Financial Decision Analysis

Report on
Dividend policy of Indian v/s Foreign Company
operating in India
A bird in the hand is worth two in the bush

Prepared By:
Dhaval Devmurari (15F50)
Divyaraj Parmar (15F56)
Jayesh Motivaras (15F13)
Ketan Bhutiya (15F18)
Submitted To:
Dr. P.K Priyan
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Table of content
Sr. No

Particular

Page.
no

Preface
Acknowledgement
1

Concept of dividend

1.1

Objective

1.2

Scope of the study

1.3

Methodology

Types of dividend policy

Forms of Payment for Dividend

Dividend Taxation

Various theories regarding to the Dividend

5.1

Relevance theory of Dividend

5.1.1

Walters model

5.1.2

Gordons Model

5.2

Irrelevance of Dividend theory

5.2.1

ModiglianiMiller theorem

HUL

6.1

HUL Dividend data for 5 years

Godrej

7.1

Godrej Dividend data for 5 years

Bibliography

Preface
The following project is Report on Dividend policy of Indian v/s Foreign Company
operating in India. As a part of this M.B.A. degree, we have to undergo a project, which is designed
keeping the privileges and preferences of Company in mind. This particular project gave us an
opportunity to implement what we learnt within the four walls of classroom.
This report that we are submitting intends to highlight our versatility in sustaining the
pulls and pressure of day to day professional life and put to perspective the facts that we are capable
enough to deliver whenever a challenge is thrown to us

Thank you

1. Concept of Dividend:
What is Dividend?
Dividend is that portion of net profits which is distributed among the shareholders. The
dividend decision of the firm is of crucial importance for the finance manager since it determines the
amount to be distributed among shareholders and the amount of profit to be retained in the business.

What is Dividend policy?

Dividend policy is the set of guidelines a company uses to decide how much of its
earnings it will pay out to shareholders. Some evidence suggests that investors are not concerned
with a company's dividend policy since they can sell a portion of their portfolio of equities if they want
cash.

Coming up with the dividend policy is challenging for the directors and financial
manager of a company, because different investors have different views on present cash dividends
and future capital gains. Another confusion that pops up is regarding the extent of effect of dividends
on the share price. Due to this controversial nature of a dividend policy it is often called the dividend
puzzle.
Various models have been developed to help firms analyze and evaluate the perfect
dividend policy. There is no agreement between these schools of thought over the relationship
between dividends and the value of the share or the wealth of the shareholders in other words.

One school consists of people like James E. Walter and Myron J. Gordon, who believe
that current cash dividends are less risky than future capital gains. Thus, they say that investors
prefer those firms which pay regular dividends and such dividends affect the market price of the
share. Another school linked to Modigliani and Miller holds that investors don't really choose between
future gains and cash dividends.

A dividend is allocated as a fixed amount per share, with shareholders receiving a

dividend in proportion to their shareholding. For the joint-stock company, paying dividends is not
an expense; rather, it is the division of after tax profits among shareholders. Retained earnings
(profits that have not been distributed as dividends) are shown in the shareholders' equity section on
the company's balance sheet - the same as its issued share capital. Public companies usually pay
dividends on a fixed schedule, but may declare a dividend at any time, sometimes called a special
4

dividend to distinguish it from the fixed schedule dividends. Cooperatives, on the other hand, allocate
dividends according to members' activity, so their dividends are often considered to be a pre-tax
expense.
The word "dividend" comes from the Latin word "dividendum" ("thing to be divided").

Objective Of study
To analyze the Dividend policy of Indian v/s Foreign Company operating in India.

Scope of the study

The study gives an analysis on the dividend policy of the organization and pattern of dividend
payout ratio of that company.

Methodology
The study is mainly based on secondary data. We have gone through large number of
websites. Also we have gone through various documents and articles pertaining to dividend policy.

2. Types of dividend policy

1) Regular dividend policy: In this type of dividend policy the investors get dividend at usual rate.
Here the investors are generally retired persons or weaker section of the society who want to get
regular income. This type of dividend payment can be maintained only if the company has regular
earning.
Merits of Regular dividend policy:

It helps in creating confidence among the shareholders.

It stabilizes the market value of shares.
It helps in marinating the goodwill of the company.
It helps in giving regular income to the shareholders.

2) Stable dividend policy: Here the payment of certain sum of money is regularly paid to the
shareholders. It is of three types:
a) Constant dividend per share: here reserve fund is created to pay fixed amount of dividend in the
year when the earning of the company is not enough. It is suitable for the firms having stable earning.
b) Constant payout ratio: it means the payment of fixed percentage of earning as dividend every
year.
c) Stable rupee dividend + extra dividend: it means the payment of low dividend per share
constantly + extra dividend in the year when the company earns high profit.
Merits of stable dividend policy:

It helps in creating confidence among the shareholders.

It stabilizes the market value of shares.
It helps in marinating the goodwill of the company.
It helps in giving regular income to the shareholders.

3) Irregular dividend: As the name suggests here the company does not pay regular dividend to the
shareholders. The company uses this practice due to following reasons:

Due to uncertain earning of the company.

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Due to lack of liquid resources.

The company sometime afraid of giving regular dividend.
Due to not so much successful business.

4) No dividend: The company may use this type of dividend policy due to requirement of funds for
the growth of the company or for the working capital requirement.

3. Forms of Payment for Dividend

Cash dividend
Stock or scrip dividend
Property dividend
Interim dividend
Other dividend (used in structured finance)

Changes in dividends convey information

Dividend increases

Management believes it can be sustained

Expectation of higher future dividends, increasing present value

Signal of a healthy, growing firm

Dividend decreases

Management believes it can no longer sustain the current level of dividends

Expectation of lower dividends indefinitely; decreasing present value

Signal of a firm that is having financial difficulties

4. Dividend Taxation

United States and Canada

The United States and Canada impose a lower tax rate on dividend income than
ordinary income, on the basis that company profits had already been taxed as corporate tax.

United Kingdom

The UK's taxation system is unique in its treatment of dividends: when a shareholder
receives a dividend, a tax credit of 10% is deemed to already have been paid on that dividend. This
ensures that double taxation does not take place, and has the effect that basic rate taxpayers pay no
additional tax. Corporate taxpayers have their tax liability satisfied by the deemed tax credit, with no
further tax liability. Non-taxpaying entities such as certain trusts, charities and pension funds are
7

unaffected by the tax credit as this is only a deemed payment. The tax credit is unavailable for
repayment.

India

In India, companies declaring or distributing dividend, are required to pay a Corporate

Dividend Tax in addition to the tax levied on their income. The dividend received by the shareholders
is then exempt in their hands. However, dividend income over and above Rs. 1000,000 shall attract
10 per cent dividend tax in the hands of the shareholder with effect from April 2016.

5. Various theories regarding to the Dividend

5.1

Relevance theory of Dividend

Dividends paid by the firms are viewed positively both by the investors and the firms.
The firms which do not pay dividends are rated in oppositely by investors thus affecting the share
price. The people who support relevance of dividends clearly state that regular dividends reduce
uncertainty of the shareholders i.e. the earnings of the firm is discounted at a lower rate, k e thereby
increasing the market value. However, its exactly opposite in the case of increased uncertainty due to
non-payment of dividends.

Two important models supporting dividend relevance are given by Walter and Gordon.

5.1.1 Walters model

Prof. James E Walter argues that the choice of dividend payout ratio almost always
affects the value of the firm. Prof. J. E. Walter has very scholarly studied the significance of the
relationship between internal rate of return (R) and cost of capital (K) in determining optimum
dividend policy which maximises the wealth of shareholders.
According to Walter Model,

P = [D + (E - D) x ROI / Kc] / Kc
P= Market price per share
E= Earnings per share
D = Dividend per share
Kc= Cost of Capital (Capitalization rate)
ROI = Return on Investment (also called return on internal retention
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Assumptions of the Walter model

The firm finances its entire investments by means of retained earnings only.
Internal rate of return (R) and cost of capital (K) of the firm remains constant.
The firms earnings are either distributed as dividends or reinvested internally.
Earnings and dividends of the firm will never change.
The firm has a very long or infinite life.

Basically, the firm's decision to give or not give out dividends depends on whether it has enough
opportunities to invest the retained earnings i.e. a strong relationship between investment and
dividend decisions is considered.
Criticism of Walters Model
It is assumed that the investment opportunities of the firm are financed through the retained
earnings and no external financing such as debt, or equity is used. In such a case either the
investment policy or the dividend policy or both will be below the standards.
The Walters Model is only applicable to all equity firms. Also, it is assumed that the rate of
return (r) is constant, but, however, it decreases with more investments.
It is assumed that the cost of capital (K) remains constant, but, however, it is not realistic since it
ignores the business risk of the firm, that has a direct impact on the firms value

5.1.2 Gordons Model

The Gordons Model, given by Myron Gordon, also supports the doctrine that dividends
are relevant to the share prices of a firm. Here the Dividend Capitalization Model is used to study the
effects of dividend policy on a stock price of the firm. Gordons Model assumes that the investors are
risk averse i.e. not willing to take risks and prefers certain returns to uncertain returns.

According to the Gordons Model, the market value of the share is equal to the present
value of future dividends. It is represented as:
P = [E (1-b)] / Ke - br
Where, P = price of a share
b = retention ratio
Br = growth rate

E = Earnings per share

Ke = capitalization rate
1-b = proportion of earnings distributed as dividends

Assumptions of Gordons Model

1.

The firm is an all-equity firm; only the retained earnings are used to finance the investments,
no external source of financing is used.
2.

The rate of return (r) and cost of capital (K) are constant.

3.

The life of a firm is indefinite.

4.

Retention ratio once decided remains constant.

5.

Growth rate is constant (g = br)

6.

Cost of Capital is greater than br

Criticism of Gordons Model

1.

It is assumed that firms investment opportunities are financed only through the retained
earnings and no external financing viz. Debt or equity is raised. Thus, the investment policy or the
dividend policy or both can be sub-optimal.

2.

The Gordons Model is only applicable to all equity firms. It is assumed that the rate of returns
is constant, but, however, it decreases with more and more investments.

3.

It is assumed that the cost of capital (K) remains constant but, however, it is not realistic in the
real life situations, as it ignores the business risk, which has a direct impact on the firms value.
Thus, Gordon model posits that the dividend plays an important role in determining the share price of
the firm.

5.2 Irrelevance of Dividend theory

Modigliani-Miller theorem

5.2.1 ModiglianiMiller theorem

The ModiglianiMiller theorem (of Franco Modigliani, Merton Miller) is a theorem on capital
structure, arguably forming the basis for modern thinking on capital structure. The basic theorem
states that in the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and
in an efficient market, the value of a firm is unaffected by how that firm is financed. Since the value of
the firm depends neither on its dividend policy nor its decision to raise capital by issuing stock or
selling debt, the ModiglianiMiller theorem is often called the capital structure irrelevance principle.

10

The key Modigliani-Miller theorem was developed in a world without taxes. However, if we
move to a world where there are taxes, when the interest on debt is tax deductible, and ignoring other
frictions, the value of the company increases in proportion to the amount of debt used.
Assumptions of Modigliani and Miller Approach
There are no taxes.
Transaction cost for buying and selling securities as well as bankruptcy cost is nil.
There is symmetry of information. This means that an investor will have access to same
information that a corporate would and investors would behave rationally.
The cost of borrowing is the same for investors as well as companies.
Debt financing does not affect companies EBIT.
Modigliani and Miller Approach indicates that value of a leveraged firm (firm which has a mix of debt
and equity) is the same as the value of an unleveraged firm (firm which is wholly financed by equity) if
the operating profits and future prospects are same. That is, if an investor purchases shares of a
leveraged firm, it would cost him the same as buying the shares of an unleveraged firm.

Modigliani and Miller Approach: Two Propositions without Taxes

Proposition 1: With the above assumptions of no taxes, the capital structure does not influence the
valuation of a firm. In other words, leveraging the company does not increase the market value of the
company. It also suggests that debt holders in the company and equity share holders have the same
priority i.e. earnings are split equally amongst them.
Proposition 2: It says that financial leverage is in direct proportion to the cost of equity. With increase
in debt component, the equity shareholders perceive a higher risk to for the company. Hence, in
return, the shareholders expect a higher return, thereby increasing the cost of equity. A key distinction
here is that proposition 2 assumes that debt share holders have upper-hand as far as claim on
earnings is concerned. Thus, the cost of debt reduces.

Without taxes:
Proposition I
VU = VL
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Where,

VU is the value of an unlevered firm = price of buying a firm composed only of equity, and V L is the
value of a levered firm = price of buying a firm that is composed of some mix of debt and equity.
Another word for levered is geared, which has the same meaning.
To see why this should be true, suppose an investor is considering buying one of the two firms
U or L. Instead of purchasing the shares of the levered firm L, he could purchase the shares of firm U
and borrow the same amount of money B that firm L does. The eventual returns to either of these
investments would be the same. Therefore the price of L must be the same as the price of U minus
the money borrowed B, which is the value of L's debt.

Proposition II
rE = ro + D/E (ro rD)

Where

rE is the required rate of return on equity, or cost of equity.

ro is the company unlevered cost of capital (i.e assume no leverage).

rD is the required rate of return on borrowings, or cost of debt.

D/E is the debt-to-equity ratio.

A higher debt-to-equity ratio leads to a higher required return on equity, because of the
higher risk involved for equity-holders in a company with debt. The formula is derived from the theory
of weighted average cost of capital (WACC).
These propositions are true under the following assumptions:

No transaction costs exist, and

Individuals and corporations borrow at the same rates.

With taxes:

Proposition I
VL = VU +TCD
Where
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VL is the value of a levered firm.

VU is the value of an unlevered firm.

TCD is the tax rate (TC) x the value of debt (D)

the term TCD assumes debt is perpetual

This means that there are advantages for firms to be levered, since corporations can deduct interest
payments. Therefore leverage lowers tax payments. Dividend payments are non-deductible.
Proposition II
rE = ro + D/E (ro rD) (1 TC)

Where

rE is the required rate of return on equity, or cost of levered equity = unlevered equity +
financing premium.

ro is the company cost of equity capital with no leverage (unlevered cost of equity, or return on
assets with D/E = 0).

rD is the required rate of return on borrowings, or cost of debt.

D/E is the debt-to-equity ratio.

TC is the tax rate.

The same relationship as earlier described stating that the cost of equity rises with leverage, because
the risk to equity rises, still holds. The formula, however, has implications for the difference with
the WACC. Their second attempt on capital structure included taxes has identified that as the level of
gearing increases by replacing equity with cheap debt the level of the WACC drops and an optimal
capital structure does indeed exist at a point where debt is 100%.
The following assumptions are made in the propositions with taxes:

Corporations are taxed at the rate TC on earnings after interest,

No transaction costs exist, and

Individuals and corporations borrow at the same rate.

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6. HUL

Hindustan Unilever Limited (HUL) is an Indian consumer goods company based

in Mumbai, Maharashtra. It is owned by Anglo-Dutch company Unilever which owns a 67% controlling
share in HUL as of March 2015 and is the holding company of HUL. HUL's products include foods,
beverages, cleaning agents, personal care products and water purifiers.
HUL was established in 1933 as Lever Brothers and, in 1956, became known as
Hindustan Lever Limited, as a result of a merger between Lever Brothers, Hindustan Vanaspati Mfg.
Co. Ltd. and United Traders Ltd. It is headquartered in Mumbai, India and employs over 16,000
workers, whilst also indirectly helping to facilitate the employment of over 65,000 people. The
company was renamed in June 2007 as "Hindustan Unilever Limited".
Hindustan Unilever's distribution covers over 2 million retail outlets across India directly
and its products are available in over 6.4 million outlets in the country. As per Nielsen market
research data, two out of three Indians use HUL products.

Brand
HUL is the market leader in Indian consumer products with presence in over 20
consumer categories such as soaps, tea, detergents and shampoos amongst others with over 700
million Indian consumers using its products. Sixteen of HUL's brands featured in the ACNielsenBrand
Equity list of 100 Most Trusted Brands Annual Survey (2014), carried out by Brand Equity, a
supplement of The Economic Times.
The "most trusted brands" from HUL in the top 100 list (their rankings in brackets) are:
Lux (6), Surf Excel (7), Clinic Plus (8), Rin (13), Lifebuoy (15), Close up (21), Pond's (22), Pepsodent
(24), Fair & Lovely (29), Dove (30), Sunsilk (34), Vim (48), Wheel (67), Vaseline (70),Pears (78),
Lakme (91).

Leadership
HUL has produced many business leaders for corporate India, including Harish
Manwani, the non-executive chairman of HUL and the former chief operating officer of Unilever. He
was also a member of Unilever Leadership Executive team (ULE), which comprises the company's
top management and is responsible for managing Unilever's profit and loss, and delivering growth
across its regions, categories and functions. Sanjiv Mehta was appointed as the Managing Director
and Chief Executive Officer of HUL with effect from 10 October 2013. He has also been appointed as
Executive vice-president, South Asia, Unilever and is also the executive head of the South Asia
cluster for Unilever.
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Hindustan Unilever Limited earned the highest recognition of Leadership in HR

Excellence across industries at the 5th Confederation of Indian Industry (CII) National HR Excellence
Awards 2014

6.1 HUL Dividend data for 5 years

Announcemen
t Date
14/10/2016
09/05/2016
05/10/2015
08/05/2015
16/10/2014
28/04/2014
15/10/2013
29/04/2013

Effective
Date
01/11/2016
22/06/2016
19/10/2015
19/06/2015
31/10/2014
11/06/2014
31/10/2013
10/07/2013

Dividend
Type
Interim
Final
Interim
Final
Interim
Final
Interim
Final

Dividend
(%)
700%
950%
650%
900%
600%
750%
550%
600%

18/10/2012

01/11/2012

Interim

1250%

Remarks
Rs.7.0000 per share(700%)Interim Dividend
Rs.9.5000 per share(950%)Final Dividend
Rs.6.5000 per share(650%)Interim Dividend
Rs.9.0000 per share(900%)Final Dividend
Rs.6.0000 per share(600%)Interim Dividend
Rs.7.5000 per share(750%)Final Dividend
Rs.5.5000 per share(550%)Interim Dividend
Rs.6.0000 per share(600%)Final Dividend
Rs.4.5000 per share(450%)Interim Dividend &
Rs.8.0000 per share(800%)Special Dividend

HUL
18

15.5

16
14

12.5

16.5

13.5
11.5

12
10
8
6
4
2
0
2012

2013

2014

2015

2016

Interpretation of dividend data of HUL

In 2012 HUL paid dividend twice i.e Interim dividend Rs.4.5 and special dividend Rs.8 per share, total
percentage of dividend is 1250% (face value of share) where face value of share is Rs.1
15

 In 2013 company paid interim dividend Rs.5.5 which increased by 22.22% as compare to 2012, and
final dividend was Rs.6.
In 2014 the dividend was Rs.6, which increased by 9% as compare to 2013, and final dividend Rs.7.5,
which is increasing by 25% as compare to 2013.
In 2015 interim dividend was Rs.6.5 and final dividend was Rs.9, interim dividend increased by 8% and
final dividend increase by 20% as compare 2014.
In 2016 company paid interim dividend Rs.7 which increased by 7% and final dividend was Rs.9.5
which increased by 5% as compare to 2015.
The overall five years average dividend paid by HUL is Rs.13.9 per share (Interim as well as final
dividend)
If we see in the table, the dividend percentage is reduced in the year 2013 by 8% as compare to 2012,
and then it was increasing by 17%, 15%, & 6% YOY till 2016.
Here, company uses the Regular dividend policy, because a company is continuously increasing the
amount of dividend.

7. Godrej

The Godrej Group is an Indian conglomerate headquartered in Mumbai, Maharashtra,

India, managed and largely owned by the Godrej family. It was founded by Ardeshir
Godrejand Pirojsha Burjorji Godrej in 1897, and operates in sectors as diverse as real estate,
consumer products, industrial engineering, appliances, furniture, security and agricultural
products. Subsidiaries and affiliated companies include Godrej Industries and its subsidiaries Godrej
Consumer Products, Godrej Agrovet, and Godrej Properties, as well as the private holding
company Godrej & Boyce.

Career
In 1897 a young man named Ardeshir Godrej gave up law and turned to lock-making.
Ardeshir went on to make safes and security equipment of the highest order, and then stunned the
world by creating toilet soap from vegetable oil. His brother Pirojsha Godrej carried Ardeshir's dream
forward, leading Godrej towards becoming a vibrant, multi-business enterprise. Pirojsha laid the
foundation for the sprawling industrial garden township now called Pirojshanagar in the suburbs of
Mumbai, where the Godrej Group has its headquarters.

Social responsibility
Godrej has a philanthropic arm that has built schools, dispensaries and a residential
complex for their employees. Trusts established by Godrej continue to invest in education, healthcare
and upliftment of the underprivileged. Godrej is a supporter of the World Wildlife Fund in India, it has
16

developed a green business campus in the Vikhroli township of Mumbai, which includes 200 acr
mangrove forest and a school for the children of company employees.
Twenty-five percent of the shares of the Godrej holding company are held in trusts that
include the Pirojsha Godrej Foundation, the Soonabai Pirojsha Godrej Foundation and the Godrej
Memorial Trust. Through these trusts the Group supports healthcare, education and environmental
sustainability initiatives such as The Mangroves, [7] Teach for India, WWF, Smile Train and the Godrej
Memorial Hospital among others.

7.1 Godrej Dividend data for 5 years

Announcement
Date

Effective
Date

Dividend
Type

Dividend
(%)

02-03-16

15-03-16

Interim

175.00%

Rs.1.7500 per share(175%)First Interim

Dividend

27-05-15

31-07-15

Final

175.00%

Rs.1.7500 per share(175%)Final Dividend

28-05-14

31-07-14

Final

175.00%

Rs.1.7500 per share(175%)Final Dividend

28-05-13

01-08-13

Final

175.00%

Rs.1.7500 per share(175%)Final Dividend

30-05-12

02-08-12

Final

175.00%

Rs.1.7500 per share(175%)Final Dividend

Remarks

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Godrej
1.75

1.75

1.75

1.75

1.75

1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2012

2013

2014

2015

2016

Interpretation of dividend data of Godrej

In 2012 Godrej paid directly final dividend Rs.1.75, which is same in all the five years from 2012 to
2015,
In 2016 company paid interim dividend Rs.1.75 and final dividend is not declared yet, may be it would
be final dividend.
As far as Godrej Company is concern they paid fixed dividend it means that fixed amount of dividend
every year from 2012 to 2015.
Here, company uses the Stable dividend policy, because a company pays the fixed amount of dividend
for every year.

The reason behind foreign company paid higher dividend as compare to Indian
company that is they have spending economy means whatever they earn during a week they
spent in weekends, as we know an Indian economy is a saving economy so that the Indian
company not giving higher dividend as compare to foreign company.

18

8. Bibliography
http://businessjargons.com/walters-model.html
http://mvn.edu.in/lms/mod/book/view.php?id=470
http://www.yourarticlelibrary.com/theories/theories-of-dividend-walters-model-gordons-model-and-modiglianiand-millers-hypothesis/29462/
https://en.wikipedia.org/wiki/Dividend_policy
http://managementation.com/4-types-of-dividend-policy/

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