Corporate Finance 1

Mohit Chaudhary

Parul Bhel

Corporate Finance

26/4/2024

Dividend Decisions

Financial Management

Financial Management is concerned with the management of the flow of funds and

involves decisions related to the acquisition and application of funds in long-term and short-term

assets. It is concerned with two aspects; they are procurement of funds and usage of finance.

Financial decisions

Financial decision refers to the decision related to financial matters of a business firm.

There are various financial decisions that the firm makes to maximize shareholders’ wealth.

There are three major decisions that every financial management takes investment decision,

financial decision, and dividend decision.

Dividend Policy

What Is a Dividend Policy?

A dividend policy is a policy a company uses to structure its dividend payout. Put simply,

a dividend policy outlines how a company will distribute its dividends to its shareholders. These

structures detail specifics about payouts, including how often, when, and how much is

distributed. There are three different types of dividend policies—stable, constant, and residual—
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each with its own benefits. Dividend policies aren't mandatory, as some companies choose not to

reward shareholders with dividends.

 A dividend policy dictates the structure of a company's dividend payout.

 Dividends are often part of a company's strategy.

 Stable, constant, and residual are the three types of dividend policy.

 Even though investors know companies are not required to pay dividends, many consider

it a bellwether of that specific company's financial health

How a Dividend Policy Works

Some companies choose to reward their common stock shareholders by paying them

a dividend. A dividend is paid on a regular basis and usually represents a portion of the profits

that these companies earn. This gives shareholders a regular stream of income, which is why

dividend-paying stocks are a favorite for some investors.

Having a dividend policy in place is important for dividend-paying companies. This is a

structure that highlights several key points, including:

 How often dividends are paid out (monthly, quarterly, or annually)

 When they are paid

 How much to pay shareholders

These decisions are made by a company's management team. It must also decide what, if

any, other factors may have to be put in place that would influence dividend payments. An

additional factor to consider includes providing shareholders with the option to take their

dividends in cash or allowing them to reinvest them by purchasing additional shares through

a dividend reinvestment program (DRIP).

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There are three types of dividend policies: a stable dividend policy, a constant dividend

policy, and a residual dividend policy. These are highlighted in more detail below. Companies

that choose not to pay their shareholders a dividend have no dividend policy, as paying a

dividend isn't mandatory. Their focus may be to grow their businesses by reinvesting their

profits.

Dividend Decision

The dividend is that portion of the profit that is distributed to the shareholders. The

decision involved here is how much of the profit earned by the company after paying the taxes is

to be distributed to the shareholders. It also includes the part of the profit that should be retained

in the business. When the current income is re-invested, the retained earnings increase the firm’s

future earning capacity. This extent of retained earnings also influences the financing decision of

the firm. The dividend decision should be taken keeping in view the overall objective of

maximizing shareholders’ wealth.

Factors affecting Dividend Decision

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There are various factors that affect the dividend decision. These are as

follows:

 Amount of Earnings: Dividends are paid out of the current and previous year’s earnings.

More earnings will ensure greater dividends, whereas fewer earnings will lead to the

declaration of a low rate of dividends.

 Stability of Earning: A company that is stable and has regular earnings can afford to

declare higher dividend as compared to those company which doesn’t have such stability

in earnings.

 Stability of Dividend: Some companies follow the policy of playing a stable

dividend because it satisfies the shareholders and helps in increasing companies

reputation. If earning potential is high, it is declared as a high dividend, whereas if the

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earning is temporary or not increasing, then it is declared as a low or normal dividend.

 Growth Opportunities: Companies with growth opportunities prefer to retain more

money out of their earnings to finance the new project. So, companies that have growth

prospects in near future will declare fewer dividends as compared to companies that don’t

have any growth plan.

 Cash flow Position: Payment of dividends is related to the outflow of cash. A

company may be profitable, but it may have a shortage of cash. In case the company has

surplus cash, then the company can pay more dividends, but during a shortage of cash,

the company can declare a low dividend.

 Taxation Policy: The rate of dividends also depends on the taxation policy of the

government. In the present taxation policy, dividend income is tax-free income to the

shareholders, so they prefer higher dividends. However, dividend decision is left to

companies.

 Stock market reaction: The rate of dividend and market value of a share are directly

related to each other. A higher rate of dividends has a positive impact on the market price

of the shares. Whereas, a low rate of dividends may hurt the share price in the stock

market. So, management should consider the effect on the price of equity shares while

deciding the rate of dividend.

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Why Do Companies Pay Dividends?

Dividends are often expected by the shareholders as a reward for their investment in a

company. Dividend payments reflect positively on a company and help maintain investors’ trust.

A high-value dividend declaration can indicate that the company is doing well and has

generated good profits. But it can also indicate that the company does not have suitable projects

to generate better returns in the future. Therefore, it is utilizing its cash to pay shareholders

instead of reinvesting it into growth.

A company with a long history of dividend payments that declares a reduction of the

dividend amount, or its elimination, may signal to investors that the company is in trouble.

AT&T Inc. cut its annual dividend in half to $1.11 on Feb. 1, 2022, and its shares fell 4% that

day.

However, a reduction in dividend amounts or a decision against a dividend payment may

not necessarily translate into bad news for a company. The company's management may have a

plan for investing the money such as a high-return project that has the potential to magnify

returns for shareholders in the long run.

Dividend-Paying Companies

Larger, established companies with predictable profits are often the best dividend payers

and the following industry sectors maintain a regular record of dividend payments:

Basic materials

Oil and gas

Banks and financial

Healthcare and pharmaceuticals

Utilities
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Companies structured as master limited partnerships (MLPs) and real estate investment

trusts (REITs) require specified distributions to shareholders. Funds may also issue regular

dividend payments as stated in their investment objectives.

Startups, such as those in the technology or biotech sectors, may not offer regular

dividends since these companies may be in the early stages of development and retain earnings

for research and development, business expansion, and operational activities.

Important Dividend Dates

Dividend payments follow a chronological order of events, and the associated dates are

important to determining which shareholders qualify to receive the dividend payment.

Announcement date: Dividends are announced by company management on

the announcement date (or declaration date) and must be approved by the shareholders before

they can be paid.

Ex-dividend date: The date on which the dividend eligibility expires is called the ex-

dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5,

then shareholders who buy the stock on or after that day will NOT qualify to receive the

dividend. Shareholders who own the stock one business day prior to the ex-date, on Friday, May

2, or earlier, qualify for the distribution.

Record date: The record date is the cutoff date, established by the company to determine

which shareholders are eligible to receive a dividend or distribution.

Payment date: The Company issues the payment of the dividend on the payment date,

which is when the money gets credited to investors' accounts.

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How Do Dividends Affect a Stock's Share Price?

As an example, a company that is trading at $60 per share declares a $2 dividend on the

announcement date. As the news becomes public, the share price may increase by $2 and hit $62.

If the stock trades at $63 one business day before the ex-dividend date. On the ex-

dividend date, it's adjusted by $2 and begins trading at $61 at the start of the trading session on

the ex-dividend date, because anyone buying on the ex-dividend date will not receive the

dividend.

Fund Dividends

Dividends paid by funds, such as a bond or mutual funds, are different from dividends

paid by companies. Funds employ the principle of net asset value (NAV), which reflects the

valuation of their holdings or the price of the assets that a fund has in its portfolio.

Regular dividend payments should not be misunderstood as a stellar performance by the

fund. For example, a bond-investing fund may pay monthly dividends because it receives

monthly interest on its interest-bearing holdings and merely transfers the income from the

interest fully or partially to the fund's investors.

A stock-investing fund pays dividends from the earnings received from the many stocks

held in its portfolio or by selling a certain share of stocks and distributing capital gains.
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Mahindra & Mahindra

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Mahindra & Mahindra

Ltd.
COMPANY BACKGROUND
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Mahindra & Mahindra is a core unit of conglomerate Mahindra Group. A major producer

of sport utility vehicles, trucks and farm tractors, the company is active in the domestic and

international markets.

The conglomerate was founded in 1945 as a steel trading company. It was established by

Jagdish Chandra Mahindra, his brother Kailash Chandra Mahindra, partner Ghulam Mohammed

and the city now known as Mumbai. J.C. Mahindra was the grandfather of Anand Mahindra, the

current chairman.

After India won independence from Britain in 1947, Mohammed entered politics in

Pakistan, leaving the management of the company to the Mahindra brothers. The company then

began building four-wheel-drive vehicles and, on the strength of the auto business, gradually

expanded its empire.

The company scored hits with its SUVs in the 2000s, helping to cement its presence in

the passenger car business. In 2010, it took over South Korean automaker Ssangyong Motor. It

also acquired domestic startups and became the first Indian company to market electric vehicles.

Mahindra Group is also engaged in the agricultural, financial services and Information

Technology services sectors. The founding family and group companies own more than 20% of

Mahindra & Mahindra.

Vision and Mission

Mahindra & Mahindra's mission statement is to challenge conventional thinking and use

resources to create positive change in the lives of communities and stakeholders around the

world. Their core values include:

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 Customer first: They measure their business's success by its customer-centricity

 Quality focus: They make quality a driving value in their work, products, and interactions

with others

 Dignity of the individual: They respect the time and efforts of their stakeholders, uphold

the right to express disagreement, and value individual dignity

Financial Summary

Mahindra & Mahindra Limited reported earnings results for the second quarter and six

months ended September 30, 2023. For the second quarter, the company reported sales was INR

342,812 million compared to INR 298,703.8 million a year ago. Revenue was INR 350,272.3

million compared to INR 301,308.5 million a year ago. Net income was INR 23,477.5 million

compared to INR 27,727.3 million a year ago. Basic earnings per share from continuing

operations was INR 21.07 compared to INR 24.93 a year ago. Diluted earnings per share from

continuing operations was INR 20.99 compared to INR 24.8 a year ago.For the six months, sales

was INR 676,876.4 million compared to INR 582,827.6 million a year ago. Revenue was INR

697,259.1 million compared to INR 587,592.4 million a year ago. Net income was INR 58,561.6

million compared to INR 49,682.7 million a year ago. Basic earnings per share from continuing

operations was INR 52.57 compared to INR 44.67 a year ago. Diluted earnings per share from

continuing operations was INR 52.35 compared to INR 44.45 a year ago.
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Dividend payouts by Mahindra and Mahindra

MAH Indus-
Title
M try

Dividend (Yield) 0.79% 0.79

Payout Ratio - 4.78%

Annualized payout 16.25 -

Annualized Growth Last 5 Years 32% 25.4

Mahindra & Mahindra Ltd Dividend 2024

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Mahindra & Mahindra Ltd is one of the most popular Consumer Cyclical company in

the world with a market capitalization of ₹2,56,452.95Cr. Its share price is ₹2,058.45 as on 24

April, 2024.

The dividend is a percentage of earnings paid out to shareholders. Last year, Mahindra

& Mahindra Ltd gave ₹27.80 for the full year.

Key Highlights

 Consumer Cyclical stocks do not always pay a dividend but as Mahindra & Mahindra Ltd

pays dividends to reward its shareholders.

 In the quarter ending March 2023, Mahindra & Mahindra Ltd has declared dividend of

₹16.25 - translating a dividend yield of 1.35%.

Let's look at Mahindra & Mahindra Ltd’s capacity to pay dividends and consider

its valuation to determine its virtues as a dividend stock:

 Mahindra & Mahindra Ltd’s revenue were ₹36,055.08Cr in the quarter ending December

2023. The revenue grew by 13.36% year on year basis since last quarter.

 Mahindra & Mahindra Ltd’s profits were ₹2,658.40Cr in the quarter ending December

2023. The profits fell by -0.68% year on year basis since last quarter.

 Mahindra & Mahindra Ltd’s dividend was ₹16.25 in the quarter ending March 2023.

Mahindra & Mahindra Ltd Dividend related ratios:

 Last dividend date: 26/05/2023

 Current Dividend Yield: 1.35%

 Annual dividend payment: ₹27.80

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Announcement Record Ex-Divi- Dividend

Description
Date Date dend Value

Rs.16.2500 per
25-May-23 - 13-Jul-23 16.25
share(325%)Dividend

Rs.11.5500 per
29-May-22 - 13-Jul-22 11.55
share(231%)Dividend

Rs.8.7500 per
27-May-21 - 14-Jul-21 8.75
share(175%)Dividend

Peer Review

ANALYSIS OF DIVIDEND TRENDS IN THE SELECTED COMPANIES

NAME OF COMPANY MEAN SD CV

Ashok Leyland 31.34 12.79 0.408

Bajaj Auto 41.58 16.51 0.397

Eicher Motors 25.18 14.23 0.565

Maruti Suzuki India 14.34 6.141 0.428

Hero Motor Corp 63.19 23.04 0.365

Mahindra and Mahindra 22.69 4.369 0.193

Force Motors Ltd 7.491 7.606 1.015

Tata Motors 65.05 76.8 1.181

TVS Motor Company 35.74 12.12 0.339

Escorts Ltd 12.34 6.585 0.534

Auto Industry Average 31.893 18.02 0.542

Average of Indian Auto industry 27.32 19.31 0.67

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The above table indicates that four companies out of the ten selected companies

belonging to Auto Industry, viz., Bajaj Auto Ltd, Hero Motorcop, Tata Motors Ltd and TVS

Motor Company followed a more liberal dividend policy as compared to the general trend of

the industry. This table also exhibits that Auto Industry adopted a more liberal dividend policy

as compared to the general trend revealed in the Indian industries.

Conclusion

Mahindra & Mahindra (M&M) has consistently paid dividends for the past five

years. For the year ending March 2023, M&M declared an equity dividend of 325%, or Rs

16.25 per share, which results in a dividend yield of 0.79% at the current share price of Rs

2044.90. M&M's trailing annual dividend yield as of March 9, 2024 is 0.86%. Over the past 10

years, M&M's dividend yield has ranged from a minimum of 0.25% to a maximum of 3.03%.

When determining the dividend rate, M&M's board considers the

following factors:

 Industry outlook for the future years

 Inflation rate

 Changes in government policies, industry specific rulings, and regulatory provisions

 Past dividend history

 Shareholders' expectations

The board may also recommend a special dividend in special circumstances, or may consider not

declaring a dividend or recommending a lower payout for a given financial year.