UNIT 3

DIVIDEND DECISION

Mr. John Pradeep Kumar

KJSOM
Why do investors invest in
equity stocks ?

Mr. John Pradeep Kumar, KJSOM 2

 MEANING
• Dividend refers to the corporate net profits
distributed among shareholders.
• A share of the after-tax profit of a company,
distributed to its shareholders according to the
number and class of shares held by them.
• Dividends are usually issued by companies that
will not reap significant growth by reinvesting
profits, and so instead choose to return funds to
shareholders in the form of a dividend.
• Companies may also issue dividends in order to
attract income investors.

Mr. John Pradeep Kumar, KJSOM 3

 Forms of dividends
1. Cash dividend: This is the most common
form of dividend, paid solely in cash.
2. Stock dividend: This is the payment of
additional shares of common stocks to the
ordinary shareholders. It increases the
number of outstanding shares but there
would not be any change in the net worth.
3. Property dividend: This is a payment in the
form of a non-cash asset, such as the
products that a company manufactures
(assets no longer necessary in operation).
Mr. John Pradeep Kumar, KJSOM 4
 Forms of dividends
4. Scrip dividend: this a form of dividends, the
equity shareholders are issued transferable
promissory notes for a shorter maturity
period that may not be interest bearing.
5. Bond dividend: Both scrip dividend and bond
dividend are same, but they differ in terms of
maturity. Bond dividend carries longer
maturity period whereas scrip dividend
carries shorter maturity. Bond dividends
bears interest.
Mr. John Pradeep Kumar, KJSOM 5
 Dividend Policy
• It dictates the amount of dividends paid out by
the company to its shareholders and the
frequency with which the dividends are paid out.
• When a company makes a profit, they need to
make a decision on what to do with it.
• They can either retain the profits in the company
(retained earnings), or they can distribute the
money to shareholders in the form of dividends.

Mr. John Pradeep Kumar, KJSOM 6

Types of Dividend Policy

Mr. John Pradeep Kumar, KJSOM 7

 A. Regular dividend policy
• The company pays out dividends to its shareholders
every year.
• If the company makes abnormal profits (very high
profits), the excess profits will not be distributed to the
shareholders but are withheld by the company as
retained earnings.
• If the company makes a loss, the shareholders will still
be paid a dividend under the policy.
• Is used by companies with a steady cash flow and
stable earnings.
• Companies that pay out dividends this way are
considered low-risk investments because while the
dividend payments are regular, they may not be very
high.
Mr. John Pradeep Kumar, KJSOM 8
 B. Stable dividend policy
• The percentage of profits paid out as dividends is fixed.
• For example, if a company sets the payout rate at 6%, it
is the percentage of profits that will be paid out
regardless of the amount of profits earned for the
financial year.
• Whether a company makes Rs.1 million or Rs.100,000
million, a fixed dividend will be paid out.
• Risky for investors as the amount of dividends
fluctuates with the level of profits.
• Shareholders face a lot of uncertainty as they are not
sure of the exact dividend they will receive.

Mr. John Pradeep Kumar, KJSOM 9

 C. Irregular dividend policy
• The company is under no obligation to pay its
shareholders and the board of directors can decide
what to do with the profits.
• If they make an abnormal profit in a certain year, they
can decide to distribute it to the shareholders or not
pay out any dividends at all and instead keep the
profits for business expansion and future projects.
• Is used by companies that do not enjoy a steady cash
flow or lack liquidity.
• Investors who invest in a company that follows the
policy face very high risks as there is a possibility of not
receiving any dividends during the financial year.
Mr. John Pradeep Kumar, KJSOM 10
 D. No dividend policy
• The company doesn’t distribute dividends to
shareholders.
• It is because any profits earned is retained and
reinvested into the business for future growth.
• Companies that don’t give out dividends are
constantly growing and expanding, and
shareholders invest in them because the value of
the company stock appreciates.
• For the investor, the share price appreciation is
more valuable than a dividend payout.
Mr. John Pradeep Kumar, KJSOM 11
 How to find out what a company’s
dividend policy is
• The best place to find a company’s dividend
policy is in its annual report.
• If a policy is in place then there will be a
dedicated section that outlines the details.
• Information on share buyback programmes or
‘scrip alternatives’, if applicable, is likely to be
included in their own sections nearby.  
• Larger businesses often have a dividend section
on their investor relations website.
• This usually focuses more on when dividends that
have already been declared will be paid. 
Mr. John Pradeep Kumar, KJSOM 12
 STOCK SPLIT
• The process of dividing the outstanding
shares into further smaller shares is known
as stock splits.
• In this the market value of the total
outstanding shares of a company remains
the same but market value of a single share
is reduced in proportion to the number of
shares extracted out of a single share.

Mr. John Pradeep Kumar, KJSOM 13

 Illustration: Split (2-for-1)
Particulars Amount
Capital structure before stock split
Paid up equity share capital 40,00,000
[4,00,000 shares of Rs. 10 each at par]
Retained earnings 1,00,00,000
Total shareholders funds 1,40,00,000

Capital structure after stock split

Paid up equity share capital [split ratio of 2:1] 40,00,000
[8,00,000 shares of Rs. 5 each at par]
Retained earnings 1,00,00,000
Total shareholders funds 1,40,00,000
Mr. John Pradeep Kumar, KJSOM 14
Recent Stock Splits in India
source: moneycontrol.com

Mr. John Pradeep Kumar, KJSOM 15

 Will Investor Incur a loss?
• No, the total market value of the outstanding
shares remains the same.
• Example:
• Mr. Peter has a stock of Company X with a market
value of Rs. 2,000 per share and the company
decides to split the stock into 10 shares (10-for-1)
then each share will have a market value of
Rs.200.
• Mr. Peter will have now 10 shares into his
portfolio with Market Value of Rs. 200 each, thus
equalling his portfolio value of Rs. 2,000 again.
Mr. John Pradeep Kumar, KJSOM 16
 Example
• Consider a company that has 1000
outstanding shares of INR 10 face value and
there was an announcement of a split of INR 5
per share. Now, the same share of INR 10 face
value will become 2 shares of INR 5 face value.
If you are holding 100 shares of this company,
you will now have 200 shares of the same
company after a stock split.

Mr. John Pradeep Kumar, KJSOM 17

 Reasons for stock split
• A company goes for a stock split, when it finds
that the liquidity of its stock in the market is
very less due to high value of its stock in the
market is very less due to high value of the
stock.
• An average investor generally does not prefer
trading in a highly valued stock and lowering
the stock value helps increasing the stock
liquidity.

Mr. John Pradeep Kumar, KJSOM 18

 Reasons for stock split
• To make share trading attractive (increasing
the stock liquidity).
• Indication of higher profits in the future.
• To give higher dividends to shareholders.
• It is particularly beneficial for retail investors
who can acquire a large number of blue chip
company shares which otherwise would have
been very expensive.

Mr. John Pradeep Kumar, KJSOM 19

 Reverse Stock Split or a Stock
Merge
• Reverse of the stock split can also be done by
the company that is cumulating a no. of stocks
into one.
• This is known as reverse stock split.
• Reverse stock split is usually done in cases
when the stock price of a company is very low.

Mr. John Pradeep Kumar, KJSOM 20

Mr. John Pradeep Kumar, KJSOM 21
 Theories of Dividend Policy
• There are two different schools of thought
regarding the dividend policy and market
value as per the theoretical literature of
finance.
• They are: (i) Dividend irrelevance theory and
(ii) Dividend relevance theory.

Mr. John Pradeep Kumar, KJSOM 22

 Irrelevance of Dividend
1. Soloman approach
• According to professors Soloman, dividend
policy has no effect on the share price of the
company.
• There is no relation between the dividend rate
and value of the firm.
• Dividend decision is irrelevant of the value of
the firm.

Mr. John Pradeep Kumar, KJSOM 23

 References
• https://www.motilaloswal.com/markets/stock-market-
live/StockSplits.aspx
• https://www.moneycontrol.com/stocks/marketinfo/splits/index.ph
p
• https://cleartax.in/s/stock-splits-stock-merge
• www.utsglobal.edu.in
• https://www.ig.com/en/news-and-trade-ideas/dividend-policies--
what-you-need-to-know-190821
• https://corporatefinanceinstitute.com/resources/knowledge/tradin
g-investing/dividend-policy/
• https://shodhganga.inflibnet.ac.in/bitstream/10603/267844/10/10
_chapter%202.pdf
• https://efinancemanagement.com/dividend-decisions/modigliani-
miller-theory-on-dividend-policy

Mr. John Pradeep Kumar, KJSOM 24

 Thank You!

Prof. John Pradeep Kumar

Contact : 9008026522
johnpradeep@kristujayanti.com
john.jpk@gmail.com

Mr. John Pradeep Kumar, KJSOM 25