The complexity in employee compensation structures have increased quite considerably in recent times

DIVIDEND POLICIES OF INDIAN COMPANIES20th All India CA Students ConferencePrepared by: Rabindra Kaiborta

Background and Introduction

Do you know the only thing that gives me pleasure? Its to see my dividends coming in.

--- John D Rockfeller, 1901

The focus of this paper is to examine the dividend behavior of listed firms in India - an emerging market in Asia. In emerging markets, including India, the central banks frequently use monetary policies as a control mechanism. Sometimes they follow highly restrictive policies, which affect the liquidity position in the economy. Here in this study, we focus on the on the dividend policies of Indian firms and the findings of intensive research conducted in this area. The analysis and indicators provide evidence that listed Indian firms follow less stable dividend policies and their dividend payments are significantly affected by the dividends of previous periods and current year earnings.

Profitable companies regularly face two important questions; How much of its free cash flow should be passed on to the shareholders?

Should it maintain a stable, consistent payment policy, or should it let the payments vary as conditions change?

Here we discuss many of the issues that affect a firms cash distribution policy and the practices in vogue. Most firms establish a policy that takes into consideration their forecasted cash flows and forecasted capital expenditure and then try to adhere to it. The policy can be changed but this can cause problems as such changes inconvenience the shareholders, send unintended signals, and convey the impression of dividend instability, all of which have negative implications for stock prices. However at times the economic and operational factors change and firms are occasionally required to step out of their comfort zone and tweak their policy.An Example of market sentiments for change in Dividend:

One of the most striking example of a dividend policy change occurred in May 1994, when FPL group, a utility holding company whose primary subsidiary is Florida Power and Light, announced a cut in its quarterly dividend from USD 0.62 / share to USD 0.42 / share. At the same time FPL stated that it would buy back 10 million of its common shares over the next three years to bolster its stock price.

The following is the text of the letter to the shareholders in which FPL announced the changes;(We have only incorporated parts relating to Dividend)

Dear shareholders Over the past several years, we have been working hard to enhance shareholder value by aligning our strategy with a rapidly changing business environment. Our dividend payout ratio of 90% is far too high for a growth company. It is well above industry average and it has limited the growth in the price of our stock. To meet the challenges of this competitive marketplace and to ensure financial strength and flexibility, the Board of Directors have announced a change in our financial strategy that includes the following milestones:

A new dividend policy that provides for paying out 60 to 65% of prior year earnings. This means a reduction on the quarterly dividend from USD 0.62 to USD 0.42 / share.

The authorization to repurchase 10 million share of common stock over the next three years.

An earlier dividend evaluation beginning in February to more closely link dividend rates to annual earnings. We believe this financial strategy will enhance long term share value and dividend growth to about 5% per year over the next several years. What did the market think about FPLs Dividend policy change?The companys stock price fell by 14% the day the announcement was made. In the past, hundreds of dividend cuts followed by sharply lower earnings had conditioned the investors to expect worst when the dividends are slashed this is the signaling hypothesis.

Stock that pay dividends are often favored over stocks that dont pay dividends by investors who desire the extra income. Theres nothing wrong with that. After all a cheque in the mail always comes in handy, even for tycoons like John Rockfeller. Why should the company dividend:The basic conflict between corporate directors and shareholders over dividends is similar to the conflict and disagreements between children and parents. The children always prefer a quick distribution, and the parents prefer to control the money for the childrens benefit.

One strong argument in favor of companies that pay dividend is that, companies that dont pay dividends have a sorry history of blowing the money in a string of stupid diversifications. It has happened enough number of times to believe in the Bladder Theory of Corporate Finance, as propounded by Hugh Liedtke of Penzoil. The more cash that builds up in the treasury, the greater is the pressure to piss it away. Another argument in favor of dividend paying stocks is that the presence of dividend can keep the stock price volatility in check. In the wipeout of 1987 which happened in the United States, the high dividend payers fared better than the non dividend payers and suffered less than half the decline of the general market. The precursor for investing in a security only for dividendIf one plans to buy a stock for its dividend find out if the company is going to be able to pay it during recession and bad times. How about Fleet Norstar, formerly Industrial National Bank, which has paid uninterrupted dividends since 1791.A company with a 20 or 30 year record of regularly raising the dividend is the best bet. DIVIDEND POLICIES OF INDIAN COMPANIES1. What is Dividend The Prologue2. After all Less is MORE3. I Like my Coffee cold, what about you and by the way, how much is the optimum sugar mix4. The US and European Trend5. Did we forget Lintner and his gospels6. The Indian Story so far7. We believe in doing it --- The Indian Way : Underlying factors and assumptions :

(Past Research for future answers) How much you got , How much I Paid (Average Dividend Paid)

How many eggs per chicken (The DPS Factor)

Hey! I just paid you but HOW MUCH (The Dividend Payout Ratio)

8. What the Biggies are doing9. The final word ( The world is watching you)1. What is Dividend The PrologueA simple and compact answer is yet to be found, but we can find many acceptable understandings on the subject of dividend.

The beauty of such topics is that they never come in One size fits all. It needs to be customized and toned down to fit each scenario.Some Basics Revisited

Dividend : It is the distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quotedin terms of the amount each share receives (i.e. dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Dividend Payout : measures the percentage of earnings that the company pays in dividends. The study of corporate dividend behavior has been a key research area in finance.

Yet we still do not have an acceptable explanation for the observed dividend behavior of companies and the dividend puzzle still remains unsolved as coined by Black).Does Dividend Matter Under the assumption that capital markets are perfect, finance researchers have shown that dividends are irrelevant, and that they have no influence on the share price (Miller and Modigliani).

When capital markets are imperfect, some researchers have argued that dividends do matter and firms pursue an appropriate dividend policy. (Walter and Gordon)However, several empirical surveys indicate that both managers and investors favor payment of dividends. Lintner (1956) was the first to point out that US companies distributed a large part of their earnings as dividends, and they also attempted to maintain stability of dividend. These findings have been vindicated in different countries and in different time periods.

Radical TheoryThe salient features for this theory is as under: Remember the TAX factor (the BIG Daddy is always watching you)

Add to above, dont forget that dividends and capital gains are subject to different - tax rates, tax shields and exemptions.

The above theory propounds that the return to a shareholder can be in the form of dividends or capital gains. The investor is interested in what comes into his pocket after considering all effects of tax and other economic factors.Hence in the cases of tax regimes where dividend are taxed higher than capital gains, the company should favor the capital gains way to fill the pockets of the shareholders.Vice versa, in cases where the dividend is taxed lower than capital gains, the company should opt the dividend way to reward the shareholders.Hence the dividend policy of a company is also driven by the tax regime and structure in which it operates. Investors will favor stocks that give a higher after tax return (the mode is irrelevant).2. After all Less is MORE

The payout conundrumThe idea that Market price of a share is the present value of future dividends, mean that, one must distribute all the earnings.

Surprisingly the answer is Not Necessarily so. Now heres why

The investors return consists of two components ;

Dividends

Capital Gains

A dividend policy affects both these components. An early lower dividend can actually translate into a higher later dividend since the retained earnings too earn returns leading to a growth in the earnings. The story of LPO and HPO tells us how.

YearsLPO (in Lacs) growth = 17.5%

HPO (in Lacs) growth = 7.5%

Net WorthEarnings DividendRENet WorthEarnings DividendRE

30%70%70%30%

1 1,000 250 75 175 1,000 250 175 75

2 1,175 294 88 206 1,075 269 188 81

3 1,381 345 104 242 1,156 289 202 87

4 1,622 406 122 284 1,242 311 217 93

5 1,906 477 143 334 1,335 334 234 100

6 2,240 560 168 392 1,436 359 251 108

7 2,632 658 197 461 1,543 386 270 116

8 3,092 773 232 541 1,659 415 290 124

9 3,633 908 272 636 1,783 446 312 134

10 4,269 1,067 320 747 1,917 479 336 144

11 5,016 1,254 376 878 2,061 515 361 155

As the above table shows, HPO pays out more dividends initially, but sometimes in the 11th year LPOs Dividend payment outstrips that of HPOs. This happens because LPO retains more than HPO and consequently the growth in its earnings, dividends and net worth is faster than that of HPO.

Slow and Steady wins the raceImplications of Payout Conundrum

Implication 1A low payout means less current dividends, more retained earnings and an accelerated earnings growth.

A high payout means more current dividends, less retained earnings and a slower earnings growth.

Implication 2Whether a higher growth rate would automatically translate into higher market price is debatable. Similarly whether a lower growth rate will by itself lead to a lower market price is uncertain.Share price is a function of myriad parameters and not just dividends.

Implication 3The dividend decision is in a way related to investment decision and financing decision. If a company has capital expenditure plan, to that extent money available for dividend will be less. If there is not enough money to pay dividends, to that extent the firm will have to raise funds by issuing new shares. In this case the dividend decision drives the financing decision and vice versa.

Hence Dividend is a trade off between retaining money for capital expenditure and issuing new shares.

3. I like MY Coffee COLD, what about you

and by the way, how much is the optimum sugar mixThe Common Sense Approach to DividendsHow much dividend should we declare?? and What is the trade off???

Should it maintain a stable, consistent payment policy, or should it let the payments vary as conditions change?

The common sense approach answers the above, in a very subtle way.

This approach offers the link amongst Cost of equity, Rate of return and Payout Ratio.An investor expects a certain rate of return. For him, it is his opportunity cost and for the company it is the cost of equity ( denoted as Ke ). The rate of return that the company earns on its investment is ascertained by computing the IRR (Internal Rate of Return) of the investments ( notated as r)

The optimum dividend payout depends on the relation between Ke and r.Growth Company

If what the investor expects (Ke) is less than what the company earns r, the investor would obviously be better off by letting his money lie with the company.

In that case he would expect the company not to declare dividends. Hence when Ke is less than r, the optimum payout ratio is 0%. Such companies are called growth companies.Declining CompanyIf what the investor expects (Ke) is greater than what the company earns r, the investor would naturally be better off by taking his money from the company.

In that case he would expect the company to distribute the entire profits as dividends. Hence when Ke is greater than r, the optimum payout ratio is 100%. Such companies are called declining companies.

This approach is also referred to as ALL or NOTHING Approach, since either all the profits are distributed as dividends or nothing.

Is it true that companies that dont distribute dividends would not command a good price.

Microsoft, the worlds most happening and adored software company, has not declared a penny of dividend till date. Yet Microsoft is the darling of the Wall Street.The rationale is simple. Investors make investments not on the basis of actual dividends received but on the basis of expectations of future dividends. The money retained and invested to earn more and more big bucks, will some day in the future be handed back to the shareholders in the form of cash dividends.4. The US TrendDividends are both pervasive and perplexing. They are pervasive in that companies have been paying regular cash dividends since the dawn of the modern limited liability company over three centuries ago, and publicly traded companies in all market economies have been paying out large fractions of their earnings ever since.

Dividends are perplexing (especially to financial economists) because it is not obvious why investors should demand cash dividends. Since the seminal paper by Miller and Modigliani, a vast literature has examined the payout policies of U.S. companies.

The understanding of US practices is all the more relevant as India today is US of 1980s The Booming and strong economy which the world looks up to. Sooner or latter, we will also hit the plateau and become a stable economy similar to US and hence the past and present policies of US call for an introspection and add to this is the effect of globalization and open trade.Manufactured in US, Followed around the World --- Dividend Policy of US Companies Recently published research on dividend payments in the United States has documented five important new results.N First, Fama and French show that the fraction of U.S. industrial firms paying cash dividends has dropped sharply over the past three decades, from 66.5 percent of listed firms in 1978 (and over 80 percent during the 1950s) to 20.8 percent in 1999. Fama and French show this dramatic decline is due to two influences:

changing firm characteristics and

a declining propensity to pay

N Second, Grullon and Ikenberry document a massive increase in the number of U.S. industrial firms repurchasing their own shares since 1982. This method of distributing corporate cash to shareholders is both tax-favored and far more flexible than paying regular cash dividends.N The third, seemingly aberrant major recent finding is that the total payout of cash dividends paid by U.S corporations has been rising inexorably for several decades, and now often approaches 100 percent of aggregate corporate profits. Weston and Siu document that the U.S. 5 corporate sectors cash dividend payout ratio increased from 40 percent in 1971 to around 60 percent in 1990where it remained throughout the 1990s--and finally to 81 percent in 2001.

N The fourth major dividend policy finding essentially squared the circle, explaining how the three results cited above declining fractions of listed companies paying dividends, increasing propensities to repurchase by companies paying dividends, and rising aggregate dividends payout could all occur simultaneously. NFinally, there is some evidence that dividends may be reappearing. Julio and Ikenberry document a small, but significant, five percentage point increase in the fraction of U.S. industrial firms paying cash dividends since 2001. They also describe a greater tendency for large firms to pay dividends since 1999. This rebound in dividend payments is partly accounted for by the 2003 Bush Tax Cut, and partly due to the natural maturation of IPO firms that went public during the 1990s. It is unclear whether the dividend reappearance Julio and Ikenberry document is permanent or temporary.5. Did we forget Lintner and his gospelsLintner's Model

A model stating that dividend policy has two parameters: (1) the target payout ratio and (2) the speed at which current dividends adjust to the target.

In 1956 John Lintner developed this theory based on two important things that he observed about dividend policy:

Companies tend to set long-run target dividends-to-earnings ratios according to the amount of positive net-present-value (NPV) projects they have available. Earnings increases are not always sustainable. As a result, dividend policy is not changed until managers can see that new earnings levels are sustainable.Lintners seminal work on dividend payout practices (1956) finds that managers believe that stockholders prefer stable dividends and that the market puts a premium on such stability. He hypothesizes that differences among firms in target payout ratios reflect judgments based on factors such as prospects for growth of the industry and the individual firm, cyclical movements of investment opportunities, and earnings prospects for the firm.

Lintner also suggests that dividend policies have industry effects. While an industry effect may reflect correlation of factors such as investment opportunities, earnings stability, and internal funds availability among firms within the same industry. In an earlier paper Lintner cites the oil industry as an example of dividend leadership at work. He states that the dividend policy of a company is related to dividend payout of similar companies in then same industry, but on occasion may be concerned with maintaining some sort of correlation to other companies whose securities are, investment-wise, close substitutes for the companys own securities, even though the other companies are in entirely different industries.

In finance literature several theoretical constructs have been proposed to explain the dividend policy of a company. Several empirical studies have been conducted to test these theories. Very few attempts have been made to understand the perceptions and attitudes of managers about the factors they think are important in determining dividend policy. A study similar to Lintner has been carried out in India and seeks to answer the following questions: 1. What factors do managers consider important in deciding their companies dividend policy? 2. Do managers perceive a relationship between their companies dividend policy and the value of the share? 3. Do managers consider last years dividend policy relevant in deciding the current dividend policy? 4. Do managers think tax status of their shareholders as an important determinant of dividend policy? 5. Do managers use dividend policy as a signal for indicating the companys future prospects to shareholders? 6. Do managers consider dividend payment merely as a residue? The questionnaire was sent to the Economic Times 250 top companies and was addressed to finance directors of these companies. This study reveals a number of interesting conclusions. Management Beliefs about Dividend Policy

First, it is shown that payment of dividend depends on current and expected earnings as well as the pattern of past dividends. This vindicates Lintners findings in U.S.A. about forty years ago. It is also pertinent to note that managers of companies in India would like their companies to continuously maintain payment of dividend. They do not consider liquidity to be a significant consideration in dividend policy. Second, managers consider that there s a positive relationship between payment of dividends and share price. However, it is surprising to find that they do not consider the purpose of dividend policy as maintaining or increasing share price. They strongly believe that companies should strive to maintain an uninterrupted record of dividend payments, and they should avoid making changes in dividend policy that might have to be reversed. Third, managers seem to prefer payment of dividend even if companies have profitable investment opportunities. Thus, they do not provide any support to dividend residual hypothesis. This is in tone with their perception that the dividend must be paid consistently and continuously.6. The Indian Story so farAnalysis of dividend trends for a large sample of stocks traded on the NSE and BSE indicate that the percentage of companies paying dividends has declined from 60.5 percent in 1990 to 32.1 percent in 2001 and that only a few firms have consistently paid the same levels of dividends which is in line with the fifth proposition in the US findings. Further, dividend-paying companies are more profitable, large in size and growth doesnt seem to deter Indian firms from paying higher dividends.Here we examine the dividend behavior of Indian corporate firms and attempt to explain the observed behavior with the help of trade-off theory, and signaling hypothesis. Trends indicate that the number of firms paying dividend during the study period has shown an up trend till 1995 and has fallen subsequently. Average DPS on the other hand has shown a steady growth except for year 2001. Average percentage Payout Ratio showed a more stable pattern up to 1997 and then has shown a declining trend. Analysis also shows that only a few firms have consistently paid same levels of dividend. Of the payers, regular payers have consistently paid higher payout as well as higher average dividend compared to that of current payers. Initiators have always paid higher levels of dividend yield compared to that of other payers. Industry trends indicate that firms in the electricity, mining and diversified industries have paid higher dividends whereas textile companies have paid less dividends.

Analysis of influence of tax regime changes shows that the tradeoff theory does not hold true in the Indian context, as Indian corporate firms on average do not appear to have increased dividend payments despite a tilt in tax regime in favor of more dividends. ( The Opposite of Radical Theory)

Analysis of characteristics of payers and non-payers shows that dividend-paying companies are more profitable and large in size.. Further, firms appear to prefer the pecking order of funds in building their larger asset base.

Now it is time to let the numbers speak for themselves Time to move to on to next lap7. We believe in doing it --- The Indian Way :

Underlying factors and assumptions :(Past Research for future answers) Kevin analyzes the dividend distribution pattern of 650 non-financial companies and net sales income of one crore rupees or more. He finds evidence for a sticky dividend policy (Lintner Model) and concludes that a change in profitability is of minor importance.

Mahapatra and Sahu analyze the determinants of dividend policy using the models developed by Lintner for a sample of 90 companies. They find that cash flow is a major determinant of dividend followed by net earnings. Further, their analysis shows that past dividend and not past earnings is a significant factor in influencing the dividend decision of firms (again Lintner Model).

Bhat and Pandey study the managers perceptions of dividend decision for a sample of 425 Indian companies. They find that on an average profit-making Indian companies have distributed about one-third of their net earnings and that the average dividend payout ratio is 43.6 percent.. Mohanty analyzes the dividend behavior of more than 200 firms for a period of over 15 years. He finds that in most bonus issue cases firms have either maintained the pre-bonus level or only decreased it marginally there by increasing the payout to shareholders. The study also finds that firms that declared bonus showed higher returns to their shareholders compared to firms which did not issue bonus shares but maintained a steady dividend growth. He finds evidence for a reversal of this trend in the 1992- 1999 period. He attributes such a reversal in trend to the changed strategy of multi-national corporations (MNCs) and their reluctance to issue bonus shares.

Narasimhan and Vijayalakshmi analyze the influence of ownership structure on dividend payout of 186 manufacturing firms. Regression analysis shows that promoters holding as of September 2001 has no influence on average dividend payout.

However, it is still not clear as to what the dividend payment pattern of firms in India is and why do they initiate and omit dividend payments or reduce or increase dividend payments. Hence it is better to analyze the dividend payout of firms in India and analyze the dividend initiations and omissions and other changes in dividends and the signals that these events convey.

How much you got , How much I Paid (Average Dividend Paid)Despite fluctuations in PAT, the average aggregate dividend payments have steadily increased from Rs. 0.98 crore in 1991 to Rs. 2.93 crore in 2000 and Rs. 4.19 crore in 2001. Further, compared to PAT the dividend payments have exhibited a smooth trend implying that dividend smoothening is occurring in the Indian context Number of firms paid dividend during the study period have shown an up trend till 1995 and have fallen subsequently, where as the percentage of companies paying dividends has declined from 60.5 percent in 1990 to 32.1 percent in 2001. This is consistent with the trend observed in the US market (Fama and French 2001).

YearNumber of FirmsAverage Dividend (Rs. Crore)SD of Dividend (Rs. Crore)Average PAT (Rs. Crore)SD of PAT (Rs. Crore)Payout in %

1991 2,184 0.98 3.79 4.05 37.88 2.59%

1992 2,505 1.11 4.54 4.19 40.45 2.74%

1993 3,097 1.11 4.85 3.06 46.76 2.37%

1994 4,020 1.27 6.19 4.15 51.41 2.47%

1995 5,115 1.56 8.42 6.96 57.55 2.71%

1996 5,600 1.85 10.80 7.19 62.92 2.94%

1997 5,855 2.05 13.91 6.38 65.65 3.12%

1998 5,980 2.26 17.18 5.69 103.52 2.18%

1999 6,248 2.39 22.14 5.09 88.19 2.71%

2000 6,225 2.93 26.46 6.11 103.54 2.83%

2001 4,766 4.19 44.71 9.36 134.39 3.12%

The fact that percentage of companies paying dividends have declined whereas the average dividend paid has increased implies that companies which have been paying dividend have paid higher amounts in recent years.

Total non-payers have steadily increased from 1990 to 2000 before declining slightly in 2001. Firms, which have never paid dividend, constituted a significant proportion through out the sample period constituting more than 50% from 1991 to 2001 continuously. The number of firms, which at some previous time paid dividend, have increased overtime and reached almost 50% of non-payers in 2001.

Total number of firms paying dividend has increased up to 1995 and has registered sustained decline there after. Mirroring these trends firms, which have paid dividends regularly, peaked in 1995 and recorded declines thereafter. Initiators have shown a steady decline from 1991 and have fallen to 5% in 2001.

Average dividend paid by payers has increased steadily from Rs. 1.69 crore in 1991 to Rs. 9.16 crore in 2000 and Rs. 13.05 crore in 2001. Regular payers are more in number and have paid higher average dividend compared to that of current payers and initiators. Current payers have paid higher dividend compared to initiators except in the year 2001. The number of initiators have increased up to the year 1995 and have shown a decline thereafter, where as current payers have steadily increased in number up to 2000.

A comparison of index and non-index firms shows that the former group of companies on average has paid more dividend than the latter group. Similarly, it is observed that companies, which constitute popular market indices such as Sensex and Nifty paid more dividends compared to companies in the broad market indices such as BSE 100, CNX Mid-Cap, BSE 200, CNX 500, and BSE 500.

These observations are on the expected lines as higher dividend payment is one of the important criteria for inclusion of stocks into indices. A study of number of companies paying dividend also reveals that a significantly larger proportion of index firms have paid dividend compared to non-index firms. 29 out of 30 Sensex firms and 49 out of 50 Nifty firms have paid dividend in 2001, the exception being Tata Engineering and Locomotive Company Ltd. (TELCO). Analysis of industry-wise average dividend paid shows that in the early 1990s, firms in the diversified industry have paid more dividends followed by mining firms and electricity firms. However, by the end of 2000 and 2001 firms in the electricity industry have paid more dividend followed by mining and diversified companies. It has also been observed that textile companies have continued to pay low amounts on an average throughout the sample period where as firms in the financial services industry have improved their average dividend payments over the sample period. The recent high growth firms in the computer hardware and software segments, which are part of the machinery industry, have generally shown lower dividend payments.

In sum, the number of firms paying dividend during the study period have shown an up trend till 1995 and have fallen subsequently. Further, compared to PAT the dividend payments have exhibited a smooth trend implying that dividend smoothening is occurring in the Indian context. Regular payers are more in number and have paid higher average dividend compared to that of current payers and initiators. Of the nonpayers, former payers are growing in numbers. Index firms appear to pay higher dividends compared to that of non-index firms. Further, smaller indices appear to have higher average dividend compared to that of larger indices. Industry trends indicate that firms in the electricity, mining and diversified industries have paid more dividend where as textile companies have paid less dividends. Firms in the machinery industry which includes computer hardware and software segments have shown lower dividends.

How many eggs per chicken (The DPS Factor)Average dividend per share (DPS) has increased from 14 paisa in 1990 to 26 paisa in 2000 and 15 paisa in 2001. An analysis of distribution of firms shows that 39 percent have paid nil DPS in 1990 and the percentage has increased to 67.7 in 2001. Percentage of firms in the average class i.e., DPS in the range of Rs. 0 to Rs. 0.25 have declined from a high of 45.9 in 1990 to 18.5 in 2001. This implies that the increased average DPS over the latter period has mainly been due to a few firms paying larger DPS.

Firms in chemicals and plastics industry have steadily improved their DPS from 14 paisa in 1990 to 27 paisa in 2000 and 25 paisa in 2001. Where as textiles firms have shown a decline in DPS from 13 paisa in 1990 to 6 paisa in 2001. Machinery firms have paid a steady 12 to 14 paisa except for the years 1996 and 1997 when they paid marginally more. An analysis of index and non-index firms DPS shows that index firms on an average paid more DPS than non-index firms. Similarly, narrow indices have high average DPS than broad indices.

Average DPS (1% trimmed) by all payers have increased from 21 paisa in 1991 to 31 paisa in 2000 and 29 paisa in 2001 (Figure 4.5). Of the payers, regular payers have consistently paid more dividend per share compared to other payers. Similarly initiators have always paid lower dividend per share compared to current payers.

An analysis of recurrence of dividend per share group shows that two firms have consistently paid dividend in the range of 25 to 50 paisa per share for all the 12 years, where as 18 firms have paid up to 25 paisa.

An analysis of dividend reductions by firms shows that only five companies namely Mahindra Sintered Products Ltd, Otis Elevator Co. (India), Bharat Electronics, Amritlal Chemaux, and Carborundum Universal have consistently paid higher dividend per share out of a 330 firms that paid dividends in all years of the sample period. 43 firms registered a single instance of dividend per share reduction, where as 68 firms lowered twice, 82 firms lowered thrice etc.

On the whole average DPS has shown a steady growth except in the year 2001. Regular payers have

consistently paid more dividend per share compared to other payers, where as initiators have always paid lower dividend per share. Analysis also shows that only a few firms have consistently paid same levels of dividend. Index firms on an average paid more DPS than non-index firms. Similarly, narrow indices have high average DPS than broad indices. Firms in chemicals and plastics industry have steadily improved their DPS, where as textiles firms have shown a decline in the study period. Machinery firms have paid a steady DPS.

Hey I just paid you ! but HOW MUCH (The Dividend Payout Ratio)An analysis of average percentage dividend payout (PR) during 1990 2001 shows a volatile trend. Percentage PR increased from 27.39 in 1990 to 32.95 in 1997 and then showed a declining trend till 2000 before reaching the peak average percentage PR of 40.53 in 2001. However, 1% trimmed average percentage PR showed a more stable pattern of around 24 percent PR up to 1997 and then has shown a declining trend before finally reaching 16.81 percent in 2001.

An analysis of distribution of firms by dividend payout percentage shows that as high as 26 percent of firms in 1990 and 56.6 percent in 2001 have paid out nothing. However, more than 10 percent firms have paid dividend in excess of 75 percent of their net profits.

An analysis of dividend payout recurrence shows that very few firms have maintained the same payout for a longer period of time. For instance, only one firm Hindustan Lever Limited has paid out a dividend in the range of 50 to 75% of its net profit for entire sample period. Similarly another firm Maharashtra Scooters Limited - maintained a dividend payout in the range of 10 to 20% for 11 of the 12-year sample period. Similarly, Kinetic Engineering Ltd., Lakshmi Machine Works Ltd., and Dalmia Cement (Bharat) Ltd. have paid out in the range of 10 20% for 10 of the 12-year sample period.

An analysis of industry-wise DPO shows a declining trend across all industries during the sample period. Diversified firms, which have a DPO in excess of 25 percent in 1990, have less than 14 percent in 2001. Firms in metals and metal products industry have registered a high degree fall in DPO from 22.84 percent in 1990 to 8.74 percent in 2001.

Total payers have registered an increase in payout from 31.25% in 1991 to a peak of 43.02% in 1997 and finally paid out 37.64% in 2001. Of the payers, regular payers have consistently paid higher payout compared to that of current payers. Further, initiators have shown higher fluctuations in their payout compared to that of regular payers.

In sum, average percentage PR showed a more stable pattern up to 1997 and then has shown a declining trend. Analysis of dividend payout recurrence shows that very few firms have maintained the same payout for a longer period of time. Industry-wise DPO shows a declining trend across all industries during the sample period. Of the payers, regular payers have consistently paid higher payout compared to that of current payers. Further, initiators have shown higher fluctuations in their payout compared to that of regular payers.

8. What the BIGGIES are doing

Deep Pockets

Net profit of 209 companies, rose from Rs 39,785 crore in 05-06 to Rs 56,190 crore in 06-07 TCS, HLL, Godrej Consumer Products, Grasim, Wipro among top dividend payers But dividends have not grown at the same level at which profit have grownIndia Inc dividend payout rises 12.5% in FY07

The corporate sector paid Rs 11,541 crore in dividend in 2006-07, up 12.5% from Rs 10,258 crore in 2005-06. According to a study, the net profit of 209 companies rose 41.2%, from Rs 39,785 crore in 2005-06 to Rs 56,190 crore in 2006-07. The ratio of dividends to net profit decreased from 25.78% in 2005-06 to 20.54% in 2006-07. The Shareholders Men and Analysis of the TOP Winners and LosersOn the basis of the rate of equity dividend, Tata Consultancy Services (TCS) topped the list of top 10 corporate followed by. The Victors and the Vanquished

1. Tata Consultancy Services (TCS)6. Grasim Industries

2. Hindustan Lever (HLL)7. WIPRO

3. Godrej Consumer Products8. Infosys Technologies

4. GG Dandekar Machine Works9. Ircon International

5. Eicher Motors10. Sterlite Industries

For The Winners - HIP HIP HurrayAmong the 209 companies which raised their dividend payments significantly during 2006-07 are Sterlite Industries, Eicher Motors, Hindustan Zinc, Gujarat Ambuja Cements, Ultratech Cement and SRF L td. Significant increase in the dividend payment of Sterlite Industries can be explained by the profit performance of the company . The companys PAT for the year 2006- 07 showed a quantum leap to Rs 901.04 crore during 2006-07 compared to Rs 511.12 crore of the previous year. For the Losers - Better luck next timeOn the other hand, companies which reduced their dividend rate significantly during 2006- 07 are Infosys Technologies, Sesa Goa, Tube Investments Of India, GlaxoSmithkline Pharmaceuticals, Kansai Nero and EID Parry India. Of the 28 industries studied, 24 distributed dividends at the rate of less than 30% of their net profit. Two industrial groups recorded a ratio in the range of 30% to 50%, while other two industries, namely FMCG and cigarettes, recorded more than 50%. But industries like automobiles, electric equipment, FMCG, media, steel and textiles were able to increase their dividend payments in step with the rise in net profit.Finally The Statement from WHO is WHO

DR Dogra, ED, Care Ratings said, The dividend has not grown at the same level at which profits have grown as the companies have plans to invest their accruals in their capital expansion plans. Some companies also do not increase dividend payments beyond a certain level looking into the cyclical nature of their industries, as in case of downward cycle, it may be difficult to reduce the dividend rate. Among the 209 dividend-paying companies for 2006-07 and 2005-06, 96 raised the rates of dividend, 40 paid lower rates and 73 maintained their levels.9. The final word (The world is watching you)From the practitioners viewpoint, dividend policy of a firm has implications for investors, managers and lenders and other stakeholders. 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. For 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 investment. Lenders may also have interest in the amount of dividend a firm declares, as more the dividend paid less would be the amount available for servicing and redemption of their claims.

However, in a perfect world as Modigliani and Miller (1961) have shown, investors may be indifferent about the amount of dividend as it has no influence on the value of a firm. Any investor can create a home made dividend if required or can invest the proceeds of a dividend payment in additional shares as and when a company makes dividend payment. Similarly, managers may be indifferent as funds would be available or could be raised with out any flotation costs for all positive net present value projects.But in reality, dividends may matter, particularly in the context of differential tax treatment of dividends and capital gains. Very often dividends are taxed at a higher rate compared to capital gains. This implies that dividends may have negative consequences for investors. To summarize, several theories have been proposed in explaining why companies pay dividends. While many earlier studies point out the tax-preference theory, more recent studies emphasize signaling and agency cost rationale of dividend payments. However, the dividend puzzle is yet unresolved and the words of Fischer Black (Black 1976) may well apply in todays context:

The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just dont fit together.