DIVIDEND POLICY

By:By Group 5:
Aayush Kumar
Lewis Francis
Jasneet
SaiVenkat
Ritika Bhalla

DIVIDEND POLICY
MEANING OF DIVIDEND
The term dividend refers to that portion of profit, which is distributed among the
owners/shareholders of the firm.
INTRODUCTION TO DIVIDEND POLICY
The dividend policy of a firm determines what proportion of earnings is paid to
shareholders by way of dividends and what proportion is ploughed back in the firm for
reinvestment purposes. If a firms capital budgeting decision is independent of its
dividend policy, a higher dividend payment will call for a greater dependence on external
financing. Thus, the dividend policy has a bearing on the choice of financing. On the other
hand, firms capital budgeting decision is dependent on its dividend decision; a higher
dividend payment will cause shrinkage of its capital budget and vice versa. In such case,
the dividend policy has a bearing on the capital budgeting decision.
Dividend Policy refers to the explicit or implicit decision of the Board of Directors
regarding the amount of residual earnings (past or present) that should be distributed to
the shareholders of the corporation. This decision is considered a financing decision
because the profits of the corporation are an important source of financing available to the
firm.

FACTORS AFFECTING DIVIDEND POLICY

1. OWNERSHIP CONSIDERATIONS- Where ownership is concentrated in few people

there are no problems in identifying ownership interests. However where

ownership is decentralised on a wide spectrum the identification of their
interests becomes difficult. Further the influence of stockholders interests on
dividend decision becomes uncertain.

2. FIRM ORIENTED CONSIDERATIONS-Ownership interests alone may not

determine the dividend policy. A firms needs are also an important consideration which
includes the following:
Liquidity, credit sharing and working capital
Needs of funds for immediate and future expansion
Availability of external capital
3. NATURE OF BUSINESS -This is an important determinant of dividend policy of a
company. Companies with unstable earnings adopt dividend policies which are different
from those which have steady earnings. Consumer goods industries usually suffer less
from uncertainties of income and hence pay dividends with greater regularity than the
capital goods industries. Industries with stable income are in a position to formulate
consistent dividend policies. Thus public utilities may be able to establish a relatively
fixed dividend rate.
4.ATTITUDES AND OBJECTIVES OF MANAGEMENT - The attitude of the
management affects the dividend policies of a corporation in another way. The
stockholders who control the management of the company may be interested in empire

building. In such a case company with the objective of expanding the business may retain
a larger portion of profit and declare less dividend to shareholders.
5.COMPOSITION OF SHARE HOLDING-There may be marked variations in
dividend policies on account of the variations in the composition of shareholding. The tax
burden on business corporations is a determining factor. The directors of closely held
companies may take into consideration the effect of dividend upon the tax position of
their shareholders. On the other hand the shareholders of the large and widely held
company may be interested in high dividend payouts.
6. INVESTMNET OPPORTUNITIES-Many companies retain the earnings to facilitate
planned expansion. Companies with low credit ratings may feel that they may not be able
to sell their securities for rising necessary finance they would need for future expansion.
So, they adopt a policy for retaining large portion of earnings.
7. DESIRE FOR FINANCIAL SOLVENCY AND LIQUIDITY-Companies may desire
to build up reserves by retaining their earnings which enable them to weather deficit years
or the downswings cycle. Cash credit limits, working capital needs, capital expenditure
commitments, repayment of long-term debts etc. influence the dividend division.
8. REGULARITY-A company may decide about dividends on the basis of its current
earnings which according to its thinking may provide the best index of what a company
can pay, even though large variations in earnings and consequently in dividends may be
observed from year to year. They may use past profits to pay dividends as more important
than anything else. Regularly in dividends cultivates an investment attitude rather than a
speculative one toward the shares of a company.
9.RESTICTIONS BY FINANCIAL INSTITUTIONS-

Sometimes financial institutins which grant long-term loans to corporations put a clause
restricting payment till the loans or a substancial part of it is repaid.
10.INFALTION-Inflation is also a factor which may effect a firms dividend decision. In
period of inflation, funds generated from depreciation may not be adequate to replace
worn out equipment. Under these circumstances, the firm has to depend upon retained
earnings of funds to make up for the shortfall. This is particular relevance if the assets
have to be replaced in near future. Consequently , the dividend payments ratio will tend to
be low.
11.OTHER FACTORS Age of the company has effect on the dividend decision. Established companies
often find it easier to distribute higher earnings without causing an adverse
corporation which has yet to establish itself.
The demand for capital expenditure, money supply, etc., undergo great oscillations
during the different stages of a business cycle. As a result, dividend policies may
fluctuate from time to time.
In many instances, dividend policies result from tradition, ignorance and
indifference rather than from considered judgement. An industry or a company
may have established some satisfactory standard for the payment of dividends;
and this standard becomes a convention or custom for that industry or company.

GOALS OF DIVIDNED POLICY

Dividend policy should be analysed in terms of its effect on the value of the
company
Investment by the company in new profitable opportunities creates value and
when a company foregoes an attractive investment, shareholders incur an
opportunity loss
Dividend, investment and financing decisions are interdependent and there is often
a trade-off
Dividend decisions should not be treated as a short-run residual decision
A workable compromise is to treat dividends as a long-run residual to avoid
undesirable variations in payout. This needs financial planning over a fairly long
time horizon
Dividend policy should be communicated clearly to investors who may then take
their decisions in terms of their own preferences and needs
Erratic and frequent changes in dividends should be avoided

TYPES OF DIVIDEND POLICY

1. ON THE BASIS OF COMPANYS GENERAL PERSPECTIVE
Whether dividend should be paid right from the initial year of operations, i.e., regular
dividends .

Whether equal amount or fixed percentage of dividend be paid every year, irrespective
of the quantum of earnings as in case of preference shares, i.e., stable dividends.
Whether a fixed percentage of total earnings be paid as dividend which would mean
varying amount of dividend per share every year, depending on the quantum of
earnings and number of ordinary shares in the year, i.e., a fixed payout ratio.
Whether the dividend be paid in cash or in the form of shares of other companies held
by it or by converting (accumulated) retained earnings into bonus shares, i.e.,
property dividend or bonus share dividend

2. ON THE BASIS OF A RESEARCH STUDY

On the basis of the nature of industry such as whether industry belongs to electrical,
chemicals, fertilisers, FMCS, automobiles, pharmaceuticals, textiles, a research study
classified dividend policy into three types. They are:
Generous dividend policy
More or less fixed dividend policy
Erratic dividend policy

3.

ON THE BASIS OF STABILITY OF DIVIDEND

Stable dividend per share
Stable percentage of net earnings
Stable rupee dividend plus extra dividend
Dividends as a fixed percentage of market value

FORMS OF DIVIDEND
1
2
3
4
5
6

Scrip Dividend
Bond Dividend
Property Dividend
Cash Dividend
Debenture Dividend
Bonus share or Stock dividends

Cash dividend is a payment made by a company out of its earnings to investors in the
form of cash. This transfers economic value from the company to the shareholder Share
bonus is an increase in the amount of shares of a company with the new shares being
given to shareholders instead of the company using the money for operations.
Share bonus is an increase in the amount of shares of a company with the new shares
being given to shareholders. The additional shares are allotted to the existing shareholders
without receiving any additional payment from them, it is known as issue of bonus shares.
Bonus shares are allotted by capitalizing the reserves and surplus. Issue of bonus shares
results in the conversion of the company's profits into share capital. Therefore it is termed
as capitalization of company's profits. Since such shares are issued to the equity
shareholders in proportion to their holdings of equity share capital of the company, a
shareholder continues to retain his / her proportionate ownership of the company. Issue of
bonus shares does not affect the total capital structure of the company. It is simply a
capitalization of that portion of shareholders' equity which is represented by reserves and
surpluses. It also does not affect the total earnings of the shareholders. Issue of Bonus
Shares is more or less a financial gimmick without any real impact on the wealth of the
shareholders. Still firms issue bonus shares and shareholders look forward to issue of
bonus shares.

REASONS FOR ISSUING BONUS SHARES

The bonus issue tends to bring the market price per share within a more reasonable
range.
It increases the number of outstanding shares. This promotes more active trading.
The nominal rate of dividend tends to decline. This may dispel the impression of
profiteering.
Share capital base increases and the company may achieve a more spectacular size
in the eyes of the investing company.
Shareholders regard a bonus issue as a strong indication that the prospects of the
company have brightened and they can reasonably look for an increase in total
dividend.
It improves the prospects of raising additional funds.

ADVANTAGES OF ISSUE OF BONUS SHARES TO THE COMPANY

1. Conservation of Cash: Issue of bonus shares does not involve cash outflow. The
company can retain earnings as well as satisfy the desire of the shareholders to
receive dividend.
2. Keeps the EPS at a reasonable level: A company having high EPS may face
problems both from employees and consumers. Employees may feel that they are
underpaid. Consumers may feel that they are being charged too high for the
company's products. Issue of bonus shares increases the number of shares and
reduces the earning per share.
3. Increases the marketability of company's shares: Issue of bonus shares reduces
the market price per share. The price of the share may come within the reach of
ordinary investors. This increases the marketability of shares.
4. Enhances prestige of the company: By issuing bonus shares, the company
increases its credit standing and its borrowing capacity. It reflects financial
strength of the company.

5. It helps in financing its projects: By issuing bonus shares, the expansion and
modernization programmes of a company can be easily financed. The company
need not depend on outside agencies for finances.
6. Retention of managerial control: Any new issue of shares has a danger of
dilution of managerial control over the company.

ADVANTAGES TO THE SHAREHOLDERS

Tax benefits: When a shareholder receives dividend in cash, it adds to his total
income and is taxed at usual income tax rates. From this point of view the bonus
shares increase the wealth of shareholders. In case the shareholder requires cash he
can sell his additional shares.
Indication of higher future profits: Issue of bonus shares is generally an
indication of higher future profits. This is because a company declares a bonus
issue only when its earnings are expected to increase.
Increase in future dividend: The shareholder will get more dividends in the
future even if the company continues to offer existing cash dividend per share.
High psychological value: Issue of bonus shares is usually perceived positively
by the market. This tends to create greater demand for the company's shares. In
fact, always the share prices rise at the declaration of bonus shares.

LIMITATIONS OF BONUS ISSUES DISADVANTAGES FOR THE COMPANY

 Issue of bonus shares leads to an increase in the capitalization of the company. The
increased capitalization can be justified only if there is increase in the earning
capacity of the company.
After the issue of the bonus shares the shareholders expect the existing rate of
dividend per share to continue. It is really a challenging task for the company to
retain the existing rate of dividend per share.
Issue of bonus shares prevents new investors from becoming the shareholders of
the company (no doubt they can buy the shares in the secondary market).

DISADVANTAGES TO THE SHAREHOLDERS

Some shareholders may prefer cash dividend to stock dividend, such shareholders
may feel disappointed (no doubt they can very well sell their bonus shares and get
their money).

SHARE SPLIT
A share split is a method to increase the number of outstanding through a proportional
reduction in the par value of the share. A share split affects only the par value and the total
number of outstanding shares, the shareholders total funds remains unaltered.
The primary motives to make shares seem more affordable to small investors even though
the underlying value of the company has not changed. A stock split can also result in a
stock price increase following the decrease immediately after the split. Since many small
investors think the stock is now more affordable and buy the stock, they end up boosting
demand and drive up prices. Another reason for the price increase is that a stock split
provides a signal to the market that the companys share price has been increasing and
people assume this growth will continue in the future, and again, lift demand and prices.

Another version of a stock split is the reverse split. This procedure is typically used by
companies with low share prices that would like to increase these prices to either gain
more respectability in the market or to prevent the company from being delisted.

REVERSE SPLIT
Under the situation of falling price of a companys share the company may want to reduce
the number of outstanding shares to prop up the market price per share. The reduction of
the number of outstanding shares by increasing the per share value is known as reverse
split.

STOCK REPURCHASE
Its actually the repurchase of its own share by a company.
To return surplus cash to shareholders as an alternative to a higher dividend payment or
investing the surplus cash in existing or new operations. Adjust or change the companys
capital structure quickly
To increase earnings per share and net asset value per share
To improve the various performance parameters like EPS, DPS, operating cash flow per
share, etc.
1

Increase in value of the firm because managers are signalling that the shares are

undervalued (otherwise they might not want to buy them)

Increase in value if they use debt to repurchase shares because of the tax benefits
of debt

Increase in value because investors pay taxes on capital gains and higher taxes on

ordinary income if they receive dividends.

Increase in value of stocks because there is a transfer of wealth from bondholders
to stockholders

EFFECTS
Effects on the Company Shareholding Pattern Changes Improvement in the financial
ratios of the company Effects on the Shareholder Tax Benefits Higher Share Price.

DIVIDEND POLICY OF 5 IT COMPANIES

1.TATA CONSULTANCY SERVICES (TCS)

Dividend Summary
For the year ending March 2013, Tata Consultancy Services has declared an equity
dividend of 2200.00% amounting to Rs 22 per share. At the current share price of Rs
2000.85 this results in a dividend yield of 1.1%.

The company has a good dividend track report and has consistently declared dividends for
the last 5 years.
* As per the Profit & Loss account

Dividend Declared

Announcement

Effective

Dividen

Dividend

Remarks

Date

Date

d Type

(%)

25-10-13

Interim

400.00

Rs.4.0000 per share(400%)

15-10-13

Second Interim Dividend

Rs.4.0000 per share(400%)
18-07-13

29-07-13

Interim

400.00
Interim Dividend
Rs.13.0000 per share(1300%)

17-04-13

06-06-13

Final

1,300.00
Final Dividend
Rs.3.0000 per share(300%)

14-01-13

23-01-13

Interim

300.00
Third Interim Dividend
Rs.3.00 per share (300%)

19-10-12

31-10-12

Interim

300.00
Second Interim Dividend
Rs.3.00 per share(300%)

12-07-12

23-07-12

Interim

300.00
Interim Dividend
Rs. 8/- per share (800%)
Final Dividend &

23-04-12

07-06-12

Final

1,600.00
Rs. 8/- per share (800%)
Special Dividend

17-01-12

25-01-12

Interim

300.00

Third Interim Dividend

17-10-11

25-10-11

Interim

300.00

Second Interim Dividend

-

14-07-11

28-07-11

Interim

300.00

08-06-11

Final

800.00

Rs.8.00 per share(800%)

21-04-11

Final Dividend
17-01-11

27-01-11

Interim

200.00

Third Interim Dividend

21-10-10

01-11-10

Interim

200.00

Second Interim Dividend

15-07-10

29-07-10

Interim

200.00

Rs.10.00 per share(1000%)

19-04-10

15-06-10

Final

1,400.00

Dividend & Rs.4.00 per share

(400%)Final Dividend

15-01-10

27-01-10

Interim

200.00

Third Interim Dividend

20-10-09

28-10-09

Interim

200.00

Second Interim Dividend

20-07-09

27-07-09

Interim

200.00

21-04-09

16-06-09

Final

500.00

& Bonus Issue

07-01-09

28-01-09

Interim

300.00

Third Interim Dividend

17-07-08

29-10-08

Interim

300.00

Second Interim Dividend

14-10-08

29-10-08

Interim

300.00

Second Interim Dividend

08-07-08

31-07-08

Interim

300.00

21-04-08

18-06-08

Final

500.00

08-01-08

23-01-08

Interim

300.00

Third Interim Dividend

2. WIPRO
Dividend Summary
For the year ending March 2013, Wipro has declared an equity dividend of 350.00%
amounting to Rs 7 per share. At the current share price of Rs 477.95 this results in a
dividend yield of 1.46%.

The company has a good dividend track report and has consistently declared dividends for
the last 5 years.
* As per the Profit & Loss account

Dividend Declared

Announcemen

Effectiv

Dividen

Dividen

Remarks

t Date

e Date

d Type

d (%)

19-04-13

27-06-13

Final

250.00

Rs.5.0000 per share(250%)

Final Dividend
Rs.2.0000 per share(100%)
15-01-13

23-01-13

Interim

100.00
Interim Dividend

25-04-12

28-06-12

Final

200.00

10-01-12

24-01-12

Interim

100.00

27-04-11

29-06-11

Final

200.00

17-01-11

27-01-11

Interim

100.00

23-04-10

15-06-10

Final

300.00

(Revised from BC
01/07/2010 to 22/07/2010)
22-04-09

29-06-09

Final

200.00

21-04-08

27-06-08

Final

200.00

AGM

3. INFOSYS
Dividend Summary
For the year ending March 2013, Infosys has declared an equity dividend of 840.00%
amounting to Rs 42 per share. At the current share price of Rs 3347.60 this results in a
dividend yield of 1.25%.

The company has a good dividend track report and has consistently declared dividends for
the last 5 years.
* As per the Profit & Loss account

Dividend Declared

Announcemen

Effectiv

Dividen

Dividen

t Date

e Date

d Type

d (%)

Remarks

Rs.20.0000 per share(400%)

26-09-13

17-10-13

Interim

400.00
Interim Dividend
Rs.27.0000 per share(540%)

12-04-13

30-05-13

Final

540.00
Final Dividend
Rs.15.0000 per share(300%)

24-09-12

18-10-12

Interim

300.00
Interim Dividend
Rs. 22.00 per share (440%)
Final Dividend & Rs.10.00

13-04-12

24-05-12

Final

640.00
per share (200%)
Special Dividend

22-09-11

20-10-11

Interim

300.00

15-04-11

26-05-11

Final

400.00

Rs.10.00 per share(200%)

Interim Dividend &

29-09-10

21-10-10

Interim

800.00
Rs.30.00 per share(600%)
Special Dividend.

13-04-10

26-05-10

Final

300.00

22-09-09

15-10-09

Interim

200.00

15-04-09

04-06-09

Final

270.00

25-09-08

16-10-08

Interim

200.00

(Final Dividend 145% +

15-04-08

29-05-08

Final

545.00
Special Dividend 400%)

4. HCL TECHNOLOGIES
Dividend Summary
For the year ending June 2012, HCL Technologies has declared an equity dividend of
600.00% amounting to Rs 12 per share. At the current share price of Rs 1050.25 this
results in a dividend yield of 1.14%.

HCL Technologies had last declared a dividend of 600.00% for the year ending June
2012.
* As per the Profit & Loss account

Dividend Declared

Announcemen

Effectiv

Dividen

Dividen

t Date

e Date

d Type

d (%)

04-10-13

22-10-13

Interim

100.00

Remarks

Rs.2.0000 per share(100%)

Interim Dividend
Rs.2.0000 per share(100%)
05-04-13

22-04-13

Interim

100.00
Third Interim Dividend
Rs.2.0000 per share(100%)

17-01-13

21-01-13

Interim

100.00
Second Interim Dividend
Rs.4.0000 per share(200%)
Final Dividend & Rs.2.0000

25-07-12

19-10-12

Interim

300.00
per share(100%)
Interim Dividend

04-04-12

23-04-12

Interim

100.00

Third Interim Dividend

04-01-12

20-01-12

Interim

100.00

Second Interim Dividend

Rs.2.00 per share(100%)
Final Dividend & Rs.4.00 per
share(200%)Interim

27-07-11

21-10-11

Final

300.00
Dividend (incl. Rs. 2/One Time Special Milestone
Dividend)

08-04-11

25-04-11

Interim

100.00

Third Interim Dividend

07-01-11

24-01-11

Interim

100.00

Second Interim Dividend

Rs.1.00 per share(50%)

29-07-10

22-10-10

Final

125.00

Final Dividend + Rs.1.50 per

share(75%)Interim Dividend.

09-04-10

26-04-10

Interim

50.00

12-01-10

29-01-10

Interim

50.00

Second Interim Dividend

25-08-09

02-12-09

Final

50.00

15-10-09

30-10-09

Interim

50.00

13-04-09

24-04-09

Interim

50.00

Third Interim Dividend

13-01-09

28-01-09

Interim

100.00

Second Interim Dividend

150% Final Dividend &

01-08-08

22-10-08

Final

300.00

150% Interim Dividend

(Revised)

01-04-08

21-04-08

Interim

100.00

Third Interim Dividend

07-01-08

23-01-08

Interim

100.00

Second Interim Dividend

Rs.6.0000 per share(300%)

31-07-13

Final

300.00
Final Dividend

5. LARSEN & TOUBRO INFOTECH.

Dividend Summary
For the year ending March 2013, Larsen and Toubro has declared an equity dividend of
925.00% amounting to Rs 18.5 per share. At the current share price of Rs 964.15 this
results in a dividend yield of 1.92%.

The company has a good dividend track report and has consistently declared dividends for
the last 5 years.
* As per the Profit & Loss account

Dividend Declared

Announcemen

Effectiv

Dividen

Dividen

t Date

e Date

d Type

d (%)

Remarks

Rs.18.5000 per share(925%

)Dividend (Final dividend of
Rs.18.50 per share is
pre-bonus dividend).
22-05-13

13-08-13

Final

616.50

Post bonus Dividend works

out to Rs.12.33 per share.
(Dividend per share taken as
Rs. 12.33 per share (616.5%)
on the Post bonus capital)

Rs.16.50 per share(825%)

14-05-12

14-08-12

Final

825.00
Dividend

19-05-11

17-08-11

Final

725.00

17-05-10

17-08-10

Final

625.00

28-05-09

18-08-09

Final

525.00

29-05-08

20-08-08

Final

750.00

AGM