Dividend Practices and Market Value of Pharma and Paper

Industries- An Analytical Study

Dr. T. Satyanarayana Chary*
Mohammed Mujahed Ali**

ABSTRACT
The objective of corporate management is generally the maximization of the market value of the enterprise i.e., wealth.
The market value of common stock of a company is influenced by its policy regarding allocation of net earnings into
plough back of profit and the payout while maximizing the market value of shares. So the dividend policy should be as
inclined as to satisfy the interest of shareholders as well as to attract the potential investors and the positive reception in the
market price of share. The present paper is a modest attempt to logically and empirically thrash out the dividend practice
of Pharama and Paper industries in India with reference to the selected companies.
Keywords: Dividend Policy, Dividend Payout, Earning Per Share, Dividend Per Share, Price Earning Ratio, Market
Price of Share.

Prelude  Whether dividend should be paid right from the

Dividend refers to the distribution of profits
earned by a joint stock company among its
shareholders. Mostly dividends are paid in cash but
there are also other forms such as scrip dividends,
debenture dividends, stock dividends, and in usual
circumstances, property dividends. Disposal of profits
in the form of dividends can become a controversial
issue, because of conflicting interests of various parties
like the directors, employees, shareholders, debenture
holders, lending institutions, etc. Even among the
shareholders there may be conflicts as they may belong
to different income groups. While some may be
interested in regular income, others may be interested
in capital appreciation and capital gains. Hence, the
formulation of dividend policy is a complex decision
and it needs cautious consideration of various factors.
Instead of an ad-hoc approach, it is more desirable to
follows a reasonably long term policy regarding
dividends.
Dividend policy refers to the policy that the
management formulates in regard to earnings, for
distribution as dividend among shareholders. It is not
merely concerned with dividends to be paid in one
year, but is concerned with the continuous course of
action to be followed over a period of several years.
Dividend decision involves dealing with several
questions, such as:
* Associate Professor& Chairman of Board of Studies, Deptt. Of Commerce, Telangana University,Dichpally, Nizamabad.
** Assistant Professor, Deptt. Of Business Management, Mohaboobia Panjetan P G College, Warrangal.
initial years of operation i.e. regular dividends.
 Whether equal amount or a fixed percentage of
dividends 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 that year i.e. fixed
payout ratio.
 Whether the dividend should be paid in cash or
in the form of shares of other companies held by
it or by converting the accumulated retained
earnings into bonus shares, i.e. property
dividend of bonus share dividend.
Normally dividend policy of any organization is
influenced by many factors such as: Nature of
Business, Attitude and Objectives of Management,
Composition of shareholdings, Investment
Opportunities, Desire for financial solvency and
liquidity, Regularity , Restrictions By Financial
Institutions, Inflation and Other Factors.

70 "Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009


Review of Literature
I.M. Pandey and Ramesh Bhatt in their article
“Dividend Behaviour of Indian Companies under
Monetary Policy Restrictions”, focused on the
corporate dividend behaviour as a key research area in
finance. They opine on the lines of Black (1976) that
dividend behaviour of companies and the 'dividend
puzzle' still remains unsolved. Under the assumption
that capital markets are perfect, the finance researchers
have shown that dividends are irrelevant, and that they
have no influence on the share price (Miller and
Modigliani, 1961). When capital markets are
imperfect, some researchers have argued that
dividends do matter and firms pursue an appropriate
dividend policy. Several empirical surveys indicate
that both managers and investors favour 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. The focus of this research is to examine the
dividend behaviour of the listed firms in India which is
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. Hence in this study,
they focused on the impact of the restrictive monetary
policy on the dividend policies of Indian firms. The
study provided evidence that the listed Indian firms
follow less stable dividend policies and their dividend
payments are significantly affected by the restricted
monetary policy of the government. To our
knowledge this is a first study providing evidence of
the restricted monetary policy constraining the
dividend policies of firms in India.
Fama et al. (1969) have conducted the seminal
study on semi-strong form of market efficiency with a
view to determine the effect of stock splits on share
prices. The study has a special importance in the area
of finance because it was the first to develop a research
methodology for testing market efficiency which is
still widely used by the researchers.
Peterson (1971) studied the reaction of share
prices following the bonus announcement. Grossman
(1976) observed that under certain conditions, prices
"Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009
Institute of Management Studies, Dehradun
can reveal all private information to uninformed
traders. However, Grossman and Stiglitz (1980)
stipulate that prices incorporate new information
immediately only if transaction costs are zero.
Grinblatt et al. (1984) provided evidence of
significantly positive announcement returns or both
stock splits and large stock dividend announcements
for American share market. If the firm has constraints,
such as legal restrictions, stock exchange rules or bond
covenants, the bonus shares can inhibit firm's ability to
pay cash dividends. Firms expecting positive future
performance will not expect these constraints to be
binding, so they do not mind reducing retained
earnings. Firms that do not expect to do well, would
consider these constraints binding, and hence would
choose not to issue more shares.
Narsimhan and Asha (1977) discussed the
impact of dividend tax on dividend policy of
companies. They observe that the uniform tax rate of
10 % on dividend as proposed by the union budget
1997-98, altered the demand of investors in favour of
high payouts rather than low payouts because of 20%
tax on capital gains in the said period.
A study done by Gupta (1973) finds out that as
many as one third of the companies issuing bonus
shares did not increase the total dividend payments.
The study period was 1948-71. A lot of changes have
taken place since then. This warrants a study of the
dividend behaviour in subsequent years. In India,
companies declare dividend as a percentage of the face
value of the share. Thus, when a company with a face
value of Rs 10 per share gives a 30 per cent dividend,
each shareholder gets Rs 3 as the dividend per share.
This practice, however, is completely different from
the practices followed abroad where a company
declares dividend as a percentage of the profit after tax
(PAT) or the net profit. In the US, payout ratio is an
important parameter in the dividend policy of any
company. Lintner (1956), for example, observed that
managers focused on the change in the existing rate of
dividend payout ratio, and not on the amount of the
newly established payout as such. One can also observe
the important role the dividend payout ratio plays in
the US corporations' dividend policy in Fama and
Babiak (1968).
Lintner's model has been generally found
applicable in a number of other developed markets. It
has been tested by Chateau (1979) in Canada, Shevin
(1982) in Australia, McDonald et. al. (1975) in
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Dividend Practices and Market Value of Pharma and Paper...
France, Leithner and Zimmermann (1993) in West
Germany, UK, France and Switzerland and Lasfer
(1996) in UK. Dewenter and Warther (1998)
compare dividend policies of firms in USA and Japan
for the period from 1982 to 1993. Their results show
that U.S.A firms tend to choose stable dividend
policies whereas Japanese firms prefer to omit
dividend and follow relatively unstable dividend
policies.
Researchers have recently started looking at the
dividend behaviour of companies in regulated and
emerging markets. Glen et. al. (1995) found
substantial differences in dividend policies of
companies in developed and emerging markets. They
show that dividend payments are much lower in
emerging markets, and firms follow less stable
dividend policies, although they do have target payout
ratios.
Rozeffs (1982) study is the first to explicitly
recognize the “role of insiders”. As one of the
monitoring managers, he observes that companies
with higher levels of insider holding have less need to
signal company value through dividends.
Kevin (1992) analyses the dividend
distribution pattern of 650 non-financial companies
which closed their accounts between September 1983
and august 1984 and net sales income of 1 crore
rupees or more. He finds evidence for a sticky dividend
policy and concludes that a change in profitability is of
minor importance
Mahapatra and sahu (1993) analyses the
determinants of dividend policy using the models
developed by Lintner (1956), for a sample of 90
companies for the period 1977-78 to 1988-89. They
found that cash flow is major determinant of dividend
followed by net earnings. Further, their analysis shows
that past dividend and not past earning - is a
significant factor in influencing the dividend decision
of companies.
Ariff and Johnson (1994) confirm Lintner's
model for firms in Singapore. In Turkey, Adaoglu
(2000) finds that current earnings are the main
determinant of dividend payments. After deregulation
of distribution of profits in Turkey in 1994, when
firms were given the flexibility of choosing their own
dividend policy, they followed unstable dividend
policies. A study of the dividend behaviour of the
listed Malaysian companies (Pandey, 2003) shows that
72 "Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009
payout ratios vary across industries and time. The
results also reveal that the dividend behaviour of the
Malaysian companies is sensitive to the changes in
earnings. Further, using Lintner's framework and
panel regression methodology, the study found the
evidence of less stable dividend policies being pursued
by the Malaysian companies. The results of the two-
way fixed effects model reveal strong individual firm
and time effects.
Sahadevan and Thiripalraju (1995) study the
price behaviour with the help of monthly observations
of money supply and stock price variables. The study
observes that M3 and Sensex does not show any
relationship among stock returns and broad money,
except for the period may 1980 March 1987. It found
no evidence across various sample periods on the
direction of causal relationship between money supply
and stock prices.
Rao (1999) studies market efficiency to
examine the response of stock prices to fiscal and
monetary policy pronouncements, changes in
industrial policy, changes in administered price policy,
and changes in exchange rate policies of a particular
industry or a group of firms such as export - oriented
firms and FERA companies concerned with fiscal and
monetary policy pronouncements, it has been found
that union budgets were associated with increases in
volatility, whereas half-yearly credit policy
announcement had no impact on the market
movements. Changes in administered crisis seem to
have the maximum impact on the market.
Chaturvedi (2000) worked on the share price
behaviour in relation to P/E ratios in the pre- and post-
announcement period of 90 stocks listed on the
Bombay stock exchange (BSE). It has also been
observed that two third of the post announcement
cumulative abnormal returns where observed to occur
in the control period + 21 days to 40 days implying
that stock prices do not adjust rapidly to the P/E
information. Gupta (2001) studied the market
efficiency to examine the semi strong form of efficient
market hypothesis with the help of selected
accounting variables and macro economic variables. It
was observed that the dividend per share was positively
and significantly related to the share prices. However,
the return on equity did not show a significant
influence but the growth in price earning ratio
showed little evidence. Likewise, the growth in
earning per share and leverage had negligible influence
in explaining the share prices.

Reddy (2002) examines the dividend behaviour
of Indian companies over the period 1990 2001.
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 per cent to 32.1 per cent in 2001
and that only a few companies have consistently paid
the same levels of dividends.
According to Mohanty (1999), the theory of
finance considers a bonus issue as a financial illusion
because it does not add value to the company under
the symmetric information assumption. This is
because bonus issue is just an accounting adjustment.
The accountant just makes a book entry by debiting
some free reserves account and crediting the share
capital account. It does not directly affect any cash
inflow or outflow and, therefore, it is assumed that it
does not add value to the company. If a company
distributes a known fraction of its earnings each year as
dividend, then the bonus issue will bring down the
dividend in proportion to the bonus ratio and hence
the theoretical ex-bonus share price will go down in
proportion to the bonus ratio. However, the number
of shares the company holds increases in the same
proportion and hence the shareholders' wealth
remains unchanged. If, however, management has
better information about the future prospects of a
company than the shareholders, then a bonus issue
may convey some valuable information to the
shareholders. The shareholders, for example, may
think that the management is more confident of the
future and hence the cash flows due to dividends will
increase after the bonus issue. In this case, the bonus
issue will be welcomed by the shareholders.
Empirical research on the effects of a bonus
issue on the stock prices gives evidence that the market
reacts favourably to a bonus issue. Fama, Fischer,
Jensen, and Roll (1969) , Charest (1978), Grinblatt,
Masulis, and Titman (1984), for example, have
documented evidence of a favourable reaction of the
stock market to a bonus issue in the US.
Ramachandran (1988) and Obaidullah (1992)
found the similar evidences in India. When there is a
bonus issue, the ex-bonus price is usually higher than
what the theoretical price should be. This is because
the dividend rate (defined as a percentage of the face
value) is not expected to change after the bonus issue.
When the company makes a bonus issue, the
shareholders perceive that the management is
confident of the future.
"Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009
Institute of Management Studies, Dehradun
Need for the Study
The dividend is the return on investment in a
share, it influences the market value of the share. So, it
is felt that it is significant to study the dividend
decision practices and impact of the same on market
value of the share in pharma and paper industries with
a specific reference to Dr.Reddy's Laboratories and
Tamil Nadu Newsprint limited, respectively.
Objectives of the Study
The main objective of the study is to analyze the
dividend practices of pharma and paper industries and
their impact on market value in India with specific
reference to the selected sample companies. Hence, to
attain this prime objective, the following secondary
objectives are formulated and undertaken by the
study:
1) To review the studies on dividend practices at
global and Indian arena.
2) To find out the factors influencing the
determinants of dividend payout.
3) To find out the trends of dividend practices.
4) To compare the market price of shares of
selected companies to share value attained
through Modigliani and Millers model to the
actual market price.
5) To offer suggestions for the betterment of
dividend practices to the selected companies.
Limitation of the Study
Though the study is very comprehensive in
nature, but it is subject to the following limitations:
 The studies conducted with specific reference to
Dr. Reddy's laboratories and Tamilnadu
Newsprint limited.
 This study has the limitations of approximation
of values.
 As the companies have provided limited data
some figures have been projected on the basis of
available data.
 The facts and figures are limited to the period of
five years 2002-03 to 2006-07.
 The ratios are generally calculated from the past
financial statements and thus there are no
indicators of future.
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Dividend Practices and Market Value of Pharma and Paper...
However, with these limitations, the study is not
handicapped in any way with the non availability of
data.
Research Methodology
The study is a case method of research that uses
secondary data as a main source. The data was
collected from the CMIE (centre for monitoring
Indian Economy), electronic database PROWESS.
Also the data was obtained from various financial
dailies, business magazines, industry reports, annual
reports of the companies, concerned websites and so
on. The data used in the study relates to only two,
Hyderabad based companies, listed in the National
Stock Exchange (NSE), viz, Tamilnadu Newsprint and
Paper limited and Dr. Reddy's Laboratories. These
companies were selected based on their fundamental
performance.
Data thus collected was processed and analysed
properly through financial tools, such as: MPS, EPS,
DPS, P/E, Ke (cost of equity capital), r (rate of return)
and dividend theory proposed by Modigliani and
Miller as well as the yield to an investor. Hence, the
calculation of cost of equity (ke) and comparison to
the rate of return (r) is made in the study. The MPS was
calculated by using the Modigliani and Miller method
and compared with actual MPS.
To calculate the market price of the share, the
following Modigliani Miller approach is taken into
consideration.
MM formula for determining the market price
per share is as follows.
P 1 = Po * (1+Ke) D1
Where:
P1 = Market price per share at the end of the year.
Po = Last year MPS
D1 = Dividend per share for the year.
K = Cost of Capitalization or (cost of equity capital)
Analysis and Discussion
To analyze the “dividend practices in Indian
Industry” the study has undertaken two companies as
sample cases, those are Tamilnadu newsprint and
paper limited and Dr. Reddy's laboratories. The
analysis is made on the basis of the data drawn from
74 "Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009
these companies' annual reports. The appropriate
analysis with regard to trends of EPS, D/P, MPS and
Yield are shown in the given tables.
Analysis of Tamilnadu Newsprint And Paper
Limited (TNPL)
Table I reveals the effect of Earning Per Share
(EPS) and Dividend Payout per share (DPS) on
Market Price of the Share (MPS). In the year 2002-03,
the EPS was Rs 7.57 and the DPS was Rs 2.8 and the
MPS was Rs 25 and the yield of the share was 11.2 per
cent that was satisfactory. During the year 2003- 04,
the earnings increased to Rs 8.10 where as the
dividend payout remaind same as in the last year, but
the MPS moved up to Rs 37.5 resulting in a decline in
the yield to 7.46 per cent. In the year 2004-05,
despite the sharp down fall in the EPS, the
management did maintain the dividend pay-out.
Consequently the market price of the share increased
to Rs 63.5 and though the yield declined to 4. 40
percent. In the year 2005-06, it was found that the
EPS was increased to nearly double against previous
year i.e. Rs 11.24, but the payout did not increase
proportionately. It is due to this reason that the MPS
declined significantly from 63.5 to 59.65. During the
year 2006-07, earnings increased to Rs 12.43, the
payout increased to Rs 4.00, the MPS increased to
Rs 117 and the yield declined to 3.41 per cent.
The above discussion seems to reveal that the
dividend policy of the organization influences the
market price of the share. Here it is clear from the
analysis that though enough profit were not there, the
MPS has gone up, because of the payment of the same
level of dividend. Another observation is that in the
years when there was good increase in EPS but but less
than proportionate increase in DPS, the MPS
declined.
Calculations and Comparison of Ke with r
In Table 2 an attempt was made to calculate Ke (
the cost of equity capital) and compare it with r (rate of
return of the company). It would be noted that inspite
of the efforts of the company in reducing cost of equity
capital (Ke), rate of return (r) has fallen short of Ke
throughout the period. This implies that the rate of
return of the company was not enough to meet its cost
of capital.
MPS Based on MM Hypothesis
In Table 3 the attempts are made to calculate the
 Institute of Management Studies, Dehradun

Table 1
Trends of EPS, D/P, MPS and Yield for TNPL
Year Earnings per Dividend Dividend Market price Yield %
share (EPS) payout % in rupees of share
(D/P)* (DPS) (MPS)
2002-03 7.57 28 2.8 25.00 11.20
2003-04 8.10 28 2.8 37.50 07.46
2004-05 5.47 28 2.8 63.50 04.40
2005-06 11.24 30 3.0 59.25 05.06
2006-07 12.43 40 4.0 117.00 03.41

Source: TNPL Annual Financial statements.

* D/P is on paid up value and it is Rs 10

Market price of the Share by using Modigliani and
Miller (MM)* method. In the year 2002-03 the Ke
was greater than r and the calculations shows that the
MPS could be Rs 28.25 when the dividend pay out
was Rs 2.80. In the year 2003-04 though the dividend
was stable, but the Ke has declined to some extent
comparatively, last year the market price of the share
was Rs 42.37. In 2004-05 the MPS was Rs 71.74,
which is higher than the previous year, it is due to
decrease in the cost of capital. In the year 2005-06 the
calculated MPS was Rs. 66.95 which shows the
relationship of the dividend and MPS of the company
is negative because, when the dividend has increased
from Rs 2.8 to Rs 3 even then MPS has decreased
from 71.74 to 66.95. In the year 2006-07 the Ke
decreased from 18.06 to 16.41 and the return r has also
decreased from 15.41 to 14.93, the D/P has increased
from Rs 3 to Rs 4, hence the MPS increased from
66.95 to 132.19 which is almost double to the
previous one.
From the above discussion, it follows that there
is no association between D/P and MPS as with
constant D/P, MPS kept increasing and when the D/P
increased the MPS decreased and at last when D/P
increased by 33%, the MPS increased by 100%.

Table 2
Comparison of Ke and r for TNPL
Year Market price of Growth rate Cost of Equity Rate of Cost vis
share (Rs) capital (Ke) return (r) a vis return.
2002-03 25.00 13% 24.20% 12.64% r<Ke
2003-04 37.50 13% 20.46% 11.77% r<Ke
2004-05 63.50 13% 17.40% 8.15% r<Ke
2005-06 59.25 13% 18.06% 15.41% r<Ke
2006-07 117.00 13% 16.41% 14.93% r<Ke

Source: TNPL Annual Financial statements.

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Dividend Practices and Market Value of Pharma and Paper...
MPS : Calculated Vs. Actual.
Table 4 demonstrates the difference between
the calculated MPS and actual MPS. It would be
noted that the investor perceptions reflected in the
actual MPS differs from that calculated by using MM
model. It is also evidently shown by the chi square
value that there is a significant difference in the market
value of share as per MM Hypothesis and the real price
in the market. This is proved by the chi square
calculated value i.e. 50.96 which is higher than the
table value at 5 per cent significant level i.e. 9.49
Correlation Test
Dividend payout is influenced by many factors
viz, interest rate, inflation rate, earnings per share etc.
to find out the impact of such factors on the dividend
payout a correlation test was employed in the study
with the suitable variables. The calculations of the
same have been shown through Table 5.
In Table 5, the co-efficients of correlation of
D/P with Interest rate (x1), Inflation rate (x2), and
Earning Per Share (x3) are reported. From Table 5, it
would be noted that D/P is highly correlated with x1,
x2 and x3 with correlation coefficients 0.9354, 0.9703
and 0.7814. Hence, it can be asserted that the
dividend decision of corporate firm can be influenced
by the Parameters viz., Interest Rate, Inflation Rate
and EPS.
Analysis of Dr Reddys Laboratories
Table 6 reveals the Earning Per Share (EPS) and
Calculation of MPS through M.M. Model.
Year Dividend Earning per
payout (%) share
D/P (Rs.)
2002-03 28 7.57
2003-04 28 8.10
2004-05 28 5.47
2005-06 30 11.24
2006-07 40 12.43
Source: TNPL Annual Financial statements.
76
Dividend Payout Per Share (DPS) and their effect on
Market Price of the Share (MPS). It would be noted
that during to 2002-03 to 2005-06, the MPS declined
while DPS remained unchanged and EPS witnessed
sharp ups and downs implying that DPS and EPS did
not have major impact on MPS or other market
condition dominated their impact.
Calculation and Comparison of Ke with r
In Table 7 calculation of cost of equity capital is
done and compared with rate of return of the
company. From Table 7, it would be noted that cost of
equity capital of the company has remained stable
while the rate of returned declined substantially
during 2002-03 to 2005-06 to bounce back in 2006-
07 that is the only year when rate of return exceeded
cost of capital. This indicates remarkable
improvement in performance of the company in the
year 2006-07.
MPS based on MM Hypothesis
Table 8 illustrates the calculation of the Market
price of the Share by using MM mode. It would be
noted MPS has not kept pace with the change in EPS
or rate of return.
MPS: Calculated Vs. Actual
Table 9 demonstrates the difference in the
calculated market price of the share and the actual
market price of the share. It would be noted that
calculated MPS is substantially different from the
actual MPS. As per Chi-square test, these values are
Table 3
Cost of Rate of Calculated
capital (Ke) return ( r ) MPS after
% % declaration of
dividend
24.2 12.64 28.25
20.46 11.77 42.37
17.4 8.15 71.74
18.06 15.41 66.95
16.41 14.93 132.19
"Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009
 Institute of Management Studies, Dehradun

Table 4 significantly different at 5 percent level of significance.

Comparison of Calculated MPS with Actual Correlation Test
MPS for TNPL
Table 10 shows correlation of interest rate,
Year Actual Market Calculated inflation rate and EPS with D/P. Here an increase in
Price Of Market inflation rate or EPS. Is found dampen the dividend
The Share Price Of payout.
The Share Findings:
2002-03 45.10 28.25
1) Dividend as a return to the factor of production
2003-04 65.45 42.37 is considered to be an image maker for a
2004-05 88.25 71.74 commercial enterprise, irrespective of the
arguments in favour and against the 'dividend
2005-06 100.90 66.95 proposition' and confidence about the
2006-07 101.05 132.19 performance and profitability of such
Average 80.15 68.3 enterprise.

Chi-square value 50.96 2) The value of a firm is found to be influenced by

dividend policy in the case of TNPL while it not
found to be influenced in case of Dr. Reddy's
Source: TNPL Annual Financial statements. Laboratories.

Table 5
Co efficient of Correlation of D/P with Interest Rates, Inflation Rates and EPS for TNPL

Year Interest rate (x1) Inflation rate (x2) EPS (x3) D/P (y)
2002-03 5.78 3.8 7.57 2.8
2003-04 5.03 3.9 8.10 2.8
2004-05 5.50 3.6 5.47 2.8
2005-06 6.31 4.7 11.24 3.0
2006-07 7.62 6.2 12.43 4.0
Co efficient of (x1,y) 0.9354 (x2,y) 0.9703 (x3,y) 0.7814
correlation

Table 6
Trends of EPS, D/P, MPS and Yield for Dr. Reddy's Laboratories

Year Earnings per Dividend Dividend Market price Yield %

share (Rs) payout % in rupees (Rs) of share (r)
(EPS) (D/P) (DPS) (Rs.) (MPS)
2002-03 30.5 100 5 1100 0.45
2003-04 37.01 100 5 905 0.55
2004-05 8.55 100 5 978 0.51
2005-06 27.53 100 5 739 0.67
2006-07 70.08 75 3.75 1420 0.26
Source: Dr. REDDY's Annual Financial statements.

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Dividend Practices and Market Value of Pharma and Paper...

Table 7

Comparison of Ke with r for Dr. Reddy's Laboratories

Year Market price of Growth rate Cost of Equity Rate of return Cost vis a
share (Po)(in Rs.) % capital (Ke)% (r) % vis return.
2002-03 1100 23 23.45 22.20 r < Ke
2003-04 905 23 23.55 15.04 r < Ke
2004-05 978 23 23.51 6.44 r < Ke
2005-06 739 23 23.67 9.12 r < Ke
2006-07 1420 23 23.26 27.60 r > Ke
Source: Dr. REDDY's Annual Financial statements.

Table 8. Calculation of MPS through M.M. Model for Dr. Reddy's Laboratories

Year Earning per Dividend Cost of Rate of Calculated MPS

share payout capital (K) return ( r ) after declaration
of dividend
2002-03 30.50 5 23.45 22.20 1352
2003-04 37.01 5 23.55 15.04 1113
2004-05 8.55 5 23.51 6.44 1202
2005-06 27.53 5 23.67 9.12 908
2006-07 70.08 3.75 23.26 27.60 1746

Source: Dr. REDDY's Annual Financial statements.

Table 9
Comparison of Calculated MPS with Actual MPS for Dr. Reddy's Laboratories
Year Actual Market Calculated
Price Of Market
The Share Price Of
The Share
2002-03 891 1352
2003-04 797 1113
2004-05 724 1202
2005-06 1267 908
2006-07 647 1746
Average 865 1265
Chi square value 1270

Source: Dr. REDDY's Annual Financial statements.

78 "Pragyaan : JOM" Volume 7 : Issue 2, Dec 2009

 Institute of Management Studies, Dehradun

Table 10

Co efficient of Correlation of D/P with Interest Rates, Inflation Rates and EPS for
Dr. Reddy's Laboratories

Year Interest rate (x1) Inflation rate (x2) EPS (x3) D/P (y)
2002-03 5.78 3.8 30.5 5
2003-04 5.03 3.9 37.01 5
2004-05 5.5 3.6 8.55 5
2005-06 6.31 4.7 27.53 5
2006-07 7.62 6.2 70.08 3.75
Co efficient of (x1,y) -0.8805 (x2,y) -0.9190 (x3,y) -0.8819
correlation

3) Return on investment of the companies is Mahapatra R P and Sahu P K (1993), “ A note on

found to fall short of cost of capital.
4) It is inferred that dividend policy of the
company is influenced by all macro parameter
of the economy and other relevant internal
factors of the company. Interest rate, inflation
rate and EPS are found to have a positive impact
on dividend payout of TNPL while a negative
impact on dividend payout of Dr. Reddy's
Laboratories.
Determinants Of Corporate Dividend
Behaviour in India An Econometric Analysis”,
Decision.
Mishra C and Narender V (1996) “Dividend Polices
of State Owned Enterprises in India An
Analysis”, Finance India
Mohanty P (1999), “Dividend and Bonus Polices of
Indain Companies” Vikalpa

5) The theoretical Market Price of the Share is Narasimhan M S and Asha C (1997), “Implications of
found to significantly deviate from actual Dividend Tax on Corporate Financial Policies”,
market price of the share. The Icfai Journal of Applied Finance.

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