Dividend Decission

 Profit –vs- Dividend

Income Distribution in a company:

Income : XXXX
XXX
(-) Operating exp.
Operating Income AAA
(-) INTEREST ON DEBT XXX
PROFIT BEFORE TAX CCC
(-) TAX Xxx
PROFIT AFTER TAX DDD

(-) RESERVE TRANSFER Xxx

Profit available to share holders EEE
(-) Preference dividend Xxx
Profit available to Equity share holders FFF
EPS ( PAE sh /No.of Equity shares) GGG
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Decision at Profit after Tax (PAT)
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Profit Earned – Dividend declaration

NO SURITY IN DECLARATION INSPITE OF PROFIT EARNED.

Liquidity and options to utilise surplus are key elements

For an expected Growth, firm has to invest in better opportunities

Sources of investment are – External financing / Internal financing

(Relatively cheaper).
Incase, either are not possible surplus income shall be utilised.

Incase, dividend is declared no funds on hand for further investment .

Declaration of dividend is a signal for future profits - MV of share is

increased.

Incase Dividend is not decalered – wealth maximisation is not attempted

Approaches in dividend declaration:

Determinents of Dividend declaration:

 Share holders expectations: It is towards dividend or capital gains.

a) Closely held co. : share holders are small / homogeneous
preferences/expectations of share holders is known to
management. Due to their intimacy to the management.
So adoption of dividend policy towards share holders satisfaction.
b) Widely held co: Share holders are widely spread over . no
intimacy with mangement/diversified desires . so that dividend
policy may not satisfy the share holders. But dominating group
among share holders will be satified.

Share holders class in widely held cos. : 1) small in size : Least

share holdings and not frequently invest. Investment decission on
advice of the adviser or others. No definite investment policy.

2)Superannuated / senior citizens: Investment in regular income

yielding securities. So those groups always expects dividend
declaration in cash.
But expects stock dividend incase such group is in high tax
bracketed.
3) Wealthy investors: Definit investment policy,always towards
wealth maximisation& tax minimisation. So expects stock
dividend .More over influencing group in a company decision
thorugh BOD.
4) Institutional investors: investment in large blocks , Not covered
under personal income tax , always expects return on investment.
So Expects Cash dividend declaration.

 Financial needs of a co.: Profitable investment options restricts

dividend declaration. But retained profits investment in such
profitable options will enhances wealth maximisation.
Inspite of profitable investment options dividends may be declared
due to firms ability to finance externally.

 Leagal restrictions : Dividend declaration also within legal frame

work of a firm.—
-- Sec205(1) of Indian co.s act , dividend declaration is only
permitted
 (out of either or current yrs. Profits )after Dep. Provision made.
Only GOI can only exempt under public interest.
--- Cash dividend declaration is the only option. Where a co. which is
prohibited to capitalise profits/reserves for stock dividend
issue.
--- Co, is restricted to declare dividends in legal issues.
 Liquidity :
Dividend declaration is stricted due to shortage of liquidity inspite of
surplus incomes. Growing firms are relatively such liquidity crunch.
So matured ones declares dividend.
 Financial condition : High leavered firms retains earnings rather
than dividend declaration to retain its equity base. But such firms also
declares dividends due to comfortable liquidity.
 Access to capital market : Greater the ability of finance greater is the
dividend declaration, despite liquidity crunch or growth options.
 Restrictions on loan agreements: Lendors laid restrictions on dividend
declaration to protect their interests. Some time times dividend
declaration is restricted until firms attains debt equity ratio exceeds
1.5:1. Or stricts the firms to transfer to sinking fund for debt retire.
 Control: Always prefers retention of profits , diverts for investment
opportunities. Rather than dividend declaration, not to loose control.
 Inflation: Due to inflation, cost of replacing an outdated asset with
reserve created for the said purpose. Then profits are diverted for
such purposes and postpone the dividend declaration.Contrary to this
certain firms declares dividend during inflation to protect the
sharholders value.

Stable dividend:
Dividend is related to incomes . But latter fluctuates. No
assurance to share holders. Affects loyalty at the firm.
Stable dividend policy is a success mantra to maintain a
share holder bond.
Stable dividend : Regularity in paying dividend annually.
Amount may fluctuate.
Forms of stable dividends:
A.Constant Dividend per Share /Dividend rate.
 Co.s, announces as a % to paid up capital . but it
variates DPS or D.Rate.
 Indian co.s follows such a practice. But requires
reserves.
 DIVIDEND EQALISAITON RESERVE..
 LONG RUN STABILISES M.price.
B.Constant Pay out:
Proportion between dividend to earnings.
Paying fixed % net earnings as dividend. But amount of
divided will flucutate.
But can only be applied profit period.
C.Constant dividend per share + Additional dividend:
A small amount of dividend as regular
Additional dividend during prosperity period.
Stable dividend policy- merits:
 Resolves investors uncertainity.
 Investors desires for curent income.
 Institutional investors satisfaction.
 Helps to raise further external financing.
Drawback with stable dividend policy:
It creats assurance to investors, but their attitude will be
affected if it fails.