#4-Dividends & Share Repurchase-1

8/9/2019 #4-Dividends & Share Repurchase-1

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DIVIDENDS &STOCK REPURCHASE - I

Dr. Kulbir Singh

ACF Term III 2013-14

IMT Nagpur


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• Shareholders love it.

• Bondholders hate it.

• Managers consider it obvious.

• Financial economists find it

puzzling.

• What is it?

• Dividends; what else?!


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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 ofits 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.


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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 thatyear.

A company may, if so authorized by its Articles of association, pay dividends in proportionto the amount paid-up on each share.

Finance Act, 1997 has introduced, w.e.f 01st June, 1997, tax on dividend – interim orotherwise, 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


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INTRODUCTION Taken together, cash dividends and share repurchased during any given year constitute a

company’s payout for the year.

A company’s payout policy is the set of principles guiding payouts.

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

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


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INTRODUCTION

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


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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


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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 theirshares are of high investment value

Even during transitory problems, companies strive not to reduce dividends

Regular dividends, esp. increasing regular dividends also signal toinvestors their company is growing and will share profits Management can use dividend announcements to communicate confidence in their

company’s future An increase in regular dividend (esp. if it is unexpected) often has appositive

effect on share price


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DIVIDEND REINVESTMENT PLAN (DRP)

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

Three types of DRPs are distinguished by company’s 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 foradditional shares by issuing them instead of purchasing them

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


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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 adividend that supplements regular cash dividends with an extra payments (interimdividend).

Coal India declared Rs 29 per share special dividend, amounting to Rs 18,317 crore, for2013-14.

According to analysts: CIL is sitting on a cash pile of Rs 62,000 crore with no concretecapex plan for the same. "So instead of burning cash it makes sense to payout dividend oruse for some other projects, but given that Coal India has a very strong cash flow it makessense 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, hasdeclared a special dividend of Rs 22.50 per equity share of Rs10 each (225 percent), incelebration of its 25th year since incorporation


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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 statedcapital)


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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 thevalue of firm

Ratio of number of share held by shareholders remains constant


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STOCK DIVIDENDS: ILLUSTRATION

Illustration of the Effect of a Stock DividendMarket 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)


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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 onFebruary 07, 2014 (Record Date) Bonus Shares in the ratio of Two Bonus equityshares to every One existing share

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


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Source: Moneycontrol.com


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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).


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CASH DIVIDEND VERSUS STOCK DIVIDEND

Cash dividends affects company’scapital structure

Cash dividends reduce assets (cash

paid out) and shareholders’ equity(RE reduces)

Liquidity ratios like Cash Ratio,Current ratio should decrease(reflecting reduction in cash)

Financial leverage ratio like D/Eand D/A should also increase

Stock dividend has no economicimpact on the company

Stock dividends do not affect

assets or shareholders’ equity Stock dividend does affect liquidity

ratios and financial leverage ratios


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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 foreach 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 asfive-for-four or seven-for-three sometimes occur.

Wealth of stockholders do not change by stock split


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STOCK SPLITS: ILLUSTRATION

Illustration of Before and After Two-for-One Stock SplitMarket 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)


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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 firm’s equity or on shareholders

To attract institutional investors and MFs that often shy from buys the lower pricedstock price (Barron’s)

Reverse Splits are less common in Asia


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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.


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#4-Dividends & Share Repurchase-1