Dividends , Buybacks , Bonus Issues ,Share Splits

Presented by : Aniket Sethi - 415 Ankit Shah - 416 Arpit Shah - 417 Rahul Agarwal - 519 Rajal Joshi - 520 Sagar Shah - 522

• Dividends are payments made by a corporation to its shareholder members. • It is the portion of corporate profits paid out to stockholders. • When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders.

• In corporate finance, it is a decision made by the directors of a company. • It relates to the amount and timing of any cash payments made to the company's stockholders. • The decision is an important one for the firm as it may influence its capital structure and stock price.

DIVIDEND PAYMENT TIMING  Declaration Date  Board declares dividend and it becomes liability for the firm  Ex.  Date of Record  Holders of stocks. are determined.Dividend Date  Occurs two business days before date of record. who will receive dividends.  Date of Payment  Checks are mailed. .

• Most companies pay relatively consistent dividends from one year to the next and managers tend to prefer to pay a steadily increasing dividend rather than paying a dividend that fluctuates dramatically from one year to the next. any cash that is surplus after it invests in all available positive net present value projects. the dividend decision is very simple. • The firm simply pays out. • A key criticism of this theory is that it does not explain the observed dividend policies of real-world companies. . as dividends.The free cash flow theory of dividends • Under this theory.

whereas a person with a high income from employment may prefer to avoid dividends due to their high marginal tax rate on income. .Dividend clienteles • A particular pattern of dividend payments may suit one type of stock holder more than another. • A retiree may prefer to invest in a firm that provides a consistently high dividend yield.

. • It suggests that dividend announcements convey information to investors regarding the firm's future prospects.Information signaling • A model developed by Merton Miller and Kevin Rock in 1985. • When investors have incomplete information about the firm (perhaps due to opaque accounting practices) they will look for other information that may provide a clue as to the firm's future prospects.

expansion and modernization of the firm • To sum up. it to a large extent affects the financial structure. . stock prices. • Retained earnings helps the firm to concentrate on the growth. flow of funds.Significance of dividend decision • The firm has to balance between the growth of the company and the distribution to the shareholders • It has a critical influence on the value of the firm • The market price gets affected if dividends paid are less. and growth of the company and investor's satisfaction. corporate liquidity.

. ($1 / $3 = 33%) • Investors usually seek a consistent and/or improving dividends payout ratio. the DPR would be 33%.DIVIDEND PAYOUT RATIO • Dividend payout ratio is the ratio of dividend per share divided by earnings per share • It is a measure of how much earnings a company is paying out to its shareholders as compared to how much it is retaining for reinvestment. if a company paid out $1 per share in annual dividends and had $3 in EPS. • Dividend Payout Ratio = Dividend per Share / Earnings per Share (EPS) x 100% • For example.

and the number of outstanding shares on the market is reduced. the relative ownership stake of each investor increases because there are fewer shares. or using its cash to buy its own shares. • When this happens. or claims. . • The idea is simple: because a company can't act as its own shareholder. wherein the company buys back its shares from the marketplace.Buybacks • A buyback is also known as a "share repurchase". • Buyback also suggests that a company is investing in itself. on the earnings of the company. repurchased shares are absorbed by the company.

. • The tender offer will stipulate both the number of shares the company is looking to repurchase and the price range they are willing to pay (almost always at a premium to the market price).Buybacks are carried out in one of two ways: • Tender Offer : Shareholders may be presented with a tender offer by the company to submit. or tender. • When investors take up the offer. a portion or all of their shares within a certain time frame. • Once the company has received all of the offers. they will state the number of shares they want to tender along with the price they are willing to accept. it will find the right mix to buy the shares at the lowest cost.

• Open Market :The second alternative a company has is to buy shares on the open market. which often causes the share price to shoot up. • It is important to note. . however. at the market price. just like an individual investor would. that when a company announces a buyback it is usually perceived by the market as a positive thing.

there are still sound motives that drive companies to repurchase shares. Although this can sometimes be the case.Reasons for buyback • Buyback is the best use of capital at a particular time. • The goal of a firm's management is to maximize return for shareholders and a buyback generally increases shareholder value. . • Companies don't see any better investment than in themselves. • Nevertheless. this statement is not always true.

• However. .metrics upon which the market seems to be heavily focused. the improvement of its financial ratios in the process may just be a byproduct of a good corporate decision. then the company is likely to face a problem in long term. if a company's motive for initiating a buyback program is sound.1. Improving Financial Ratios : Another reason a company might pursue a buyback is solely to improve its financial ratios . • If reducing the number of shares is not done in an attempt to create more value for shareholders but rather make financial ratios look better.


the P/E decreases to 68 ($15/22 cents) due to the reduction in outstanding shares. the market often thinks lower is better. • Therefore. • The P/E ratio is one of the most well-known and oftenused measures of value. In other words.2. fewer shares + same earnings = higher EPS . the P/E ratio before the buyback is 75 ($15/2 cents). after the buyback. P/E Ratio : The buyback also helps to improve the company's price-earnings ratio (P/E). if we assume that the shares remain at $15. when it comes to the P/E ratio. • At the risk of oversimplification.

3 . Dilution : Another reason that a company may move forward with a buyback is to reduce the dilution that is often caused by generous employee stock option plans (ESOP). • Bull markets and strong economies often create a very competitive labor market - companies have to compete to retain personnel and ESOPs comprise many compensation packages. • Stock options have the opposite effect of share repurchases, as they increase the number of shares outstanding when the options are exercised. • As was seen in the above example, a change in the number of outstanding shares can affect key financial measures such as EPS and P/E. • In the case of dilution, it has the opposite effect of repurchase: it weakens the financial appearance of the company.

4 .Tax Benefit : In many ways, a buyback is similar to a dividend because the company is distributing money to shareholders. • Traditionally, a major advantage that buybacks had over dividends was that they were taxed at the lower capital-gains tax rate, whereas dividends are taxed at ordinary income tax rates. • However, with the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rate on dividends is now equivalent to the rate on capital gains.

Dividends or Buybacks--Which Are Better for Shareholders?
• Both dividends and share buybacks are often cited as ways for a company to ''give back some money'' to its shareholders, as if they were functional equivalents. • But they are not equivalent at all. • In fact, the only similarity between dividends and share buybacks is that the company uses a portion of its earnings to pay for them.

The Board declares. Dividends are usually declared quarterly. approved by the Board of Directors. If you own 100 shares. and sent out to shareholders a few weeks later. say. that the dividend will be $1. they send you $100. .• Dividends are simple: The company sends you money.00 per share.

• The plan might be. . the Board authorizes using some of the company's retained earnings to buy shares of itself on the open market. for example. taking them in-house and therefore off the market. but there's more going on than with dividends.000. • If the stock sells for an average of $20 per share during the program. the company will purchase 1.000. the company will spend $20. • With share repurchase programs.• Share repurchases are not complex either.000 to buy back its own shares.000 shares of itself. that over the next six months.

• After the company buys back X shares.• These two very different corporate actions. the value comes in the form of an increase in the value of each share remaining on the market. The company sends you a check. every remaining share is worth more to its owner. because in each case the company is using some of its retained earnings to transfer something of value to its shareholders. • With share buybacks. the value is money itself. • With dividends. • The corporate pie has been sliced into fewer-and .

or you can do anything else you want with it. real money. Companies rarely cut or eliminate dividends • Pro: Dividends help support a higher share price. You can use it as income • Pro: Most dividend programs are equivalent to corporate policy.Pros and cons of dividends: • Pro: They are cash in your pocket. assuming that the market places a value on strong . You can reinvest that money in the company.

Significant changes in the pattern are reported instantly. so information about them is easy to obtain. Over time. • Con: You must pay taxes on the dividends. companies establish dividend patterns which are pretty predictable. However. .• • Dividends are closely watched and reported. the federal income tax rate of 15% on dividends makes it one of the least-taxed forms of income available.

to realize this increased value. the market must reprice the remaining shares upwards. • Con: Share repurchase programs are not monitored . However.'' not regular programs at most corporations. thus increasing the value of the remaining shares.Pros and cons of share buybacks: • Pro: Since no money is sent to you. • Con: Share repurchase programs are ''one-offs. They are not predictable as to size or frequency. you are not taxed. • Pro/con: The share repurchase reduces the number of shares circulating.

Types of Dividends .

to be paid on June 1 to all shareholders of record on April 1.000. the company records this entry Debit Retained earnings Dividends payable 1.000 Credit Debit Dividends payable 1.000 .000 1.000. On February 1.000.000.Cash Dividend • Most common of the dividend types used • Date of record & date of payment • On February 1.000 outstanding shares.50 per share on the company's 2.000. ABC International's board of directors declares a cash dividend of $0.000 Credit Cash 1.

Regular • dividend paid annually • final dividend because it is usually paid after the finalization of accounts Interim • If Articles so permit. the directors may decide to pay dividend at any time between the two Annual General Meeting before finalizing the accounts • declared and paid when company has earned heavy profits or abnormal profits • No Interim Dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for .

generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. • No change in equity • ABC International declares a stock dividend to its shareholders of 10. and its par value is $1. ABC records the following entry: Debit Retained earnings Common stock.000 40. • Such shares are issued instead of paying dividend in cash and called 'Bonus Shares'. not having good cash position. The fair value of the stock is $5.000 Credit .00.000 shares.000 10. $1 par value Additional paid-in capital 50.Stock Dividend • Companies.

000 25.000 .Scrip Dividend • This practice has been stopped now • When earnings justify a dividend. but the cash position of the company is temporarily weak • shareholders are issued shares and debentures of other companies • ABC International declares a $250.000 Credit 250. it records the following entry Retained earnings Notes payable Notes payable Interest expense Cash Debit 250.000 scrip dividend to its shareholders that has a 10 percent interest rate. At the dividend declaration date.000 Debit 250.000 Credit 275.

• The effect of such dividend is the same as that of paying dividend in scrips. .Bond Dividend • In rare instances. dividends are paid in the form of debentures or bounds or notes for a long-term period. • The shareholders become the secured creditors is the bonds has a lien on assets.

000 Debit 4.000 Debit 4.000.000 Credit 4.artwork Debit 3.000 Credit 4. which the company has stored in a vault for a number of years.500.000. ABC records the following entry as of the date of declaration to record the change in value of the assets. and they have a fair market value as of the date of dividend declaration of $4. as well as the liability to pay the dividends: Long-term investments .000.000. The company originally acquired the prints for $500.000.000 Credit 3.500.000.Property Dividend • Dividend is paid in the form of asset instead of payment of dividend in cash • The distribution of dividend is made whenever the asset is no longer required in the business such as investment or stock of finished goods • ABC International's board of directors elects to declare a special issuance of 500 identical.000.artwork Gain on appreciation of artwork Retained earnings Dividends payable Dividends payable Long-term investments .000 . signed prints by Pablo Picasso.

600.000 Debit 1. It records the dividend declaration with this entry: Additional paid-in capital Dividends payable Dividends payable Cash Debit 1.600.000 Credit 1.000 .600.Liquidating Dividend wishes to return the • When the board of directors capital originally contributed by shareholders as a dividend • May be a precursor to shutting down the business • ABC International's board of directors declares a liquidating dividend of $1.600.600.000.000 Credit 1.

Bonus share and Difference between them .Special Dividends. Stock split.

. special dividends are distributed if a company has exceptionally strong earnings that it wishes to distribute to shareholders or if it is making changes to its financial structure. such as debt ratio. if any.Special Dividend • Payment made by a company to its shareholders that the company declares to be separate from the typical recurring dividend cycle. for the company. • A prominent example of a special dividend was Patni Computer Systems announcing a special dividend of Rs 63 per share in Aug 2010. • In the case of a special dividend the company is signalling that this is a one-off payment. • Typically.

. • A stock split may act in the favour of the company splitting it since the investors may think that the share is now more affordable and end up buying the stock which could boost the price of each share. • A stock split of 5:1 would mean that the face value of the stock would reduce to one fifth and so would the current market price and the number of shares outstanding in the market would become 5 times.Stock Split • All listed companies that are being traded in the secondary market have a fixed number of outstanding shares that are being traded in the market. • Companies tend to go for stock split when the board feels that the price of the stock has become too high that constraints it’s trading or the prices are beyond the price levels of similar companies in their sector. Therefore each shareholder would now have 5 times the number of hares he currently holds.

• A recent example of this is that of Binani metals listed in the Calcutta stock exchange.Reverse Stock Split • Companies with low share prices that would like to increase these prices to either gain more respectability in the market or to prevent the company from being delisted ( • A recent example of such a reverse split is the one of Sify in Nasdaq. Sify has informed Nasdaq that it would reverse split the shares in the ratio 4:1. for every four shares held by the company. A recent reverse stock split in 2011 has led to the company’ face value rise to Rs 1000. • Another reason to reverse the stock split could be to reduce the number of shareholders of the company.e. . It had many dormant (dead share holders and Custodian of Enemy Property) shareholders. i. it would issue a single share to the shareholder.

• Bonus shares are distributed in a fixed ratio to the shareholders. Although the total number of issued shares increases. based upon the number of shares that the shareholder already owns • Does not change the value of the company. the ratio of number of shares held by each shareholder remains constant. . • Sometimes a company will change the number of shares in issue by capitalizing its reserve.Bonus share • Free share of stock given to current shareholders in a company. it can convert the right of the shareholders because each individual will hold the same proportion of the outstanding shares as before. In other words.

the distribution of bonus shares only changes its issued share capital (or even only its outstanding shares) . this is almost never a "distribution" in the corporate law sense. • A bonus share issue is very similar to a stock split. bonus and stock split • A bonus share issue is not a dividend.Difference between Dividend. The only practical difference is that a bonus issue creates a change in the structure of the company's shareholders' equity (in accounting). • Another difference between a bonus issue and a stock split is that while a stock split usually also splits the company's authorized share capital. Although these shares are "distributed" from a company to its shareholders.

Dividend Policy at Reliance Communication .

unless the Board recommends the payment of a dividend. • Dividends are generally declared as a percentage of the par value.• Under the Companies Act. • Dividend decided by board then distributed and paid to shareholders in proportions to the paid-up value of their Shares as on the record date for which such dividend is payable . but not higher. the shareholders at a general meeting have no power to declare any dividend. dividend is declared by shareholders. • A lower.

. • Any dividend declared shall be deposited by the Company in a separate bank account within five days from the date of declaration of such dividend. dividends can only be paid in cash to shareholders listed on the register of shareholders on the date which is specified as the “record date” or “book closure date” or to those shareholders registered in NSDL and CDSL. • The Company’s dividend policy is aimed at enabling shareholders to share progressively in the operating performance of the Company. • No shareholder is entitled to a dividend while any lien in respect of unpaid calls on any of his Shares is outstanding.• Under the Companies Act.

dividends may be paid out of the profits of a company in the year in which the dividend is declared or out of the undistributed profits of the previous fiscal years. • Under the Companies Act.• Dividends must be paid within 30 days from the date of the declaration and any dividend which remains unpaid or unclaimed after that period must be transferred within 7 days to a special unpaid dividend account held at a schedule bank. • The Company may pay a dividend in excess of 10 per cent of paid up capital in respect of any year out of the profits of that year only after it has transferred to the reserves of the Company a percentage of its profits for that year ranging between 2.5 percent to 10 percent depending on the rate of dividend proposed to be declared in that year in accordance with the rules framed under the Companies Act .

may not exceed an amount equivalent to one tenth of such paid-up capital and free reserves. or 10 per cent of paid-up capital ▫ The total amount to be drawn from the accumulated profits from previous years and transferred to the reserves. subject to the following conditions ▫ The rate of dividend to be declared may not exceed the lesser of the average of the rates at which dividends were declared in the five years immediately preceding the year. the dividend for that year may be declared out of the accumulated profits earned in previous years and transferred to reserves.• The Companies Act further provides that if the profit for a year is insufficient or in the absence of profits in any year. and the amount so drawn is first to be used to set off the losses incurred in the financial year before any dividends in respect of preference or equity shares are declared ▫ The balance of reserves after withdrawals must not be below 15 per cent of paid up share capital .

• During the year under review.511. The Company has incurred loss of 757. your Company has earned income of 12. .72 crore in the previous year.02 crore against 12.93 crore in the previous year.614.99 crore compared to profit after tax of 478.

Dividend Yield .

Dividend Payout Cash Ratio .

Dividend Policy .TATA Communications Ltd.

TATA communications acquired a 45% stake. • VSNL was the first Indian PSU to be listed in the NYSE in 2000. . • In 2002. • On 13 February 2008 VSNL. formerly owned by the government. was taken over by the Tata Group and renamed Tata Communications Ltd.Introduction • It was founded as VSNL (Videsh Sanchaar Nigam Limited) in 1986.

. • The company tries to retain most of its Earnings as Reserves and Surplus. • Staying ahead of major competition.Dividend Policy at TATA Communications • The dividend policy followed by TATA communication is one of being very conservative.

. which allows our client businesses to focus on their core competencies. Asia. with an emphasis on India.• Investments in: ▫ The growth of emerging new market economies. ▫ The shift towards managed services. ▫ The growth of IP and cloud-based communication and IT solutions. the Middle East and Africa.

• Various constraints that can change this ▫ ▫ ▫ ▫ ▫ Cash flow constraints Contractual constraints Legal constraints Tax considerations Return considerations .• The company aims at maintain a minimum constant Dividend Payout ratio across the years.

19 560.44 57 9.25 12.77 Amount Carry forwarded 1411.Particulars Amount available for appropriation Dividend amount Dividend Tax General Reserves Debenture redemption reserve For FY 2010-2011 Amount in Rs.23 . Cr 2050.

Dividend Payment Dividend (%) 800 750 700 600 500 500 400 Dividend (%) 300 200 125 100 40 0 Jul 1998 Jul 1999 80 20 Aug 2000 Mar 2000 Dec 2001 Jul 2001 May 2002 May 2003 Jun 2004 Jun 2005 Jun 2006 May 2007 Jun 2008 May 2009 85 60 45 60 45 45 45 45 20 May 2011 .

1. Interim dividend of 60% was announced to the shareholders. • In 2005.50 + Rs. 6/(Dividend Rs.Special One Time Dividend) per share. .50/. the board announced an interim dividend of 750%.(including Rs.40/.50 One Time Special Dividend) per share. the board announced a dividend of Rs. • In December 2002.Exceptions • In March 2000. • In July 2001.4. the board announced a Dividend Rs.

42 0.68 16.24 0.73 .10 10.70 16.50 4.35 0.95 18.44 Reported EPS (Rs) Dividend per share 2.76 0.27 0.2011 5.00 - 4.58 0.65 100 0.50 Mar ' 11 Payout Ratios Dividend Payout ratio Earning Retention Ratio Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 0.50 4.Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Per share ratios For FY 2010.

. The Bonus ratio was 2:1. • TATA Communication has not had any Share Split since it going public.Bonus & Splits • TATA communication has issued a Bonus only once that is in the year 2000.

• Reliance Infocomm gives dividends every year. • TATA communication is based on the profits by the company. it gave a minimum dividend to the shareholders. The company tries to keep its dividend between 10 to 20 percent every year. Even when the company was suffering heavy losses.Comparison • The dividend policy at Reliance Infocomm is more of being constant. • Sometimes the dividend issued may be nil while in some other year the company might give a very high dividend .

• But for an investor would want a higher gain in the long term. Reliance Infocomm would be a better option because of the stability it provides. but in the long term dividends are much higher. .Conclusion • For an investor who is more pessimistic towards the market. TATA communication would be a better option as it may not guarantee short term returns.

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