1. Submitted By :
Ajay Yadav
Amit Srivastava
Dhrubaji Mandal
28/06/2013
(MDI APRIL 2013 PTPGM)
Project Report On Dividend Policy
&Its impact on Market Price
2. 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.
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3. INDEX
S. No. Content Page No.
1 Introduction 4
2 Content 5
3 Corelation With Market 6
4 Scope 9
5 The Study 10
5a
National Thermal Power Corporation
Ltd
11
5b
National Hydroelectric Power
Corporation Ltd
14
5c TATA Power 17
5d
power grid corporation of India
limited
20
5e Torrent 23
6 Analysis as a Whole 26
7 Conclusion & References 27
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4. INTRODUCTION
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.
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5. 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 = P
D
pricestock
dividendannual
=
Measures % return earned by investor from dividends alone
Firm’s dividend policy can also be measured by payout ratio:
Payout ratio = EPS
D
shareperearnings
dividendannual
=
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6. 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
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7. 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.
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8. Like other important policy decisions dividend policy too has a signaling effect on the firms
share prices. Generally, announcements of dividend increases 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.
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9. 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
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11. 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 26,000 (2012)
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12. Website www.ntpc.co.in
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YEAR Div.paid PAT(Crores_) no.of shares DPS(D/N) EPS(PAT/N)
PAY OUT
RATIO
2010 3133.2 8728.2 82454.64 3.8 10.59 35.88
2011 3133.26 9102.59 82454.64 3.8 11.04 34.42
2012 3298.73 9223.73 82454.64 4 11.19 35.74
13. 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.
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14. 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 nhpcindia.com
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15. 0
5
10
15
20
25
30
35
2010 2011 2012
EPS(PAT/N)
PAY OUT RATIO
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YEAR Div.paid PAT(Crores) No.of shares DPS(D/N) EPS(PAT/N)
PAY OUT
RATIO
2010 676.54 2090.5 123007.43 0.55 1.7 32.35
2011 738.04 2166.67 123007.43 0.6 1.76 34.09
2012 861.06 2771.77 123007.43 0.7 2.25 31.11
16. 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.
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17. COMPANY – 3
Lighting up Lives!
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
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18. Year Div.paid PAT(Crores No.of shares DPS(D/N) EPS(PAT/N)
PAY
OUT
RATIO
2010 285.05 947.65 2373.07 12 39.93 30.05
2011 296.92 941.49 2373.07 12.5 39.67 31.5
2012 296.92 1169.7 23730.72 1.25 4.93 25.35
0
5
10
15
20
25
30
35
40
2010 2011 2012
EPS(PAT/N)
PAY OUT RATIO
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19. 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.
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20. COMPANY – 4
Type State-owned enterprise
Public
Traded as NSE: POWERGRID
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21. 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
Year Div.paid PAT(Crores) No.of shares DPS(D/N)
EPS(PAT/N
)
PAY OUT
RATIO
2010 631.34 2040.94 46297.3 1.5 4.85 30.92
2011 810.23 2696.89 46297.3 1.75 5.83 30.02
2012 976.89 3254.95 46297.3 2.11 7.03 30.02
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23. 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
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24. 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:
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25. Year Div.paid PAT(Crores) no.of shares DPS(D/N) EPS(PAT/N)
PAY OUT
RATIO
2010 141.73 836.55 4724.48 3 17.71 16.93
2011 259.85 1065.72 4724.48 5.5 22.56 24.37
2012 307.08 1237.46 4724.48 6.5 26.19 24.81
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26. 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 shareho lders 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.
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28. 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
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