Dividend Policy

Abstract

Dividend policy/decision constitutes yet another major financial decision for corporate firms. It relates to the share of dividends to be paid out of profits earned. The company should prefer the decision which has a salutary effect on the wealth of the shareholders. The two major objectives of this chapter are first, to ascertain/identify the practices followed by the sample companies in this regard and second, to assess whether the sample companies follow a stable dividend policy or not.

It is gratifying to note from the 11-year (2001–2011) period of the study that the majority of the sample companies follow stable dividend policy. They seem to follow an approach similar to Lintner’s model. The survey findings on the preference to adopt stable dividend policy (by sectors like oil and gas and ICT amongst others) were in fact more revealing. This practice is in tune with the sound principles of financial management.

The empirical evidence, further, suggests that the sample firms have dividend–payout ratio of much less than 25 % for the entire period of the study perhaps suggesting that the sample consists of companies with good growth opportunities. It is worthwhile to mention here that the dividend–payout ratios have been gradually decreasing over the past two decades (as is evident after comparing results with previous studies, viz., Jain and Kumar (Comparative financial management: practices of India and South East Asia. Hindustan Publishing Corporation, New Delhi, pp 43–44, 1997), Jain and Yadav (Financial management practices in select private corporate enterprises – a comparative study of India. Hindustan Publishing Corporation, India/Thailand/Singapore, 2000, Financial management practices – a study of public sector enterprises in India. Hindustan Publishing Corporation, New Delhi, 2005), perhaps indicating better growth opportunities for companies now, necessitating the ploughing back of cash into the business.

The study has also brought out industry-wise variations, to some extent, as far as dividend policy and practices are concerned. For instance, FMCG and healthcare sectors had high D/P ratios whereas sectors like metals and diversified reported low D/P ratios.

Appendices

Appendices

Appendix 4.1: Mean, median and quartile values of dividend payout ratio of constituent sectors of the sample companies over phase 1 (2001–2006) and phase 2 (2007–2011)

Sector	Phase 1 (2001–2006)				Phase 2 (2007–2011)
	Mean	Median	Quartile 1	Quartile 3	Mean	Median	Quartile 1	Quartile 3
Fast-moving consumer goods (FMCG)	43.90	49.89	16.57	68.70	43.55	45.79	18.66	65.90
Transport	28.66	27.56	13.58	38.70	26.62	23.37	15.45	38.26
Healthcare	27.83	25.83	15.16	40.05	26.25	22.51	15.30	32.55
Oil and gas	27.48	31.58	15.27	36.28	23.54	24.78	9.02	32.36
Miscellaneousa	26.53	23.98	5.44	41.54	29.70	28.28	16.30	41.21
Capital goods	23.87	19.29	12.27	30.60	19.74	21.03	13.96	24.12
Diversified	20.34	21.44	5.13	28.20	16.54	17.16	3.99	23.04
Power	19.33	20.50	9.50	27.17	20.99	24.93	2.50	33.53
Internet and communications technology (ICT)	18.39	12.34	4.58	26.39	20.67	15.73	5.38	32.40
Housing	16.88	14.87	2.67	26.17	20.27	11.69	5.64	24.21
Metals	14.64	13.45	3.48	20.21	14.72	12.30	6.25	20.99

1. ^aMiscellaneous sectors comprises of the media and publishing sector; agriculture, chemicals and petrochemicals; and tourism, textiles and miscellaneous sectors

Paired samples t-test of constituent sectors of the sample companies based on dividend payout ratio over phase 1 (2001–2006) and phase 2 (2007–2011)

	Phase 1 and Phase 2
	t	df	Significance (2-tailed)
Diversified	1.763	8	0.116
Capital goods	1.644	12	0.126
ICT	1.591	17	0.130
Power	−1.095	11	0.297
Housing	1.043	16	0.312
Healthcare	0.881	13	0.395
Oil and gas	0.574	14	0.575
Metals	−0.445	17	0.662
Transport	0.407	16	0.690
Miscellaneous	0.398	15	0.697
FMCG	0.327	11	0.750

Appendix 4.2: Mean, median and quartile values of dividend payout ratio of constituent sectors of the sample companies over phase 3 (2007–2008) and phase 4 (2009–2011)

Sector	Phase 3 (2007–2008)				Phase 4 (2009–2011)
	Mean	Median	Quartile 1	Quartile 3	Mean	Median	Quartile 1	Quartile 3
FMCG	41.12	44.33	14.78	63.43	44.85	45.79	23.01	66.57
Healthcare	28.00	22.82	12.26	36.34	24.93	22.64	17.62	29.49
Miscellaneous	27.65	25.23	14.49	38.32	31.78	31.37	18.24	43.94
Oil and gas	23.94	22.11	8.82	34.05	22.27	24.43	7.35	30.85
Housing	23.62	9.24	6.02	21.97	20.43	13.39	7.11	27.12
Transport	23.44	25.36	15.02	31.87	28.26	22.08	14.26	43.11
ICT	22.57	19.01	5.19	33.52	16.27	10.68	2.02	26.66
Power	22.00	26.50	2.00	33.50	19.31	22.20	1.00	32.72
Capital goods	19.97	20.93	11.87	24.58	18.54	21.27	14.17	23.41
Metals	15.78	13.46	5.24	21.34	13.40	10.80	6.52	20.83
Diversified	15.44	14.54	4.03	24.29	17.18	17.31	5.29	22.39

Paired samples t-test of constituent sectors of the sample companies based on dividend payout ratio over phase 3 (2007–2008) and phase 4 (2009–2011)

	Phase 3 and Phase 4
	t	df	Significance (2-tailed)
ICT	2.214	17	0.041
Power	2.154	13	0.051
Miscellaneous	−2.040	14	0.061
Capital goods	1.619	12	0.131
Transport	−1.417	17	0.174
Oil and gas	1.136	15	0.274
Metals	0.833	17	0.416
Housing	0.675	17	0.509
Healthcare	0.586	13	0.568
Diversified	−0.525	8	0.614
FMCG	−0.171	11	0.867

Appendix 4.3: ANOVA of the consolidated sample and the constituent sectors of the sample companies based on dividend payout ratio over phase 1 (2001–2006) and phase 2 (2007–2011) and phase 3 (2007–2008) and phase 4 (2009–2011)

Sector	Phase 1 and Phase 2		Phase 3 and Phase 4
	F	Significance	F	Significance
Consolidated	6.154	0.000	3.392	0.000
Housing	5.544	0.027	0.027	0.871
Capital goods	1.535	0.227	0.485	0.493
ICT	0.547	0.466	0.229	0.636
Diversified	0.335	0.571	0.071	0.794
Miscellaneous	0.272	0.606	0.002	0.961
Metals	0.215	0.647	0.953	0.338
Healthcare	0.071	0.792	0.186	0.670
Oil and gas	0.048	0.828	0.036	0.851
FMCG	0.007	0.935	0.005	0.942
Power	0.000	0.985	0.175	0.679
Transport	0.000	0.989	0.603	0.444

Appendix 4.4: Adherence to stable dividend policy by the constituents sectors of the sample companies (Figures are in percentages)

Sector	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	Phase1	Phase2	Phase3	Phase4
Capital goods	70.00	90.00	91.67	84.62	53.85	69.23	53.85	41.67	50.00	66.67	78.03	56.28	61.54	52.78
Healthcare	75.00	75.00	83.33	61.54	85.71	78.57	71.43	66.67	69.23	57.14	76.12	68.61	75.00	64.35
Diversified	57.14	85.71	85.71	83.33	66.67	66.67	100.00	66.67	66.67	50.00	75.71	70.00	83.34	61.11
FMCG	37.50	90.00	90.00	80.00	80.00	75.00	58.33	50.00	83.33	33.33	75.50	60.00	66.67	55.55
Metals	58.33	75.00	83.33	92.85	66.67	80.00	62.50	25.00	50.00	56.25	75.24	54.75	71.25	43.75
Housing	70.00	81.82	81.82	83.33	50.00	50.00	92.86	42.86	66.67	43.75	73.39	59.23	71.43	51.09
Miscellaneous	45.45	72.73	76.92	85.71	62.50	43.75	62.50	43.75	87.50	33.33	68.66	54.17	53.13	54.86
Oil and gas	80.00	70.00	70.00	75.00	41.67	76.92	76.92	66.67	75.00	53.85	67.33	69.87	76.92	65.17
Transport	41.67	69.23	85.71	64.29	60.00	81.25	93.75	35.29	76.47	62.50	64.18	69.85	87.50	58.09
Power	50.00	28.57	85.71	75.00	75.00	55.56	77.78	100.00	66.67	77.78	62.86	75.56	66.67	81.48
ICT	54.55	45.45	50.00	50.00	57.14	61.54	78.57	50.00	28.57	33.33	51.43	50.40	70.06	37.30