Dividend Policy

INTRODUCTION:
Dividend policy is concerned with financial policies regarding paying cash dividends in the
present or paying an increased dividend at a later stage. Whether to issue dividends, and what
amount, is determined mainly on the basis of the company’s un-appropriated profit (excess
cash) and influenced by the company’s long-term earning power. When cash surplus exists
and is not needed by the firm, then management is expected to pay out some or all of those
surplus earnings in the form of cash dividends or to repurchase the company’s stock through
a share buyback program.

Management must also choose the form of the dividend distribution, generally as cash
dividends or via a share buyback. Various factors may be taken into consideration: where
share-holders must pay tax on dividends, firms may elect to retain earnings or to perform a
stock buyback, in both cases increasing the value of shares outstanding.

The amount of earnings to be retained back within the firm depends the availability of
investment opportunities. To evaluate the efficiency of an opportunity, the firm assesses a
relationship between the rate of return on investment ‘’r’’ and cost of capital ‘’K’’.

The dividend policy is important because it outlines the magnitude, method, type and
frequency of dividend distributions. At the highest level of decision making, companies have
two basic options regarding what to do with their profits: retain or distribute the earnings.

MEANING:
Dividend policy is the policy a company uses to structure its dividend pay-out to
shareholders. Some researchers suggest that dividend policy may be irrelevant, in theory,
because investors can sell a portion of their shares or portfolio if they need funds.

A Company’s dividend policy generally refers to a set of decisions and a set of guidelines that
outline how the company handles distributions of earnings or assets to its shareholders.

The dividend policy is a financial decision that refers to the portion of the firm’s earnings to
be paid out to the shareholders. Here, a firm decides on the portion of revenue that it to be
distributed to the shareholders as dividends or to be ploughed back into the firm.

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REVIEW OF LITERATURE:
Aldin et.al (2010) in their Study no general consensus has yet emerged after several decades
of investigation, and scholars can often disagree even about the same empirical evidence.
This aims at providing a comprehensive understanding of dividends and dividends policy by
reviewing the main theories and explanation of dividends policy including dividend
irrelevance hypothesis of miller and Modigliani, bird-in-the hand, tax preferences, clientele
effects, signalling, and agency costs hypothesis.

Taneem et.al (2011) in their study they have try to analyse the dividend policy decisions on
the value of the firm. Their study make use of a stocks listed on both BSE and NSE. Their
study mainly focus on the information content during the dividend announcement and the
stock market behaviour by taking the 82 diversified across 21 different industries. The study
reveals that as soon as the dividends announcement is made, there will be an investors
reactions and hence the change in the stock price will be reflected.

Mehta (2012) studied the impact of dividend policy on the value of the firm. Many dividend
theories have been propounded to give the explanation on how the dividend decisions are
being undertaken and whether it has an influence on the value of the firm. On the right, there
is a conservable group that believes an increase in dividend pay-out increases the value of the
firm. On the left, there is a radical group believes a higher dividend pay-out reduces the value
of the firm. The study clearly shows that size and risk are the two most important
considerations in deciding on dividend policy by UAE companies.

Bhat et.al (2012) use of accounting information for equity valuation is a field of research
which has seen a lot of activities. Earnings is an important variable affecting the market value
of equity share. Once a successful company starts building-up reserves it will also look for
expanding it’s earnings. Once a company starts earning attractive sum, the equity share will
have more and more demand which will result in increase in market value of the equity.

Khalid (2014) the dividend decision is the most important decision that the managers may
take. This decision is influencing the primary aims of shareholders which is maximising their
wealth through taking the dividend. Also, this study examined the relationship between share
price volatility and other variables such as size, stock dividend, and stock repurchase.

Movalla et.al (2014) dividend policy determines the distribution of net cash flow generate
from successful trading between dividend payment and corporate retention. They have

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studied 30 companies listed under BSE SENSEX. They have studied profitability, leverage,
growth rate, earning and rate of return and it’s impact on dividend distribution of companies
listed in BSE SENSEX during 2010 to 2014.

Kapoor et.al (2015) dividend paying firms listed on the National Stock Exchange (NSE) in
India to learn their views about the factors influencing dividend policy, dividend issues, and
explanations for paying cash dividends and repurchasing shares. The most important
determinants of dividends involve earnings and the pattern of past dividends.

Bhayani et.al (2019) identified important variables like DPR, EPS, DPS, CR, QR and firm
size for dividend policy. Determinants of dividend smoothing behaviour of business group-
affiliated firms relative to unaffiliated firms in India during period from 1994-95 to 2012-
2013. For the determinants of dividend smoothing, the investment opportunities and the
financial leverage are significant factors influencing the dividend smoothing behaviour of
business group affiliated firms and standalone firms respectively.

SIGNIFICANCE OF THE STUDY:

The study would be useful for the financial managers in the companies formulating their
dividend policy. The financial managers have to decide how much will be the dividend pay-
out ratio and how much will be the retention ratio out of the earning per share they should
take such a decision which would maximizes investor’s wealth. The investors should invest
in companies which pay dividends. As investors prefer certain small dividend in place of
Indian Manufacturing sector Companies.

NEED FOR THE STUDY:

Dividends are the benefits or the returns given to shareholders by the companies. The
dividend decisions is not unique and same for all the companies. Many factors influence the
dividend decisions of the company and again the share holders reactions would be of most
important during the dividend announcements. Hence, the present study finds it’s need to
understand the impact of dividends policies on the value of the firm.

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SCOPE OF THE STUDY:

The purpose of this study is to understand the impact of dividend policy on stock price of
selected manufacturing companies. The present study is confined to only 5 stocks in the
Indian context for time period 2008-18.

OBJECTIVES OF THE STUDY:

The main goal of the business enterprises is to protect and maximize the interest of
shareholders by maximizing the overall profit of the business units. Hence the objectives of
the study is to analyse the patterns of dividend policy and study interrelationship between
several pertinent aspects relating to dividend policies. The specific objective of study is
identified as given below;

 To analyse the dividend and its impact on profitability of selected Manufacturing

sector companies.
 To evaluate the comparative ratios of the selected Manufacturing sector companies
with concerned to the dividend.
 To understand the impact of dividend on the profitability of selected manufacturing
sector companies.
 To find-out trend of dividend of selected units.

REREARCH METHODOLOGY:
The intent of this study would be to understand the overall performance of dividend
policy for 5 companies from manufacturing sector for the financial years between 2008-18.
Ten-year data has been taken for the study as the long-term would discount the minor
fluctuations and also smoothen the data.

SOURCES OF DATA INFORMATION AND COLLECTION:

Information collected for comparative study of dividend policy would be mainly
from secondary sources such as:

 Authenticated Companies websites on internet.

 Annual Report provided by selected companies of last ten financial years.

 Data collect from books, websites and articles.

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COMPANIES SELECTED:
 ACC Cements
 JK Tyres
 Nestle India
 Sun Pharmaceuticals Ltd
 Tata Motors

TOOLS & TECHNIQUES:

For the purpose of study the descriptive statistics will be used.

LIMITATIONS OF THE STUDY:

 This study is based on secondary data taken from published annual reports and
accounts of selected manufacturing sector companies and such its findings depends
entirely on the accuracy of such data.
 The study is confined only for the last 10 years data and hence the study results
cannot be generalised prior to and after study period.

CHAPTERIZATION:
Chapter 1: Deals with introduction, review of literature, significance, need for the
study, scope, objectives and research methodology.

Chapter 2: Deals with conceptual frame work. Financing Working capital needs

Chapter 3: Deals with company profile.

Chapter 4 Deals with data analysis and interpretation.

Chapter 5: Deals with finding and conclusion.

BIBLIOGRAPHY:

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1. Anupam Mehta, “An Empirical Analysis of Determinants of Dividend Policy- Evidence

from The UAE Companies’’, Global review of accounting and finance (2012), Vol. no. 3(1),
pp.18-31.

2. Fawaz Khalid Al-Shawawreh, “The Impact of Dividend Policy on Share Price Volatility’’,
European Journal of Business and Management (2014), Vol.no.6, Issue no.38, ISSN 2222-
1905 (Paper) , ISSN 2222-2839 (Online).

3. Kent Baker. H & Sujata Kapoor, “Dividend policy in India: New Survey Evidence’’,
Managerial Finance (2015), Vol. no. 41 (2), pp.182-204.

4. Husam Aldin, Nizar Al Malkawi, Michael Raffely & Rekha Pillai, “Dividend Policy; A
Review of Theories and Empirical Evidence’’, International bulletin of business
administrative (2010), Vol. no. 9(1), pp.171-200.

5. Nilesh Movalla & Pintu Venkariya, “A Study on Determinant of Dividend Policy and Its
Impact on Dividend of Listed Company Under BSE SENSEX’’, Journal of Business
Management & Social Science Research (2014), Vol. no. 3 (12), pp.70-72.

6. Pushpa Pushpa Bhatt & JK Sumangala, “Impact of Earning Per Share on Market Value of
an Equity Share; An Empirical Study in Indian Capital Market’’, Journal of Finance,
Accounting & Management (2012), Vol. no. 3(2).

7. Sanjay Bhayani & Butalal Ajmera, “Dividend Policy Decision: Panel Data Analysis for
Selected Cement Companies in India’’, Journal of Commerce & Accounting Research (2019),
Volume. no. 8 (4).

8. Shania Taneem, “Information Content of Dividend Announcement: An Investigation of the

Indian Stock Market’’, International Business & Economics Research Journal (2015) Vol.
no.10, Issue. no. 5.

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