Dividend Policy.ppt

Dividend Policy

1. DIVIDEND POLICY

2. Objectives Of Dividend Policy
•Firm’s Need for Funds
•Shareholders’ Need for Income
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3. Practical Considerations In Dividend Policy
•Firm’s Investment Opportunities and Financial Needs
•Shareholders’ Expectations
•Constraints on Paying Dividends
–Legal restrictions
–Liquidity
–Financial condition and borrowing capacity
–Access to the capital market
–Restrictions in loan agreements
–Inflation
–Control
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4. Stability Of Dividends
•Constant Dividend per Share or Dividend
Rate.
•Constant Payout.
•Constant Dividend per Share Plus Extra
Dividend.
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5. Constant dividend per share policy
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6. Dividend policy of constant payout ratio
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7. Significance of Stability of Dividends
•Resolutions of investors uncertainty.
•Investors’ desire for current income.
•Institutional Investors’ Requirement.
•Raising Additional Finances.
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8. Forms Of Dividends
•Cash Dividends
•Bonus Shares (Stock Dividend)
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9. Advantages of Bonus Shares
•To shareholders:
–Tax benefit
–Indication of higher future profits
–Future dividends may increase
–Psychological value
•To company:
–Conservation of cash
–Only means to pay dividend under financial difficulty
and contractual restrictions
–More attractive share price
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10. Limitations of Bonus Shares
•Shareholders’ wealth remains unaffected
•Costly to administer
•Problem of adjusting EPS and P/E ratio
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11. Conditions for the Issue of Bonus Shares
•Residual reserve criterion
•Profitability criterion
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12. Share split
•Asharesplitisamethodtoincreasethe
numberofoutstandingsharesthrougha
proportionalreductionintheparvalueofthe
share.Asharesplitaffectsonlytheparvalue
andthenumberofoutstandingshares;the
shareholders’totalfundsremainunaltered.
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13. Example
•ThefollowingisthecapitalstructureofWalchandSons
&Company:
•Walchand Company split their shares two-for-one. The
capitalization of the company after the split is as follows:
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14. Bonus Share vs. Share Split
•Thebonusissueandthesharesplitaresimilarexcept
forthedifferenceintheiraccountingtreatment.
•Inthecaseofbonusshares,thebalanceofthe
reservesandsurplusesaccountdecreasesduetoa
transfertothepaid-upcapitalandthesharepremium
accounts.Theparvaluepershareremains
unaffected.
•Withasharesplit,thebalanceoftheequityaccounts
doesnotchange,buttheparvaluepersharechanges.
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15. Reasons for Share Split
•Tomaketradinginsharesattractive
•Tosignalthepossibilityofhigherprofitsinthe
future
•Togivehigherdividendstoshareholders
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16. Reverse Split
•Underthesituationoffallingpriceofacompany’sshare,the
companymaywanttoreducethenumberofoutstanding
sharestopropupthemarketpricepershare.
•Thereductionofthenumberofoutstandingsharesby
increasingpershareparvalueisknownasareversesplit.
•Thereversesplitisgenerallyanindicationoffinancial
difficulty,andis,therefore,intendedtoincreasethemarket
pricepershare.
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17. Buyback Of Shares
•Thebuybackofsharesistherepurchaseofits
ownsharesbyacompany.
•Infosyshad,onJanuary11,2019,
announcedbuybackofsharesworthuptoRs
8,260croreatRs800pershare.Thecompany
saiditwouldbuyback103.25millionequity
shares,whichaccountsfor2.36percentofthe
paid-upcapitalofthecompanyasofDecember
31,2018(onastandalonebasis).
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18. InIndiathefollowingconditionsapply
incaseofthebuybackshares:
•Acompanybuyingbackitsshareswillnotissuefreshcapital,
exceptbonusissue,forthenext12months.
•Thecompanywillstatetheamounttobeusedforthebuyback
ofsharesandseekpriorapprovalofshareholders.
•Thebuybackofsharescanbeaffectedonlybyutilizingthe
freereserves,viz.,reservesnotspecificallyearmarkedfor
somepurpose.
•Thecompanywillnotborrowfundstobuybackshares.
•Thesharesboughtunderthebuybackschemeswillbe
extinguishedandtheycannotbereissued.
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19. Methods of Shares Buyback
•First,acompanycanbuyitssharesthrough
authorizedbrokersontheopenmarket.
•Second,thecompanycanmakeatenderoffer,which
willspecifythepurchaseprice,thetotalamountand
theperiodwithinwhichshareswillbeboughtback.
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20. Effects of the Shares Buyback
•Itisbelievedthatthebuybackwillbe
financiallybeneficialforthecompany,the
buyingshareholdersandtheremaining
shareholders.
•Increaseinthecompany’sdebt-equityratio
duetoreducedequitycapital.
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21. Advantages of the Buyback
Return of surplus cash to shareholders
Increase in the share value
Increase in the temporarily undervalued share
price
Achieving the target capital structure
Consolidating control
Tax savings by companies
Protection against hostile takeovers
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22. Drawbacks of the Buyback
Not an effective defence against takeover
Shareholders do not like the buyback
Loss to the remaining shareholders
Signal of low growth opportunities
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