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INTRODUCTION

All types of investors either large institutional or individual could see the new media for the
report on the movements of the stock prices. Share prices are the most important indicators
used by investors to invest or not to invest on a particular share. Their main objective of
investing in the stock market is to maximize the expected return at low level of risk. There
are psychological factors contributed to the price changes or volatility. Dividend payment is a
major component of stock return to shareholders. Dividend payment could provide a signal to
the investors that the company is complying with good corporate governance practices (Jo
and Pan, 2009). Good corporate governance practices are valuable for a company as it
implying that the company is able to raise funds from capital market with attractive terms. By
distributing dividend, it able to attract investors and indirectly increase the company share
price. This sort of company could easily raise funds through new share issuance for
expansion which then would increase profits and increase share price.

A number of researchers have advanced theories and provided empirical evidence


regarding determinants of a firm’s dividend policy. The dividend policy issue, however, is
yet unresolved. There are many factors that could affect a firm’s dividend payout behaviour.
These reasons include profitability, stability of dividend payout and retained earnings,
liquidity and cash flows, investment variables and financial variables.

To decide whether or not the dividend policy matters, we first have to define what we mean
by dividend policy. All other things being the same, of course dividends matter. Dividends
are paid in cash and cash is something that everybody likes. The heart of the dividend policy
question goes like this: Should the company pay out money to its shareholders or should it
keep that money, invest it and pay back later to its shareholders. Dividend policy, therefore,
is the time pattern of dividend payout. In particular, should the firm pay out a large
percentage of its earnings now or a small or even zero percentage? This is the dividend policy
question.
THEORETICAL FRAMEWORK

The term dividend refers to that part of profits of a company which is distributed by the
company among its shareholders. It is the reward of the shareholders for investments made
by them in the shares of the company. The investors are interested in earning the maximum
return on their investments and to maximise their wealth. A company, on the other hand,
needs to provide funds to finance its long-term growth.

The Dividend Policy is a financial decision that refers to the proportion of the firm’s
earnings to be paid out to the shareholders. Here, a firm decides on the portion of revenue
that is to be distributed to the shareholders as dividends or to be ploughed back into the firm.

When the dividend amount is expressed as a percentage of market price, it is called dividend
yield, while expressed as a percentage of earnings is known as dividend payout. Hence,
dividend yield is the ratio of dividend per share to market price per share and dividend payout
is the ratio of dividend per share to earnings per share.

Dividend policy determines the division of Earnings between payment to shareholders and
Retained earnings.

Dividend policy may be viewed as a:

(a) Long-term financing decision

(b) Wealth maximization Decision

TYPES OF DIVIDENDS

Classifications of dividends are based on the form in which they are paid. Following given
below are the different types of dividends:

 Cash dividend
 Bonus Shares referred to as stock dividend
 Scrip dividend
 Liquidating dividend
The amount of earnings to be retained back within the firm depends upon the availability of
investment opportunities. To evaluate the efficiency of an opportunity, the firm assesses a
relationship between the rate of return on investments “r” and the cost of capital “K.”

As per the dividend models, some practitioners believe that the shareholders are not
concerned with the firm’s dividend policy and can realize cash by selling their shares if
required. While the others believed that, dividends are relevant and have a bearing on the
share prices of the firm. This gave rise to the following models:
Dividend • Miller and
Irrelavance Modigliani
Theory hypothesis
Dividend • Walter's Model
Relavance • Gordon's Model
Theory
As long as returns are more than the cost, a firm will retain the earnings to finance the
projects, and the shareholders will be paid the residual dividends i.e. the earnings left after
financing all the potential investments. Thus, the dividend payout fluctuates from year to
year, depending on the availability of investment opportunities.

Factors Affecting Dividend Policies:

1. General State of Economy:

In case, of uncertain economic and business conditions, the management may like to retain
whole or large part of the earnings. To build up reserves to absorb future shocks. In periods
of prosperity, the management may not be liberal in dividend payments because of
availability of larger profitable investment opportunities. In periods of inflation, the
management may retain larger portion of earnings to finance replacement of obsolete
machines.

2. Trade Cycles:

Business cycles also exercise influence upon dividend Policy. Dividend policy is adjusted
according to the business oscillations. During the boom, prudent management creates
reserves for contingencies which follow the inflationary period. Higher rates of dividend can
be used as a tool for marketing the securities in an otherwise depressed market. The financial
solvency can be established and maintained by the companies in dull years if adequate
reserves have been built up.

3. Government Policies:
The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial,
labor control and other government policies. Sometimes, government restricts the distribution
of dividend beyond a certain percentage in a particular industry or in all spheres of business
activity as was done in emergency. The dividend policy has to be modified or formulated
accordingly in those enterprises.

4. Legal Requirements:

In deciding on the dividend, the directors take the legal requirements too into consideration.
In order to protect the interests of creditors and outsiders. The companies Act 1956 prescribes
certain guidelines in respect to the distribution and payment of dividend. Moreover, a
company is required to provide for depreciation on its fixed and tangible assets before
declaring dividend on shares. It proposes that in any case Dividend should not be distributed
out of capital. Likewise, contractual obligation should also be fulfilled, for example, by
payment of dividend on preference shares in priority over ordinary dividend.

5. Liquidity:

Although dividend is related to earnings, the actual payment of dividend is made from
available cash. Thus, liquidity always plays an important role in any cash payment by a firm.
This usually happens in case of high growth firms or firm which requires more funds for
expansion purposes, which have very low liquidity because of substantial investment like
profitability, liquidity etc. Also has positive relationship with dividend. Hence, greater the
cash position and overall liquidity of a company, greater is the ability to pay dividend. The
Current-Ratio is one of the best-known measures of financial strength and liquidity. It is
calculated as shown below:

Current-Ratio = Total Current-Assets /Total Current-Liabilities

6. Size and Growth:

Big companies are usually in mature industries with higher credit levels. Therefore, due to the
fact that the cost of dividend policy is relatively large companies have a stable dividend
policy and moreover have a higher payout than small companies. In order to study the
influence of size on dividend. Various measures such as Total Assets, Paid-up Capital, and
Net worth etc. have beenused by researchers to represent size. Larger firms should be able to
pay higher dividends. Therefore expect to see the positive relationship between size and
dividend payment. Higher Growth companies have lots of investment opportunities and are
likely to pay low dividends because they have profitable uses for the capital. Therefore, high
growth companies prefer to capitalize on their favourable investment prospects and have
clear disincentive’s in paying operating cash flows and profits as dividends.(Gaver and
Gavert,1993)39this ratio indicates the rate of growth of the total assets in the business and is
expressed in percentage.
7. Leverage:

A firm with large amounts of debts will follow a more conservative dividend policy. The
reason is that if a firm has relatively high financial leverage, its dependence on external
finance is increased. Therefore, such firms’ pay low dividends to avoid borrowing i.e. a firm
with higher leverage will pay a lower fraction of earnings in order to lower its dependence on
external financing leverage can be calculated by Debt/Equity Ratio. The Debt/Equity or
Leverage Ratio indicates the extent to which the business is reliant on debt financing.

Debt/Equity Ratio =Long-term funds/Shareholder’s fund

8. Provision for Taxation:

In India, dividends were taxed in the hands of investors. Since investor did not give
significance to tax matter individual tax rates were irrelevant while determining dividend
policy in the Indian context. However, shareholders in the high tax bracket may have
preferred dividend income rather than capital gains. This is because, though dividend income
for the individual was free, capital gains are taxable in India. Under the Finance Act 199740,
no tax was payable on dividends by a company and consequently there was no withholding
tax on dividends paid by a company to its shareholders. However, a company declaring a
dividend was required to pay income-tax at the rate of 10% on the amount of dividend
distributed. If, tax on dividends is viewed from point of view of the corporate sector, they
have to pay dividend tax and changes individual tax rates may influence the company’s
dividend policy. For Example, a cut in dividend tax from 20% to 10% on the dividend
declared by companies had been viewed as positive.

COMPANY PROFILE
Infosys:
Infosys Limited (formerly Infosys Technologies Limited) is an Indian multinational
corporation that provides business consulting, information technology and outsourcing
services. It has its headquarters in Bengaluru, Karnataka, India. The credit rating of the
company is A- (rating by Standard & Poor's).

Infosys is the second-largest Indian IT company by 2017 revenues and 596th largest public
company in the world in terms of revenue.On June 29, 2018 its market capitalisation was
$42.23 billion.

Products & Services:


It provides software development, maintenance and independent validation services to
companies in finance, insurance, manufacturing and other domains. One of its known
products is Finacle which is a universal banking solution with various modules for retail &
corporate banking.

Its key products and services are:

 NIA - Next Generation Integrated AI Platform (formerly known as Mana).


 Infosys Consulting - a global management consulting service
 Infosys Information Platform (IIP)- Analytics platform
 Edge Verve Systems which includes Finacle, a global banking platform
 Panaya Cloud Suite
 Skava.

TCS:
Tata Consultancy Services Limited (TCS) is an Indian multinational information technology
(IT) service, consulting company headquartered in Mumbai, Maharashtra. It is part of the
Tata Group and operates in 46 countries. TCS is one of the largest Indian companies by
market capitalization.

TCS is one of the largest Indian companies by market capitalization. TCS is now placed
among the most valuable IT services brands worldwide. TCS alone generates 70% dividends
of its parent company, Tata Sons.

Products & Services:

TCS and its 67 subsidiaries provide a wide range of information technology-related products
and services.

 Application development and maintenance (43.80%) value;


 Asset leverage solutions (2.70%);
 Assurance services (7.70%);
 Business process outsourcing (12.50%);
 Consulting (2.00%);
 Engineering and Industrial services (4.60%);
 Enterprise solutions (15.21%); and
 IT infrastructure services (11.50%).
Comparison:

Market Capitalisation and Net Sales:

COMPANY NAME LAST 52 WK 52 WK MARKET NET


PRICE HIGH LOW CAP SALES
(RS. CR)
TCS 1994.50 2012.00 1210.33 763,609.32 97,356.00

Infosys 1383.20 1392.10 861.50 302,108.48 61,941.00

OBJECTIVES:
 Factors affecting Dividend policy
 Significance of stable dividend policy
 Analysis based on dividend policy

RESEARCH METHODOLOGY:
For purpose of doing this case research IT sector was selected as IT sector companies are
known for paying good dividends. For analysis we selected two major IT companies i.e, TCS
and Infosys.

In this case research we studied the impact of various other factors like liquidity, profitability
and growth on dividend policies. The dividend payout ratio is the amount of dividends paid to
stockholders relative to the amount of total net income of a company. For this purpose
Dividend Payout Ratio(DPR) for past 5 years was taken as the basis of comparison. To check
the check the impact of dividend policies on other factors, correlation between DPR and each
other factor was calculated.

Following factors impacting dividend policies were taken for the comparison:

 Liquidity- Two ratios that is current ratio and cash retention ratio was taken
 Profitability- For profitability PBIT margin was taken

LIMITATIONS:
 Analysis is completely based on secondary data.
 Only two companies are selected for analysis due to time constraints.
 Analysis is only based on past five years data.
 Limitations on getting and analysing statistical data.
 Analysis is completely based on correlation
DATA ANALYSIS AND INTERPRETATIONS
Data Analysis-Calculation of correlation between different factors
TCS

dividend liquidity( cash


year current retention PBIT
payout
ratio) ratio Margin(%)
2018 36.78 4.85 65.48 32.82
2017 38.73 6.4 63.69 32.45
2016 34.63 4.72 67.43 34.18
2015 80.35 2.46 25.07 32.75
2014 33.92 2.84 67.96 36.44
Correlation -0.55233 -0.99999 -0.40796

Interpretation

We can see that there exist negative correlation between DPR and current ratio. This means
as the dividend payout increases the current ratio decreases. So we can say that there is a
moderate downhill (negative) relationship. Cash Retention Ratio and DPR have very strong
or near to perfect downhill (negative) linear relationship. PBIT and DPR also shows weak to
moderate negative relationship.

Infosys

dividend liquidity( cash


year current retention PBIT
payout
ratio) ratio Margin(%)
2018 34.80 37.78 67.99 32.14
2017 50.51 4.05 53.93 31.94
2016 43.88 3.98 59.67 32.6
2015 42.01 3.12 60.92 34.64
2014 35.49 3.83 67.97 31.57
correlation -0.55754 -0.99772 0.138505

Interpretation
For Infosys also we can see the same trend that there exist negative correlation between DPR
and current ratio. This means as the dividend payout increases the current ratio decreases. So
we can say that there is a moderate downhill (negative) relationship. Cash Retention Ratio
and DPR have very strong or near to perfect downhill (negative) linear relationship.
However, PBIT and DPR also shows weak to moderate positive relationship.
CONCLUSION
The objective of the study was to examine the impact of firm's dividend policy and DPR on
the liquidity and profitability.

Form the above data we can conclude that there exist a negative relationship between
dividend policies and the liquidity of the firm. With increasing DPR the liquidity decreases.
From the data analysis we can say that dividend decisions highly impact the cash retention
ratio of the firm.

For profitability both the companies showed varied results. In case of TCS there was a
negative relationship between DPR and PBIT whereas in the case of Infosys there was a
positive relationship.
REFERENCES
http://financeformulas.net/Dividend_Payout_Ratio.html

https://www.moneycontrol.com/

https://www.tcs.com/

https://www.infosys.com/

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