend decision for a sample of 425 Indian
companies. They find that on an average profit-making Indian companies have distributed about one-third
of their net earnings and that the average dividend payout ratio is 43.6 percent..

Mohanty analyzes the dividend behavior of more than 200 firms for a period of over 15 years. He finds that
in most bonus issue cases firms have either maintained the pre-bonus level or only decreased it marginally
there by increasing the payout to shareholders. The study also finds that firms that declared bonus showed
higher returns to their shareholders compared to firms which did not issue bonus shares but maintained a
steady dividend growth. He finds evidence for a reversal of this trend in the 1992- 1999 period. He
attributes such a reversal in trend to the changed strategy of multi-national corporations (MNCs) and their
reluctance to issue bonus shares.

Narasimhan and Vijayalakshmi analyze the influence of ownership structure on dividend payout of 186
manufacturing firms. Regression analysis shows that promoters holding as of September 2001 has no
influence on average dividend payout.

However, it is still not clear as to what the dividend payment pattern of firms in India is and why do they
initiate and omit dividend payments or reduce or increase dividend payments. Hence it is better to
analyze the dividend payout of firms in India and analyze the dividend initiations and omissions and
other changes in dividends and the signals that these events convey.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

How much you got , How much I Paid (Average Dividend Paid)
Despite fluctuations in PAT, the average aggregate dividend payments have steadily increased from Rs. 0.98
crore in 1991 to Rs. 2.93 crore in 2000 and Rs. 4.19 crore in 2001. Further, compared to PAT the dividend
payments have exhibited a smooth trend implying that dividend smoothening is occurring in the Indian context
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. This is consistent with the trend observed in the US market (Fama and French 2001).

Year

Number
of Firms

1991

2,184

1992

Average
Dividend (Rs.
Crore)

SD of Dividend
(Rs. Crore)

Average PAT
(Rs. Crore)

SD of PAT
(Rs. Crore)

Payout
in %

0.98

3.79

4.05

37.88

2.59%

2,505

1.11

4.54

4.19

40.45

2.74%

1993

3,097

1.11

4.85

3.06

46.76

2.37%

1994

4,020

1.27

6.19

4.15

51.41

2.47%

1995

5,115

1.56

8.42

6.96

57.55

2.71%

1996

5,600

1.85

10.80

7.19

62.92

2.94%

1997

5,855

2.05

13.91

6.38

65.65

3.12%

1998

5,980

2.26

17.18

5.69

103.52

2.18%

1999

6,248

2.39

22.14

5.09

88.19

2.71%

2000
2001

6,225
4,766

2.93
4.19

26.46
44.71

6.11
9.36

103.54
134.39

2.83%
3.12%

The fact that percentage of companies paying dividends have declined whereas the average dividend 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 2000 before declining slightly in 2001. Firms, which
have never paid dividend, constituted a significant proportion 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 non-payers in 2001.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

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 1995 and recorded 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.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

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 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 firms. 29 out of 30
Sensex firms and 49 out of 50 Nifty firms have paid dividend in 2001, the 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 throughout the
sample period where as firms in the financial services industry have improved their average dividend payments
over the sample period. The recent high growth firms in the computer 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 1995 and have
fallen subsequently. Further, compared to PAT the dividend payments have exhibited a smooth trend implying

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

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 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 trends
indicate that firms in the electricity, mining and 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.

How many eggs per chicken (The DPS Factor)


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 of firms shows that 39 percent have paid nil DPS in 1990 and the percentage has
increased to 67.7 in 2001. 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 1990 to 18.5 in 2001. This implies that the increased average DPS over the
latter 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 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 that index firms on an average paid
more DPS than non-index firms. Similarly, narrow indices have high average DPS than broad indices.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

Average DPS (1% trimmed) by all payers have increased from 21 paisa in 1991 to 31 paisa in 2000 and 29 paisa
in 2001 (Figure 4.5). Of the payers, regular payers have consistently paid more dividend per share compared to
other payers. Similarly initiators have always paid lower dividend per share compared to current payers.

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 Mahindra Sintered
Products Ltd, Otis 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 firms 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 2001. 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. 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.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

Hey I just paid you ! but HOW MUCH (The Dividend Payout Ratio)
An analysis of average percentage dividend payout (PR) during 1990 2001 shows a volatile trend. Percentage
PR increased 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. However, 1% trimmed average percentage PR showed a more
stable pattern of around 24 percent PR up to 1997 and then has shown a declining trend before finally reaching
16.81 percent in 2001.

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 dividend
in excess of 75 percent of their net profits.
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.

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.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

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 the payers, regular payers have consistently paid higher payout compared to that of
current payers. Further, initiators have shown higher 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 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,
initiators have shown higher fluctuations in their payout compared to that of regular payers.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

8. What the BIGGIES are doing


Deep Pockets
Net profit of 209 companies, rose from Rs 39,785 crore in 05-06 to Rs 56,190 crore in 06-07
TCS, HLL, Godrej Consumer Products, Grasim, Wipro among top dividend payers
But dividends have not grown at the same level at which profit have grown
India Inc dividend payout rises 12.5% in FY07

The corporate sector paid Rs 11,541 crore in dividend in 2006-07, up 12.5% from Rs 10,258 crore in
2005-06.

According to a study, the net profit of 209 companies rose 41.2%, from Rs 39,785 crore in 2005-06 to
Rs 56,190 crore in 2006-07.

The ratio of dividends to net profit decreased from 25.78% in 2005-06 to 20.54% in 2006-07.

The Shareholders Men and Analysis of the TOP Winners and Losers
On the basis of the rate of equity dividend, Tata Consultancy Services (TCS) topped the list of top 10 corporate
followed by.
The Victors and the Vanquished
1. Tata Consultancy Services (TCS)
2. Hindustan Lever (HLL)
3. Godrej Consumer Products
4. GG Dandekar Machine Works
5. Eicher Motors

6. Grasim Industries
7. WIPRO
8. Infosys Technologies
9. Ircon International
10. Sterlite Industries

For The Winners - HIP HIP Hurray


Among the 209 companies which raised their dividend payments significantly during 2006-07 are Sterlite
Industries, Eicher Motors, Hindustan Zinc, Gujarat Ambuja Cements, Ultratech Cement and SRF L td.
Significant increase in the dividend payment of Sterlite Industries can be explained by the profit performance of
the company . The companys PAT for the year 2006- 07 showed a quantum leap to Rs 901.04 crore during
2006-07 compared to Rs 511.12 crore of the previous year.
For the Losers - Better luck next time
On the other hand, companies which reduced their dividend rate significantly during 2006- 07 are Infosys
Technologies, Sesa Goa, Tube Investments Of India, GlaxoSmithkline Pharmaceuticals, Kansai Nero and EID
Parry India.
Of the 28 industries studied, 24 distributed dividends at the rate of less than 30% of their net profit. Two
industrial groups recorded a ratio in the range of 30% to 50%, while other two industries, namely FMCG and
cigarettes, recorded more than 50%.
But industries like automobiles, electric equipment, FMCG, media, steel and textiles were able to increase their
dividend payments in step with the rise in net profit.

DIVIDEND POLICIES OF INDIAN COMPANIES


20th All India CA Students Conference

Prepared by: Rabindra Kaiborta

Finally The Statement from WHO is WHO


DR Dogra, ED, Care Ratings said, The dividend has not grown at the same level at which profits have grown
as the companies have plans to invest their accruals in their capital expansion plans. Some companies also do
not increase dividend payments beyond a certain level looking into the cyclical nature of their industries, as in
case of downward cycle, it may be difficult to reduce the dividend rate. Among the 209 dividend-paying
companies for 2006-07 and 2005-06, 96 raised the rates of dividend, 40 paid lower rates and 73 maintained their
levels.

9. The final word (The world is watching you)


From the practitioners viewpoint, dividend policy of a firm has implications for investors, managers and
lenders and other stakeholders.
For investors, dividends whether declared today or accumulated and provided at a later date - are not
only a means of regular income, but also an important input in valuation of a firm.
For managers flexibility to invest in projects is also dependent on the amount of dividend that they can
offer to shareholders as more dividends may mean fewer funds available for investment.
Lenders may also have interest in the amount of dividend a firm declares, as more the dividend paid
less would be the amount available for servicing and redemption of their claims.
However, in a perfect world as Modigliani and Miller (1961) have shown, investors may be indifferent about the
amount of dividend as it has no influence on the value of a firm. Any investor can create a home made
dividend if required or can invest the proceeds of a dividend payment in additional shares as and when a
company makes dividend payment.
Similarly, managers may be indifferent as funds would be available or could be raised with out any flotation
costs for all positive net present value projects.
But in reality, dividends may matter, particularly in the context of differential tax treatment of dividends and
capital gains. Very often dividends are taxed at a higher rate compared to capital gains. This implies that
dividends may have negative consequences for investors.
To summarize, several theories have been proposed in explaining why companies pay dividends. While many
earlier studies point out the tax-preference theory, more recent studies emphasize signaling and agency cost
rationale of dividend payments.
However, the dividend puzzle is yet unresolved and the words of Fischer Black (Black 1976) may well apply in
todays context:
The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just dont fit
together.