DIVIDENDS &

STOCK REPURCHASE - I

Dr. Kulbir Singh

ACF Term III 2013-14
IMT Nagpur

 Shareholders love it.

Bondholders hate it.
Managers consider it obvious.
Financial economists find it
puzzling.
What is it?

Dividends; what else?!

INTRODUCTION

Dividend has been defined u.s. Sec 2 (14A) of the Companies Act, 1956

Dividend payment by Indian Companies are regulated by Sec 205 of Companies Act, 1956

Dividend is distribution of divisible or distributable profits of a company among the holders of
its shares.

Paid by the company to its shareholders on the basis of number of shares held by them and the
rights attached to the various class of shares.

Dividend includes any interim dividend

Dividend declared at any time between two AGM

Paid in anticipation of profits of a period before accounts for that period have been prepared

Can be paid if authorized by AoA

Declared by Board of Directors in AGM

Declaration of dividend is usually one of the items of the Agenda of every annual general meeting

Approval of shareholders required in India and most of Europe and China,

but not in some countries like the USA.

INTRODUCTION

Dividend is paid by a company to its shareholders on a particular date (book closure date)
either out of profits or out of reserves.

Dividends are paid after providing fro Depreciation (Sec 205(1) to the extent specified in Sec
350 of the Companies Act) and

After transferring to the reserves (Sec 205(A)) of the company at least 10% of its profit that
year.

A company may, if so authorized by its Articles of association, pay dividends in proportion

to the amount paid-up on each share.

Finance Act, 1997 has introduced, w.e.f 01st June, 1997, tax on dividend interim or
otherwise, designated as Tax on Distributed Profit.

Present rate of tax 15% plus surcharge @ 5% plus education cess @ 2% of amount so
declared, distributed or paid

Dividend tax is different from short term capital gains which is 15.45% if STT of 0.10%

Long Term Capital Gains tax is nil, as long as the investor has paid STT

INTRODUCTION

Taken together, cash dividends and share repurchased during any given year constitute a
companys payout for the year.

A companys payout policy is the set of principles guiding payouts.

Dividends concern analysts and managers, as they affect investment returns and financial
ratios.

Dividends also provide important information about future company performance and future
investment returns.

INTRODUCTION

http://www.google.com/finance?q=NSE%3AHCLTECH&ei=1OX1UpiAJ42ykgWU4QE

DIVIDENDS: FORMS

Companies can pay dividends in a number of ways:

Cash dividend

Regular
Extra/special/irregular
Liquidating

Stock dividend/Bonus Shares

Stock splits

Stock repurchase

We will explore different forms of dividends and their impact on both the
shareholders and the issuing company

REGULAR CASH DIVIDENDS

Many companies choose to distribute cash on a regular basis.

Customary frequency may vary among markets
Geographic Differences in Frequency of Payment of Cash Dividends
Market

Most Common Frequency

United States and Canada

Quarterly

Europe

Semiannually

Japan

Semiannually

China

Annually

India

Annually

REGULAR CASH DIVIDENDS..

Dividend paying companies strive to maintain or increase dividends

Consistent dividends over a long period of time is interpreted as evidence of
profitability

Consistent increase in dividends over a period indicate to investors that their
shares are of high investment value

Even during transitory problems, companies strive not to reduce dividends

Regular dividends, esp. increasing regular dividends also signal to

investors their company is growing and will share profits

Management can use dividend announcements to communicate confidence in their
companys future

An increase in regular dividend (esp. if it is unexpected) often has appositive
effect on share price

DIVIDEND REINVESTMENT PLAN (DRP)

A program offered by a publicly held company which allows shareholders to
automatically reinvest all or a portion of cash dividends from the company to buy
more shares of the company.

Three types of DRPs are distinguished by companys source of shares for dividend
reinvestment

Open-market DRPs : company purchase shares in open market to acquire the
additional shares credited to plan participants

New-Issue DRPs (scrip dividend schemes in U.K): company meets the need for
additional shares by issuing them instead of purchasing them

Plans that are permitted to obtain shares through either open-market purchases or
new share issuance.

SPECIAL DIVIDEND

Also referred to as Extra or Irregular dividend

Dividend paid by a company that does not pay dividends on a regular schedule, or a
dividend that supplements regular cash dividends with an extra payments (interim
dividend).

Coal India declared Rs 29 per share special dividend, amounting to Rs 18,317 crore, for
2013-14.

According to analysts: CIL is sitting on a cash pile of Rs 62,000 crore with no concrete
capex plan for the same. "So instead of burning cash it makes sense to payout dividend or
use for some other projects, but given that Coal India has a very strong cash flow it makes
sense to pay a big dividend and that is what they have done.

Government and Minority shareholders will get Rs. 23,000 crore.

Announcement of special dividend made CIL share price jump by 5%.

Sasken Communication Technologies at its meeting held on January 20, 2014, has
declared a special dividend of Rs 22.50 per equity share of Rs10 each (225 percent), in
celebration of its 25th year since incorporation

LIQUIDATING DIVIDEND

A dividend may be referred to as a liquidating dividend when a company:

Goes out of business and net assets of the company are distributed to shareholders
(after all liabilities are paid)

Sells a portion of its business for cash and the proceeds are distributed to shareholders

Pays a dividend that exceeds its accumulated retained earnings (impairs stated
capital)

STOCK DIVIDEND

Also known as Bonus issue of shares or bonus shares

Stock dividends are non-cash form of dividends

Common in China

Company issues additional shares to existing shareholders without any consideration

Conditions

Bonus issue is not made unless the partly-paid share, if any, are made fully paid

The company has not defaulted in payment of interest or principal, or payment of statutory
dues of employees, PF, gratuity, bonus, etc.

Issued by capitalizing its existing reserves.

Bonus issue increases total number of shares issued and owned, but it does not increase the
value of firm

Ratio of number of share held by shareholders remains constant

STOCK DIVIDENDS: ILLUSTRATION

Illustration of the Effect of a Stock Dividend
Market

Before Dividend

After Dividend

Shares outstanding

1,000,000

1,030,000

Earnings per share

Rs. 1.00

Rs. 0.97 (1,000,000/1,030,000)

Stock Price

Rs. 20.00

Rs. 19.4175 (20 X 0.9709)

P/E

20

20

Total Market Value

Rs. 20 million

Rs. 20 million (1,030,000 X Rs. 19.4175)

Shares owned

100,000 (10% X 1,000,000)

103,000 (10% X 1,030,000)

Ownership Value

Rs. 2,000,000 (100,000 X Rs. 20)

Rs. 2,000,000 (103,000 X Rs. 19.4175)

STOCK DIVIDEND

Advantages to Company

Broadens the shareholders base

Belief that lower stock price will attract more investors, all else equal.

Example:

Rai Saheb Rekhchand Mohota Spinning & Weaving Mills Ltd will issue on
February 07, 2014 (Record Date) Bonus Shares in the ratio of Two Bonus equity
shares to every One existing share

Shrey Chemicals Ltd on January 24, 2014 issued bonus shares in the ratio of 2:1
i.e. 2 bonus equity shares for every on existing equity share

Source: Moneycontrol.com

STOCK DIVIDEND

Academicians have been arguing that stock dividends do not have economic value,
companies continue to pay stock dividends.

Why companies pay stock dividends, better is to ask them.

Baker and Phillips (1993) - asked the CFOs of 312 firms (136 responded).

CASH DIVIDEND VERSUS STOCK DIVIDEND

Cash dividends affects companys
capital structure

Stock dividend has no economic

impact on the company

Cash dividends reduce assets (cash

paid out) and shareholders equity
(RE reduces)

Stock dividends do not affect

assets or shareholders equity

Liquidity ratios like Cash Ratio,

Current ratio should decrease
(reflecting reduction in cash)

Financial leverage ratio like D/E
and D/A should also increase

Stock dividend does affect liquidity

ratios and financial leverage ratios

STOCK SPLITS

Stock splits are similar to stock dividends

No economic effect on company and shareholders value

In two-for-one stock split, each shareholder will be issued an additional share for
each share currently owned.

EPS will become half, while P/E and Equity market value remain unchanged

Dividend yield will remain unchanged (if dividend payout ratio remains same)

Two-for-one, and three-for-one stock splits are most common, unusual splits, such as
five-for-four or seven-for-three sometimes occur.

Wealth of stockholders do not change by stock split

STOCK SPLITS: ILLUSTRATION

Illustration of Before and After Two-for-One Stock Split
Market

Before Split

After Split

No. of Shares outstanding

4 million

8 million

Stock Price

Rs. 40.00

Rs. 20.00 (Rs. 40/2)

EPS

Rs. 1.50

Rs. 0.75 (Rs. 1.50/2)

DPS

Rs. 0.50

Rs. 0.25 (Rs. 50/2)

Dividend Payout Ratio

1/3

1/3

Dividend Yield

1.25%

1.25% (Rs. 0.25/Rs. 20.00)

P/E

26.7

26.7 (Rs. 20.00/Rs. 0.75)

Market Value of Company

Rs. 160 million

Rs. 160 million (Rs. 20.00 X 8 million)

STOCK SPLITS

Stock splits are announced after a period in which stock price has risen

Indicates to shareholders further rise in stock price after stock price

Stock splits merely recognizes that stock has risen enough to justify a stock split to
return the stock price to a lower, more marketable range.

Reverse Stock Split

Increases share price and reduces number of shares outstanding

No impact on the market value of firms equity or on shareholders

To attract institutional investors and MFs that often shy from buys the lower priced
stock price (Barrons)

Reverse Splits are less common in Asia

DIVIDENDS: PAYMENT CHRONOLOGY

Declaration Date

First date on the time line

Day when company issues a statement declaring a specific dividend (any kind)
Shareholders must approve India, China & Several European countries
Japan abolished this system in 2006
On this date, holder-of-record date, company also announces payment date

Ex-Dividend Date/Ex-Date

Two business days before holder-of-record date (Hong Kong 01 Business day)

Investors who owns shares on ex-date or who purchase shares on the business day
before ex-date will receive dividend.

DIVIDENDS: PAYMENT CHRONOLOGY

Holder-of-Record Date

Two business days after ex-business date

Shareholders whose name appear in the record will get dividends

Payment Date

Final date

Company mails/electronically transfers dividend payment