Session 15.

Earnings Distribution Decisions

Part I
PGP, IIM INDORE
Core Functions: Investment, financing and Earnings
Distribution decisions
Earnings Distribution decision:
 Reinvest in the firm (Equivalent to raising equity)
 Hold as cash reserves for future investments
 Pay-out to the shareholders: Pay dividends (Dividend Decision) and/or Repurchase shares

Principle: If you cannot find investments that make your minimum acceptable rate, return the
cash to investors
 How much cash you can return depends upon current & potential investment opportunities
Earnings Distribution Decision
•Does Pay-out Policy affect firm value?
•Relevance of the investment policy and the debt policy is setting the earnings distribution policy
The Dividend Puzzle
“The harder we look at the dividend picture, the more it seems like a
puzzle with pieces that just don’t fit together” -Fisher Black
Types of Dividends / Distributions
Cash Distribution
◦ Cash Dividend (Regular or special)
◦ Stock Buyback
Procedure for Cash Dividend
25 Oct. 3 Nov. 4 Nov. 5 Nov. 7 Dec.
…

Declaration Cum- Ex- Record Payment

Date dividend dividend Date Date
Date Date
Declaration Date: The Board of Directors declares a payment of dividends.
Cum-Dividend Date: Buyer of stock still receives the dividend.
Ex-Dividend Date: Buyer of stock does not receive the dividend. Seller of the stock
retains the dividend. One business day before the record date.*
Record Date: The corporation prepares a list of all individuals believed to be
stockholders as of 5 November. Person appears as a shareholder on this date in
company records, receives dividend.

*Recently, the ex-dividend date has come down to 1 business day before the record date.
Price Behavior
 In a perfect world, the stock price will fall by the amount of the
dividend on the ex-dividend date.
-t … -2 -1 0 +1 +2 …

Rs.P

Rs.P - div
The price drops Ex-dividend
by the amount of Date
the cash Taxes complicate things a bit. Empirically, the
dividend. price drop is less than the dividend and occurs
within the first few minutes of the ex-date.
Dividends: Price Behavior
Dividends: Price Behavior
Stock Repurchase
Repurchase of Stock
•Firms can payout excess cash through buying shares of their own stock.
•Infosys closed a share buy back worth INR 8260 crores in August 2019
• a special dividend of Rs. 4 per share (Jan 2019)
• Infosys completed a share buy back of worth Rs. 13000 crores in Dec, 2017.
•TCS announced the biggest buyback worth INR 16000 crores in Feb, 2017
• Number of shares – 5.61 crores
• 2.85% of the total paid equity capital
• Price – INR 2850
• TCS’ investors clearly liked the buyback plan as the company’s stock soared over 4 per
cent to close at ₹2,506.50 on Monday on the BSE
Repurchases
•Reasons for repurchases:
• As an alternative to distributing excess cash as special dividends.
• To dispose of one-time cash from an asset sale.
• To make a large capital structure change.
•Approaches:
◦ Tender Offer to Shareholders
• Example: TCS buyback worth INR 16000 crores in Feb, 2017
• Number of shares – 5.61 crores, Price – INR 2850
◦ Buy Shares on Market, i.e., open offer purchase
◦ Negotiated Deals, i.e., targeted buyback (not allowed in India)
 Open offer purchase
•Reliance Industries announced a buyback offer worth INR 10440 crores, in Jan, 2012.
•The buyback of 12 crore equity shares
•Maximum price of INR 870 Per share
•The period of buyback – 1st Feb, 2012 to 19th January, 2013.

• http://economictimes.indiatimes.com/markets/stocks/news/reliance-industries-rs-10440-cr-share-buyback-to-start-from-february-
1/articleshow/11612446.cms
Reference
Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2015). Principles of corporate finance. Tata
McGraw-Hill Education. Referred to as BM hereafter.
◦ BM: Ch 16