Dividend Decisions and forms of dividend

Dividend Decisions and forms of dividend

• 1.
  FINANCIAL MANAGEMENT By RAMA KRISHNAIAH. A MBA,M.Com, CBMA, (PhD) Assistant Professor Department of MBA, Bharat Institute of Engineering and Technology, Hyderabad.
• 2.
  UNIT-Iv dividend decisions
• 3.
  Introduction to DividendDecisions Dividend refers to the portion of a company's profit that is distributed to its shareholders as a reward for investing in the company.It Concerned with the distribution of net profit to shareholders
• 4.
  Meaning of DividendDecisions Dividend decisions refer to the financial choices a company makes regarding the distribution of profits to its shareholders in the form of dividends. When a company earns a profit, it has two main options: • Distribute a part of the profit as dividends to its shareholders. • Retain the profit for reinvestment in the business (called retained earnings).
• 5.
  The dividend decisionis about determining: •How much of the profit should be distributed as dividends. •How much should be retained for future growth and expansion. •When to pay the dividend (timing and frequency). •In what form to pay the dividend.
• 6.
  Importance of DividendDecisions: •It affects shareholder satisfaction. •Influences the company’s stock price. •Impacts the financial structure and future investment capacity. •Reflects the company’s financial health and stability.
• 7.
  Forms of Dividend •-Cash Dividend: Most common form; paid in cash. •- Stock Dividend: Additional shares given instead of cash. •- Property Dividend: Assets (non-cash) distributed. •- Scrip Dividend: Promissory note to pay later. •- Liquidating Dividend: Paid from capital, not profits.
• 8.
  Forms of Dividend Policy
• 9.
  ✅ 1. RegularDividend Policy The company pays a fixed amount of dividend regularly (e.g., annually or quarterly), regardless of fluctuations in profit. • Key Features: • Shows financial stability and builds investor trust. • May increase over time, but rarely decreases. • Example: • ₹5 per share paid every year, whether profits are high or low.
• 10.
  ✅ 2. IrregularDividend Policy The company does not follow a consistent pattern in paying dividends. • Dividends depend on profits, cash position, and discretion of management. • Key Features: • No commitment to pay regularly. • Dividend amounts and timing vary. • Example: • Dividend paid this year, skipped next year, paid more the following year.
• 11.
  ✅ 3. StableDividend Policy The company pays a consistent dividend and aims to avoid fluctuations in dividend payments. • Key Features: • Reflects management’s commitment to shareholders. • Can gradually increase as profits rise. • Suitable For: • Mature, cash-rich companies with stable earnings.
• 12.
  ✅ 4. NoDividend Policy The company does not pay any dividend and retains all earnings for reinvestment. • Key Features: • All profits are used for business expansion, R&D, debt repayment, etc. • Common in early-stage, high-growth companies. • Example: • A tech startup that reinvests everything into product development.
• 13.
  Factors Determining DividendPolicy • Type of Industry • Age of corporation • Shareholders expectation • Future Financial Goals • Profitability • Liquidity • Investment Opportunities • Legal Provisions • Debt Obligations • Market Conditions • Tax Considerations
• 14.
  Type of Industry •- Capital-intensive industries retain earnings (e.g., manufacturing). • - Service industries may offer stable dividends. Age of the Corporation • - New firms: Focus on growth, less likely to pay dividends. • - Mature firms: More likely to pay regular dividends. Shareholders' Expectations • - Retirees prefer regular income (dividends). • - Growth investors may prefer capital appreciation. Future Financial Goals • - Companies with future expansion/R&D goals may retain profits. • - Limited goals may lead to higher dividends.
• 15.
  Profitability • - Higherprofits enable dividend payments. • - Less profitable firms may retain earnings for stability. Liquidity Position • - Dividend payments require cash, not just profit. • - Poor liquidity can restrict dividend payout. Investment Opportunities • - Profitable opportunities lead to earnings retention. • - Lack of opportunities encourages dividend distribution. Legal Provisions • - Governed by company laws. • - Cannot pay dividends out of capital without special approval.
• 16.
  Debt Obligations • -High debt = fixed financial commitments. • - Reduces cash available for dividends. Market Conditions • - Economic downturn: Firms conserve cash. • - Booming market: More confidence in paying dividends. Tax Considerations • - Heavily taxed dividends may discourage payments. • - Favorable tax policies can boost dividends.
• 17.
  Dividend Policies ofIndian Companies •Indian firms prefer stable dividends •Bonus shares and interim dividends common •Examples: Infosys, TCS, HUL
• 18.
  Dividend Theories
• 19.
  Dividend Theories Introduction •-Dividend theories explain the impact of dividend policy on firm value. •- Two broad categories: Relevance and Irrelevance theories.
• 20.
  Relevance of Dividends •Investorsprefer certain dividends over uncertain capital gains •Dividends provide signals about firm performance •Reduces investor uncertainty
• 21.
  Irrelevance Theory •Proposed byModigliani & Miller •Assumes perfect capital markets •Dividend policy does not affect firm value •Investors can create 'homemade dividends'
• 22.
  Walter’s Model (RelevanceTheory) •- Dividends are relevant to firm value. •- If Return (r) > Cost of Capital (k): Retain earnings. •- If r < k: Distribute dividends. •- Formula: P = [D + (r/k)(E – D)] / k
• 23.
  Gordon’s Model (RelevanceTheory) •- Investors prefer current dividends over future capital gains. •- Higher dividends = Higher share value. •- Formula: P = [E(1 – b)] / (k – br)
• 24.
  MM Theory (IrrelevanceTheory) •- Dividend policy has no effect on firm value in a perfect market. •- Assumes no taxes, no transaction costs. •- Value depends on investment policy, not dividend policy.
• 25.
  Bonus Shares •Issued fromreserves •No cash outflow •Increases number of shares •Retains capital within the firm
• 26.
  Rights Issue • Existingshareholders offered to buy additional shares • Usually at a discount • Raises fresh capital
• 27.
  Share Splits •Increases numberof shares •Reduces face value per share •Improves liquidity in the market
• 28.
  Dividends and Valuation •Dividends= Dividend yield + capital gains •Stable dividends can reduce perceived risk •Influence investor perception
• 29.
  Conclusion •Dividend decisions arecrucial for financial strategy •Must align with investor expectations and firm goals •Optimal policy balances growth and returns