DIVIDEND POLICY & SHAREHOLDERS WEALTH MAXIMIZATION

By :

Anish

Ankan

Ashish

Atul

Prashant

Introduction : What is a Dividend ? What is a Dividend Policy ? What is Bonus Issue & Stock Split of

shares ? What is the Buyback and Reverse

Split of shares ?

What is Dividend?

“A dividend is a distribution to shareholders out of profit or reserve available for this purpose”.

- Institute of Chartered Accountants of India

What is Dividend Policy :

“ Dividend policy determines the division of earnings between payments to shareholders and retained earnings”.

- Weston and Bringham

Dividend Policies involve the decisions, whether-

To retain earnings for capital investment and other purposes; or

To distribute earnings in the form of dividend among shareholders; or

To retain some earning and to distribute remaining earnings to shareholders.

Contd.

Factors Affecting Dividend Policy Legal Restrictions Magnitude and trend of earnings Desire and type of Shareholders Nature of Industry Age of the company Future Financial Requirements Taxation Policy Stage of Business cycle Regularity Requirements of Institutional Investors

Dimensions of Dividend Policy

Pay-out Ratio Funds requirement Liquidity Access to external sources of financing Shareholder preference Difference in the cost of External Equity

and Retained Earnings Control Taxes

Stability Stable dividend payout Ratio Stable Dividends or Steadily changing

Dividends

Contd.

Types of Dividend Policy

Regular Dividend Policy Stable Dividend Policy

Constant dividend per share Constant pay out ratio Stable rupee dividend + extra

dividend Irregular Dividend Policy

Effect of Dividend Policy on Value of Share

Case If Dividend Payout ratio Increases

If Dividend Payout Ration decreases

1. In case of Growing firm i.e. where r > k

Market Value of Share decreases

Market Value of a share increases

2. In case of Declining firm i.e. where r < k

Market Value of Share increases

Market Value of share decreases

3. In case of normal firm i.e. where r = k

No change in value of Share

No change in value of Share

Where,

r = Internal Rate of Return

k = Cost of Equity Capital

What is Bonus Issue ?

“They are the shares issued to capitalize on the reserves and surplus of the company without charging the shareholders”.

From the accounting perspective it involves a debit to the free reserves & a credit to the share capital.

What is Stock Split & Reverse Split ?

“A stock split is a procedure that increases or decreases a company’s total number of shares outstanding without altering the firm’s market value”.

This action, which requires advance approval from the company’s board of directors, usually involves the issuance of additional shares to existing stockholders.

What is Buy Back of shares ? The repurchase of outstanding shares

(repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

HUL – Introduction

HUL- Key Fundamentals

Market Cap (Rs Cr.) : 136,816 EPS - TTM (Rs) : 17.88 P/E Ratio (x) : 35.37 Face Value (Rs) : 1.00 Latest Div. (%) : 1850.00 Div. Yield (%) : 2.92% Industry P/E Ratio : 36.96

HUL – Key Fundamentals

HUL – EPS Vs DPS

Last 10 Years Next 4 Years

HUL – Bonus Issue & Stock Split

HUL – Analysis

ITC – Introduction

Market Cap (Rs Cr.) : 267,930 EPS - TTM (Rs) : 11.05 P/E Ratio (x) : 30.58 Face Value (Rs) : 1.00 Latest Div. (%) : 600.00 Div. Yield (%) : N.A. Industry P/E Ratio : 34.48

ITC – Key Fundamentals

ITC – Business Matrix

ITC – EPS Vs DPS

ITC – Bonus Issue & Stock Split

ITC – Analysis

Market Cap (Rs Cr.) : 47,259 EPS - TTM (Rs) : 88.50 P/E Ratio (x) : 55.28 Face Value (Rs) : 10.00 Latest Div. (%) : 125.00 Div. Yield (%) : 0.98 Industry P/E Ratio : 34.11

Nestle – Key Fundamentals

Nestle – EPS Vs DPS

Nestle – Bonus Issue & Stock Split

Nestle – Analysis

Comparative Analysis

Bibliography Google Moneycontrol Economics Times Wikipedia Financial Management by Prasanna

Chandra.