RESEARCH PROJECT ON DIVIDEND POLICY

Submitted By:
Sarfaraz Ahmed
MBA205021
6th Semester
01/04/2023
 ABSTRACT

Dividend policy has been an issue of interest in financial literature

since Joint Stock Companies came into existence. Dividends are
commonly defined as the distribution of earnings (past or present) in
real assets among the shareholders of the firm in proportion to their
ownership. Dividend policy connotes to the payout policy, which
managers pursue in deciding the size and pattern of cash distribution
to shareholders over time. Managements' primary goal is
shareholders' wealth maximization, which translates into maximizing
the value of the company as measured by the price of the company's
common stock. This goal can be achieved by giving the shareholders
a "fair" payment on their investments. However, the impact of firm's
dividend policy on shareholders wealth is still a debatable issue.
Dividend policy is one of the most complex aspects in finance. Three
decades ago, Black (1976) in his study on dividend wrote, "The
harder we look at the dividend picture the more it seems like a
puzzle, with pieces that just don't fit together". Why shareholders
like dividends and why they reward managers who pay regular
increasing dividends is still unanswered.
 INDEX
S. NO. Content Remarks

1 Introduction

2 Content

3 Corelation With Market

4 Scope

5 The Study

5a National Thermal power Corporation

Ltd

5b National Hydroelectric power corporation

Limited

5c Tata Power

5d Power grid corporation of India

Limited

5e Torrent

6 Analysis as a Whole

7 Conclusion

8 References
 INTRODUCTION TO THE TOPIC

In the words of Ezra Salomon, "In an uncertain world where verbal statement
can be misinterpreted or ignored, dividend speaks louder than 1000 words."
What is Dividend?
Dividends are payments made by a corporation to its shareholder members. It
is the portion of corporate profits paid out to stockholders.
What are different kinds of dividend?
1. Cash Dividends: This is the most common form of dividend. Cash dividends
are those dividends when simply cash is paid out of the profits.
2. Share Repurchases: The Company repurchases the stock. Shareholders pay
tax only on the capital gains portion.
3. Stock Split: It increases the number of shares in a public company. The price
is adjusted such that the before and after market capitalization of the company
remains the same and dilution does not occur.
4. Bonus Issue: It is a free share of stock given to current shareholders in a
company, based upon the number of shares that the shareholder already owns.
While the issue of bonus shares increases the total number of shares issued
and owned, it does not change the value of the company.
5. Right Issue: With the issued rights, existing shareholders have the privilege
to buy a specified number of new shares from the firm at a specified price
within a specified time.
What is Dividend Policy?
Dividend policy is concerned with taking an implicit or explicit decision of the
Board of Directors regarding paying cash dividend in the present or paying an
increased dividend at a later stage to the shareholders.
The policy a company uses to decide how much it will pay out to shareholders
in dividends from PAT and this decision is considered a financing decision
What are the different dividend policies?
Dividend policy can be of two types: managed and residual.
1. Managed dividend policy: distribution is pre-decided whether the company
will be paying same dividend per share over the time or it will be increasing
dividend per share year by year.
2. Residual dividend policy: the amount of dividend is simply the cash left after
the firm makes desirable investments using NPV rule. The rule is- if the
company does not have any positive NPV projects to invest in, then it should
pay shareholders dividend.
 Concept

Dividends paid by the firms are viewed positively both by the investors and the
firms. The firms which do not pay dividends are rated in oppositely by investors
thus affecting the share price.

Dividend policy is challenging for the directors and financial manager of a

company, because different investors have different views on present cash
dividends and future capital gains. And also, regarding the extent of effect of
these dividends on the share price. Due to this controversial nature of a
dividend policy, it is often called the dividend Puzzle.

Most common type of dividend Measure

Level of dividends often measured by dividend yield:
Dividend yield= annual dividend/ stock price=(D/P)
Measures % return earned by investor from dividends alone

Firm's dividend policy can also be measured by payout ratio:

Payout ratio= annual dividend/earnings per share=(D/EPS)
 Correlation with Market Price

Two important models supporting dividend Correlation are given by Walter and
Gordon.
1. Walter Model
Walter's model: Dividends paid to the shareholders are reinvested by the
shareholder further, to get higher returns
Mathematically it's given by

Where,
P = Market price of the share
D = Dividend per share
r = Rate of return on the firm's investments
ke = Cost of equity
E = Earnings per share
Therefore, from above the market value of a share is the result of expected
dividends and capital gains according to Walter

2. Gordon Model
Investors are risk averse and believe that incomes from dividends are certain
rather than incomes from future capital gains.
According to which the market prices of the share is calculated as follows

Where,
P = Market price of the share
E = Earnings per share
b= Retention ratio (1-payout ratio)
r=Rate of return on the firm's investments
ke = Cost of equity
br=Growth rate of the firm (g)
Therefore, the model shows a relationship between the payout ratio, rate of
return, cost of capital and the market price of the share.
Normally, the amount of dividend is highly variable. If the manager believes
dividend policy is important to their investors and it positively influences share
price valuation, they will adopt managed dividend policy. Firms generally adopt
dividend policies that suit the stage of life cycle they are in. For instance, high-
growth firms with larger cash flows and fewer projects tend to pay more of
their earnings out as dividends. The dividend policies of firms may follow
several interesting patterns adding further to the complexity of such decisions.
Also, there are distinct differences in dividend policy over the life cycle of a
firm, resulting from changes in growth rates, cash flows, and project
investments in hand. Shareholders wealth is represented in the market price of
the company's common stock, which, in turn, is the function of the company's
investment, financing and dividend decisions. Among the most crucial
decisions to be taken for efficient performance and attainment of objectives in
any organization are the decisions relating to dividend. Dividend decisions are
recognized as centrally important because of increasingly significant role of the
finances in the firm's overall growth strategy. The objective of the finance
manager should be to find out an optimal dividend policy that will enhance
value of the firm.
Like other important policy decisions dividend policy too has a signalling effect
on the firms share prices. Generally, announcements of dividend increase
generate abnormal positive security returns, and announcements of dividend
decreases generate abnormal negative security returns. This is due to the fact
that the company's management has access to private and superior
information about future prospects and choose a dividend level to signal that
private information. Such a calculation, on the part of the management of the
firm may lead to a stable dividend payout ratio.
Dividend policy of a firm has implications for investors, managers and lenders
and other stakeholders, specifically the claimholders. For investors, dividends -
whether declared today or accumulated and provided at a later date are not
only a means of regular income, but also an important input in valuation of a
firm. Similarly, managers' flexibility to invest in projects is also dependent on
the amount of dividend that they can offer to shareholders as more dividends
may mean fewer funds available for future investments. Lenders may also have
interest in the amount of dividends a firm declares, as more the dividend paid
less would be the amount available for servicing and redemption of their
claims. The dividend payments present an example of the classic agency
situation as its impact is borne by various claimholders. Accordingly, dividend
policy can be used as a mechanism to reduce agency costs. The payment of
dividends reduces the discretionary funds available with the management for
perquisite consumption and investment opportunities and requires them to
seek financing in capital markets. This monitoring by the external capital
markets compels the managers to be more disciplined and act in owners' best
interest.
Companies generally prefer a stable dividend payout ratio because the
shareholders expect it and reveal a preference for it. Shareholders may want a
stable rate of dividend payment for a variety of reasons. Risk-averse
shareholders would be willing to invest only in those companies which pay high
current returns on shares. Similarly, educational institutions and charity firms
prefer stable dividends, because they will not be able to carry on their current
operations otherwise. Such investors would therefore, prefer companies, which
pay a regular dividend every year. This clustering of stockholders in companies
with dividend policies that match their preference is called clientele effect.
 SCOPE

1. Study of the annual reports of different power sector companies:

I. .National Thermal Power Corporation (NTPC Limited)
II. National Hydroelectric Power Corporation Ltd(NHPC)
III. TATA Power
IV. power grid corporation of India limited
V. Torrent

2. For each company, annual reports are taken from the year 2009 to 2012
(2009-12).

3. The scope of the study of report is limited to the establishment of Dividend

Payout Pattern and the factors necessary for such establishment

4. Following ratios have been worked out:

I. Scale of firm's operation by taking Natural Log of Net Sales
II. Dividend Yield
III. Dividend Payout Ratio
IV. Dividend Ratio
THE STUDY
 COMPANY -1

Name: National Thermal Power Corporation (NTPC Limited)

Type State-owned enterprise Public company
Traded as BSE: 532555
NSE: NTPC; BSE SENSEX Constituent
Industry Electric utility
Founded 1975
Headquarters New Delhi, India
Key people Arup Roy Choudhury
Products electrical power, natural gas
Services Electricity generation and distribution
Natural gas exploration, production, transportation and distribution
Revenue Increase INR690.36 billion (US$12 billion) (2011-12)[2]
Net income Increase INR98.14 billion (US$1.7 billion)(2011-12)[2]
Employees 26000(2012)
 NTPC DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant.
For the two years 2010 & 2011 the Dividend paid is constant and thus DPS
(dividend per share) is same for these two years. For year 2012 there is
increase in Dividend paid and thus increase in the DPS. To increase in DPS
means that the company is wooing their shareholders by giving more dividend
to them in the year 2012. As PAT (profit after tax) is increases continuously
from 2010 to 2012 and therefore EPS is also increasing.
This is a very good sign for a company because the numbers of shares are
constant and PAT is increasing. This means that the company is doing well in
terms of making profit. Next comes the PAYOUT Ratio i.e. an indication that
what the company is doing with their earnings. It implies that how much share
of PAT the company is giving as a Dividend and how much of it the company is
reserved as its surplus i.e. for its expansion mode. From the graph it is evident
that the PayOut ratio is almost constant for all the three years. Lower is the
PayOut Ratio of a company higher secure the payment of the dividend.
 COMPANY-2

Type Public company

(BSE: 533098, NSE: NHPC)
Industry Electric utility
Founded 1975
Headquarters Faridabad, India
Key people G.Sai.Prasad
Products Electricity generation, energy trading
Revenue $1.1 billion (2010)
Net income $485 million (2010)
Website nhpeindia.com
 NHPC DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant.
For all the three years 2010, 2011 & 2012 the Dividend paid is increasing
continuously and thus DPS (dividend per share) is increasing for these three
years. To increase in DPS means that the company is wooing their shareholders
by giving more dividend to them in all the three years. As PAT (profit after tax)
is slightly increases from 2010 to 2011 and thus the EPS is almost constant for
these two years.
In the year 2012 there is much increase in PAT and thus EPS is very high
because the numbers of shares is constant. A very good sign for a company
because the number of shares is constant and PAT is increasing. This means
that the company is doing well in terms of making profit. Next comes the
PAYOUT Ratio i.e. an indication that what the company is doing with their
earnings. It implies that how much share of PAT the company is giving as a
Dividend and how much of it the company is reserved as its surplus i.e. for its
expansion mode. From the graph it is evident that the Payout ratio is increasing
from year 2010 to 2011 which means that the dividend paying security is
decreasing. In 2012 the Payout ratio is increasing.
 COMPANY-3

Type Public
Traded as BSE: 500400
BSE SENSEX Constituent
Industry Electric utility
Founded 1911
Founder(s) Dorabji Tata
Headquarters Mumbai, Maharastra, India
Key people Cyrus Pallonji Mistry
Products Electrical power, Natural gas
Services Electricity generation and distribution Natural gas
exploration, production, transportation and distribution
Revenue IncreaseINR194.5076 billion (US$3.3 billion) (2011)[1]
Net income Increase INR21.4753 billion (US$370 million)(2009-2010)[1]
Employees 3,809 (2010)
Website www.tatapower.com
 TATA POWER DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant.
From year 2010 to 2011 the Dividend paid is increasing and thus DPS (dividend
per share) is increasing for these two years. For year 2012 the Dividend paid is
not increasing and thus DPS is same for the two years but here Stock split took
place thus increasing the numbers of shares and consequently the DPS. As PAT
(profit after tax) is slightly decreasing from 2010 to 2011 and therefore EPS is
also decreasing. But PAT is increasing from 2011 to 2012 .This is a very good
sign for a company because the numbers of shares are constant and PAT is
increasing. This means that the company is doing well in terms of making
profit. But here also Stock Split took place and thus the EPS is decreasing
because the numbers of shares increasing.
Next comes the PAYOUT Ratio i.e. an indication that what the company is doing
with their earnings. It implies that how much share of PAT the company is
giving as a Dividend and how much of it the company is reserved as its surplus
i.e. for its expansion mode. From the graph it is evident that the Payout ratio is
increasing from year 2010 to 2011 but it is increasing from year 2011 to 2012
considerably. No effect on Payout Ratio of Stock Split. Lower is the Payout Ratio
of a company higher securing the payment of the dividend.
 COMPANY-4

Type State-owned enterprise

Public
Traded as NSE: POWERGRID
BSE: 532898
Industry Electric utility
Founded 23 October 1992
Headquarters Gurgaon, India
Area served India
Key people Shri R.N. Nayak (Chairman & MD)
Products transmission and distribution; energy trading
Revenue IncreaseINR13,329 crore (US$2.3 billion) (2012-13)[1]
Net income IncreaseINR4,234 crore (US$730 million)(2012-13)[2]
Employees 10,000 (2012)
Website: www.Powergridindia.com
 TATA POWER DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant.
From year 2010 to 2011 the Dividend paid is increasing and thus DPS (dividend
per share) is increasing for these two years. For year 2012 the Dividend paid is
not increasing and thus DPS is same for the two years but here Stock split took
place thus increasing the numbers of shares and consequently the DPS. As PAT
(profit after tax) is slightly decreasing from 2010 to 2011 and therefore EPS is
also decreasing. But PAT is increasing from 2011 to 2012.
This is a very good sign for a company because the numbers of shares are
constant and PAT is increasing. This means that the company is doing well in
terms of making profit. But here also Stock Split took place and thus the EPS is
decreasing because the numbers of shares increasing. Next comes the PAYOUT
Ratio i.e. an indication that what the company is doing with their earnings. It
implies that how much share of PAT the company is giving as a Dividend and
how much of it the company is reserved as its surplus i.e. for its expansion
mode. From the graph it is evident that the Payout ratio is increasing from year
2010 to 2011 but it is increasing from year 2011 to 2012 considerably. No effect
on Payout Ratio of Stock Split. Lower is the Payout Ratio of a company higher
securing the payment of the dividend.
 COMPANY-5

Type Public
Traded as BSE: 532779
NSE: TORNTPOWR
Industry Energy
Founded 1996
Headquarters Ahmedabad, India
Products Natural gas production, sale and distribution,
Electricity generation and distribution,
Hydroelectricity, wind power, energy trading
Revenue Increase INR 23 billion (2006)
Net income Increase INR 1.2 billion (2006)
Employees 4000
Parent Torrent Group
Website torrentpower.com
DATA FOR TORRENT POWER
 TORRENT POWER DIVIDEND POLICY ANALYSIS

From the data it is evident that the numbers of shares are fixed i.e. constant.
For all the three years the Dividend paid is increasing and thus DPS (dividend
per share) is increasing for these three years. To increase in DPS means that the
company is wooing their shareholders by giving more dividend to them in all
the three years. As PAT (profit after tax) is increases continuously from 2010 to
2012 and therefore EPS is also increasing. This is a very good sign for a
company because the numbers of shares are constant and PAT is increasing.
This means that the company is doing well in terms of making profit. Next
comes the PAYOUT Ratio i.e. an indication that what the company is doing with
their earnings. It implies that how much share of PAT the company is giving as a
Dividend and how much of it the company is reserved as its surplus i.e. for its
expansion mode. From the graph it is evident that the PayOut ratio is
considerably increasing from year 2010 to 2011 and slightly increasing from
year 2011 to 2012.
ANALYSIS AS A WHOLE
 CONCLUSION

There is no fixed pattern in the distribution of Dividend of the

Automobile Industry. But pattern could be worked out for different
Companies.
For Shareholders: From the Shareholders' point of view the company
which is giving more Dividend is good for the shareholders'. So
companies should try to increase their DPS (dividend per share) to
woo the shareholders' to invest more and more in them.

For Organizations: The companies which have higher EPS (earning

per share) is good because higher the EPS higher is the PAT. So
companies should try to increase their PAT so that their EPS will
increase.

Regarding Payout Ratio: From the analysis of all the five companies
we found that their Payout Ratios are in the range of 25-35 which is
considered a very good ratio. The companies are distributed their
almost 1/3rd as their Dividend and rest are retained as surplus.
 REFERENCES

1.https://en.wikipedia.org/wiki/NTPC_Limited
2. http://en.wikipedia.org/wiki/NHPC_Limited
3. http://en.wikipedia.org/wiki/Tata Power
4. https://en.wikipedia.org/wiki/PowerGrid
Corporation of India
5. http://en.wikipedia.org/wiki/Torrent Power