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Presented by : Aniket Sethi - 415 Ankit Shah - 416 Arpit Shah - 417 Rahul Agarwal - 519 Rajal Joshi - 520 Sagar Shah - 522
DIVIDENDS
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders.
DIVIDEND DECISION
In corporate finance, it is a decision made by the directors of a company. It relates to the amount and timing of any cash payments made to the company's stockholders. The decision is an important one for the firm as it may influence its capital structure and stock price.
Date of Record
Holders of stocks, who will receive dividends, are determined.
Date of Payment
Checks are mailed.
Dividend clienteles
A particular pattern of dividend payments may suit one type of stock holder more than another. A retiree may prefer to invest in a firm that provides a consistently high dividend yield, whereas a person with a high income from employment may prefer to avoid dividends due to their high marginal tax rate on income.
Information signaling
A model developed by Merton Miller and Kevin Rock in 1985. It suggests that dividend announcements convey information to investors regarding the firm's future prospects. When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information that may provide a clue as to the firm's future prospects.
For example, if a company paid out $1 per share in annual dividends and had $3 in EPS, the DPR would be 33%. ($1 / $3 = 33%) Investors usually seek a consistent and/or improving dividends payout ratio.
Buybacks
A buyback is also known as a "share repurchase", wherein the company buys back its shares from the marketplace. Buyback also suggests that a company is investing in itself, or using its cash to buy its own shares. The idea is simple: because a company can't act as its own shareholder, repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced. When this happens, the relative ownership stake of each investor increases because there are fewer shares, or claims, on the earnings of the company.
Open Market :The second alternative a company has is to buy shares on the open market, just like an individual investor would, at the market price. It is important to note, however, that when a company announces a buyback it is usually perceived by the market as a positive thing, which often causes the share price to shoot up.
1. Improving Financial Ratios : Another reason a company might pursue a buyback is solely to improve its financial ratios - metrics upon which the market seems to be heavily focused. If reducing the number of shares is not done in an attempt to create more value for shareholders but rather make financial ratios look better, then the company is likely to face a problem in long term. However, if a company's motive for initiating a buyback program is sound, the improvement of its financial ratios in the process may just be a byproduct of a good corporate decision.
2. P/E Ratio : The buyback also helps to improve the company's price-earnings ratio (P/E). The P/E ratio is one of the most well-known and oftenused measures of value. At the risk of oversimplification, when it comes to the P/E ratio, the market often thinks lower is better. Therefore, if we assume that the shares remain at $15, the P/E ratio before the buyback is 75 ($15/2 cents); after the buyback, the P/E decreases to 68 ($15/22 cents) due to the reduction in outstanding shares. In other words, fewer shares + same earnings = higher EPS
3 . Dilution : Another reason that a company may move forward with a buyback is to reduce the dilution that is often caused by generous employee stock option plans (ESOP). Bull markets and strong economies often create a very competitive labor market - companies have to compete to retain personnel and ESOPs comprise many compensation packages. Stock options have the opposite effect of share repurchases, as they increase the number of shares outstanding when the options are exercised. As was seen in the above example, a change in the number of outstanding shares can affect key financial measures such as EPS and P/E. In the case of dilution, it has the opposite effect of repurchase: it weakens the financial appearance of the company.
4 .Tax Benefit : In many ways, a buyback is similar to a dividend because the company is distributing money to shareholders. Traditionally, a major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate, whereas dividends are taxed at ordinary income tax rates. However, with the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rate on dividends is now equivalent to the rate on capital gains.
Dividends are simple: The company sends you money. Dividends are usually declared quarterly, approved by the Board of Directors, and sent out to shareholders a few weeks later. The Board declares, say, that the dividend will be $1.00 per share. If you own 100 shares, they send you $100.
Share repurchases are not complex either, but there's more going on than with dividends. With share repurchase programs, the Board authorizes using some of the company's retained earnings to buy shares of itself on the open market. The plan might be, for example, that over the next six months, the company will purchase 1,000,000 shares of itself, taking them in-house and therefore off the market. If the stock sells for an average of $20 per share during the program, the company will spend $20,000,000 to buy back its own shares.
These two very different corporate actions, because in each case the company is using some of its retained earnings to transfer something of value to its shareholders. With dividends, the value is money itself. The company sends you a check. With share buybacks, the value comes in the form of an increase in the value of each share remaining on the market. After the company buys back X shares, every remaining share is worth more to its owner. The corporate pie has been sliced into fewer-and
Dividends are closely watched and reported, so information about them is easy to obtain. Over time, companies establish dividend patterns which are pretty predictable. Significant changes in the pattern are reported instantly. Con: You must pay taxes on the dividends. However, the federal income tax rate of 15% on dividends makes it one of the least-taxed forms of income available.
Types of Dividends
Cash Dividend
Most common of the dividend types used Date of record & date of payment
On February 1, ABC International's board of directors declares a cash dividend of $0.50 per share on the company's 2,000,000 outstanding shares, to be paid on June 1 to all shareholders of record on April 1. On February 1, the company records this entry
Debit Retained earnings Dividends payable 1,000,000 1,000,000 Credit
Debit
Dividends payable 1,000,000
Credit
Cash
1,000,000
Regular dividend paid annually final dividend because it is usually paid after the finalization of accounts Interim If Articles so permit, the directors may decide to pay dividend at any time between the two Annual General Meeting before finalizing the accounts declared and paid when company has earned heavy profits or abnormal profits No Interim Dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for
Stock Dividend
Companies, not having good cash position, generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. Such shares are issued instead of paying dividend in cash and called 'Bonus Shares'. No change in equity
ABC International declares a stock dividend to its shareholders of 10,000 shares. The fair value of the stock is $5.00, and its par value is $1. ABC records the following entry:
Debit Retained earnings Common stock, $1 par value Additional paid-in capital 50,000 10,000 40,000
Credit
Scrip Dividend
This practice has been stopped now When earnings justify a dividend, but the cash position of the company is temporarily weak shareholders are issued shares and debentures of other companies
ABC International declares a $250,000 scrip dividend to its shareholders that has a 10 percent interest rate. At the dividend declaration date, it records the following entry
Debit 250,000
Credit 250,000
Credit 275,000
Bond Dividend
In rare instances, dividends are paid in the form of debentures or bounds or notes for a long-term period. The effect of such dividend is the same as that of paying dividend in scrips. The shareholders become the secured creditors is the bonds has a lien on assets.
Property Dividend
Dividend is paid in the form of asset instead of payment of dividend in cash The distribution of dividend is made whenever the asset is no longer required in the business such as investment or stock of finished goods
ABC International's board of directors elects to declare a special issuance of 500 identical, signed prints by Pablo Picasso, which the company has stored in a vault for a number of years. The company originally acquired the prints for $500,000, and they have a fair market value as of the date of dividend declaration of $4,000,000. ABC records the following entry as of the date of declaration to record the change in value of the assets, as well as the liability to pay the dividends:
Long-term investments - artwork Gain on appreciation of artwork Retained earnings Dividends payable Dividends payable Long-term investments - artwork Debit 3,500,000 Debit 4,000,000 Credit
3,500,000 Credit
4,000,000
Debit 4,000,000
Credit
4,000,000
Debit 1,600,000
Debit 1,600,000
Credit 1,600,000
Credit 1,600,000
Special Dividends, Stock split, Bonus share and Difference between them
Special Dividend
Payment made by a company to its shareholders that the company declares to be separate from the typical recurring dividend cycle, if any, for the company. In the case of a special dividend the company is signalling that this is a one-off payment. Typically, special dividends are distributed if a company has exceptionally strong earnings that it wishes to distribute to shareholders or if it is making changes to its financial structure, such as debt ratio. A prominent example of a special dividend was Patni Computer Systems announcing a special dividend of Rs 63 per share in Aug 2010.
Stock Split
All listed companies that are being traded in the secondary market have a fixed number of outstanding shares that are being traded in the market. A stock split of 5:1 would mean that the face value of the stock would reduce to one fifth and so would the current market price and the number of shares outstanding in the market would become 5 times. Therefore each shareholder would now have 5 times the number of hares he currently holds. Companies tend to go for stock split when the board feels that the price of the stock has become too high that constraints its trading or the prices are beyond the price levels of similar companies in their sector. A stock split may act in the favour of the company splitting it since the investors may think that the share is now more affordable and end up buying the stock which could boost the price of each share.
Another reason to reverse the stock split could be to reduce the number of shareholders of the company. A recent example of this is that of Binani metals listed in the Calcutta stock exchange. It had many dormant (dead share holders and Custodian of Enemy Property) shareholders. A recent reverse stock split in 2011 has led to the company face value rise to Rs 1000.
Bonus share
Free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns Does not change the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. Bonus shares are distributed in a fixed ratio to the shareholders.
Sometimes a company will change the number of shares in issue by capitalizing its reserve. In other words, it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before.
Under the Companies Act, unless the Board recommends the payment of a dividend, the shareholders at a general meeting have no power to declare any dividend. A lower, but not higher, dividend is declared by shareholders. Dividends are generally declared as a percentage of the par value. Dividend decided by board then distributed and paid to shareholders in proportions to the paid-up value of their Shares as on the record date for which such dividend is payable
Under the Companies Act, dividends can only be paid in cash to shareholders listed on the register of shareholders on the date which is specified as the record date or book closure date or to those shareholders registered in NSDL and CDSL. No shareholder is entitled to a dividend while any lien in respect of unpaid calls on any of his Shares is outstanding. The Companys dividend policy is aimed at enabling shareholders to share progressively in the operating performance of the Company. Any dividend declared shall be deposited by the Company in a separate bank account within five days from the date of declaration of such dividend.
Dividends must be paid within 30 days from the date of the declaration and any dividend which remains unpaid or unclaimed after that period must be transferred within 7 days to a special unpaid dividend account held at a schedule bank.
Under the Companies Act, dividends may be paid out of the profits of a company in the year in which the dividend is declared or out of the undistributed profits of the previous fiscal years.
The Company may pay a dividend in excess of 10 per cent of paid up capital in respect of any year out of the profits of that year only after it has transferred to the reserves of the Company a percentage of its profits for that year ranging between 2.5 percent to 10 percent depending on the rate of dividend proposed to be declared in that year in accordance with the rules framed under the Companies Act
The Companies Act further provides that if the profit for a year is insufficient or in the absence of profits in any year, the dividend for that year may be declared out of the accumulated profits earned in previous years and transferred to reserves, subject to the following conditions
The rate of dividend to be declared may not exceed the lesser of the average of the rates at which dividends were declared in the five years immediately preceding the year, or 10 per cent of paid-up capital The total amount to be drawn from the accumulated profits from previous years and transferred to the reserves, may not exceed an amount equivalent to one tenth of such paid-up capital and free reserves, and the amount so drawn is first to be used to set off the losses incurred in the financial year before any dividends in respect of preference or equity shares are declared The balance of reserves after withdrawals must not be below 15 per cent of paid up share capital
During the year under review, your Company has earned income of 12,614.02 crore against 12,511.72 crore in the previous year. The Company has incurred loss of 757.99 crore compared to profit after tax of 478.93 crore in the previous year.
Dividend Yield
Introduction
It was founded as VSNL (Videsh Sanchaar Nigam Limited) in 1986. VSNL was the first Indian PSU to be listed in the NYSE in 2000.
Investments in:
The growth of emerging new market economies, with an emphasis on India, Asia, the Middle East and Africa. The growth of IP and cloud-based communication and IT solutions. The shift towards managed services, which allows our client businesses to focus on their core competencies.
The company aims at maintain a minimum constant Dividend Payout ratio across the years. Various constraints that can change this
Cash flow constraints Contractual constraints Legal constraints Tax considerations Return considerations
Particulars
For FY 2010-2011
Amount in Rs. Cr
2050.44
57 9.25 12.19 560.77
1411.23
Dividend Payment
Dividend (%)
800
750 700
600
500
500
400
Dividend (%)
300
200
125
100 40 0 Jul 1998 Jul 1999 80 20 Aug 2000 Mar 2000 Dec 2001 Jul 2001 May 2002 May 2003 Jun 2004 Jun 2005 Jun 2006 May 2007 Jun 2008 May 2009 85 60 45 60 45 45 45 45 20 May 2011
Exceptions
In March 2000, Interim dividend of 60% was announced to the shareholders. In July 2001, the board announced a dividend of Rs.50/- (including Rs.40/- Special One Time Dividend) per share. In December 2002, the board announced an interim dividend of 750%. In 2005, the board announced a Dividend Rs. 6/(Dividend Rs.4.50 + Rs.1.50 One Time Special Dividend) per share.
Mar ' 11
Mar ' 10
Mar ' 09
Mar ' 08
Mar ' 07
2.00
4.50
4.50
4.50
Mar ' 11 Payout Ratios Dividend Payout ratio Earning Retention Ratio
Mar ' 10
Mar ' 09
Mar ' 08
Mar ' 07
0.35 0.65
100
0.24 0.76
0.42 0.58
0.27 0.73
Comparison
The dividend policy at Reliance Infocomm is more of being constant. The company tries to keep its dividend between 10 to 20 percent every year. Reliance Infocomm gives dividends every year. Even when the company was suffering heavy losses, it gave a minimum dividend to the shareholders. TATA communication is based on the profits by the company. Sometimes the dividend issued may be nil while in some other year the company might give a very high dividend
Conclusion
For an investor who is more pessimistic towards the market, Reliance Infocomm would be a better option because of the stability it provides.
But for an investor would want a higher gain in the long term, TATA communication would be a better option as it may not guarantee short term returns, but in the long term dividends are much higher.
Thank You