STUDY OF DIVIDEND PAYOUT PATTERN OF AUTOMOBILE COMPANIES

STUDY OF DIVIDEND PAYOUT PATTERN

ABSTRACT

Dividend policy has been an issue of interest in financial literature since Joint Stock Companies came into existence. Dividends are commonly defined as the distribution of earnings (past or present) in real assets among the shareholders of the firm in proportion to their ownership. Dividend policy connotes to the payout policy, which managers pursue in deciding the size and pattern of cash distribution to shareholders over time. Managements’ primary goal is shareholders’ wealth maximization, which translates into maximizing the value of the company as measured by the price of the company’s common stock. This goal can be achieved by giving the shareholders a “fair” payment on their investments. However, the impact of firm’s dividend policy on shareholders wealth is still a debatable issue.

Dividend policy is one of the most complex aspects in finance. Three decades ago, Black (1976) in his study on dividend wrote, “The harder we look at the dividend picture the more it seems like a puzzle, with pieces that just don’t fit together”. Why shareholders like dividends and why they reward managers who pay regular increasing dividends is still unanswered.

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INDEX

S. No. Content Page No.1 Introduction 42 Scope 63 The Study 73a Maruti Suzuki India Ltd 83b Mahindra & Mahindra 113c Tata Motors 153d Hyundai Motor Company 193e Volkswagen AG 22

4 Analysis as a Whole 255 Conclusion 26

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INTRODUCTION

In the words of Ezra Salomon, “In an uncertain world where verbal statement can be misinterpreted or ignored, dividend speaks louder than 1000 words.”

What is Dividend?Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders.

What are different kinds of dividend?1. Cash Dividends: This is the most common form of dividend. Cash dividends are those dividends when simply cash is paid out of the profits.2. Share Repurchases: The Company repurchases the stock. Shareholders pay tax only on the capital gains portion.3. Stock Split: It increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.4. Bonus Issue: It is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not change the value of the company.5. Right Issue: With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time.

What are the different dividend policies?Dividend policy can be of two types: managed and residual. 1. Managed dividend policy: distribution is pre-decided whether the company will be paying same dividend per share over the time or it will be increasing dividend per share year by year. 2. Residual dividend policy: the amount of dividend is simply the cash left after the firm makes desirable investments using NPV rule. The rule is- if the company does not have any positive NPV projects to invest in, then it should pay shareholders dividend.

Normally, the amount of dividend is highly variable. If the manager believes dividend policy is important to their investors and it positively influences share price valuation, they will adopt managed dividend policy. Firms generally adopt dividend policies that suit the stage of life cycle they are in. For instance, high- growth firms with larger cash flows and fewer projects tend to pay more of their earnings out as dividends. The dividend policies of firms may follow several interesting patterns adding further to the complexity of such decisions. Also, there are distinct differences in dividend policy over the life cycle of a firm, resulting from changes in growth rates, cash flows, and project investments in hand. Shareholders wealth is represented in the market price of the company’s common stock, which, in turn, is the function of the company’s investment, financing and dividend decisions. Among the most crucial decisions to be taken for

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efficient performance and attainment of objectives in any organization are the decisions relating to dividend. Dividend decisions are recognized as centrally important because of increasingly significant role of the finances in the firm’s overall growth strategy. The objective of the finance manager should be to find out an optimal dividend policy that will enhance value of the firm. Like other important policy decisions dividend policy too has a signaling effect on the firms share prices. Generally, announcements of dividend increases generate abnormal positive security returns, and announcements of dividend decreases generate abnormal negative security returns. This is due to the fact that the company’s management has access to private and superior information about future prospects and choose a dividend level to signal that private information. Such a calculation, on the part of the management of the firm may lead to a stable dividend payout ratio.

Dividend policy of a firm has implications for investors, managers and lenders and other stakeholders, specifically the claimholders. For investors, dividends – whether declared today or accumulated and provided at a later date are not only a means of regular income, but also an important input in valuation of a firm. Similarly, managers’ flexibility to invest in projects is also dependent on the amount of dividend that they can offer to shareholders as more dividends may mean fewer funds available for future investments. Lenders may also have interest in the amount of dividends a firm declares, as more the dividend paid less would be the amount available for servicing and redemption of their claims. The dividend payments present an example of the classic agency situation as its impact is borne by various claimholders. Accordingly dividend policy can be used as a mechanism to reduce agency costs. The payment of dividends reduces the discretionary funds available with the management for perquisite consumption and investment opportunities and requires them to seek financing in capital markets. This monitoring by the external capital markets compels the managers to be more disciplined and act in owners’ best interest.

Companies generally prefer a stable dividend payout ratio because the shareholders expect it and reveal a preference for it. Shareholders may want a stable rate of dividend payment for a variety of reasons. Risk-averse shareholders would be willing to invest only in those companies which pay high current returns on shares. Similarly, educational institutions and charity firms prefer stable dividends, because they will not be able to carry on their current operations otherwise. Such investors would therefore, prefer companies, which pay a regular dividend every year. This clustering of stockholders in companies with dividend policies that match their preference is called clientele effect.

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SCOPE

1. Study of the annual reports of different automobile companies:I. Maruti Suzuki India Ltd.

II. Mahindra & MahindraIII. Tata MotorsIV. Hyundai Motor CompanyV. Volkswagen AG

2. For each company, annual reports are taken from the year 2006 (2006-07) to 2010 (2010-11).

3. The scope of the study of annual report is limited to the establishment of Dividend Payout Pattern and the factors necessary for such establishment. These are:

I. SalesII. Profit

III. Interest chargesIV. Earnings per shareV. Total number of issued shares

VI. Dividend proposedVII. Cash & Cash equivalents

VIII. Market prices of shareIX. Face value of shareX. Bonus Issue

XI. Right IssueXII. Stock Repurchase

XIII. Stock-Split

4. Following ratios have been worked out:I. Scale of firm's operation by taking Natural Log of Net Sales

II. Profit as a %age of salesIII. Dividend YieldIV. Dividend Payout RatioV. Dividend Ratio

VI. Debt Equity Ratio

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THE STUDY

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COMPANY – 1

Name: Maruti Suzuki India Ltd

Business: Manufacturing of Passenger Cars

Head Office: New Delhi, India

Establishment: 1981

Sales in year 2010-11: Rs 36128 crores

Profits in year 2010-11: Rs 2288 crores

Dividend proposed in year 2010-11: Rs 7.5 per share

Currency: Rupees

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Data for Cash Dividend:

Year/Variables

ScaleProfit % of Sales

Dividend Yield

Dividend payout

Dividend Ratio

Debt Equity

2010-11 (2010)

12.79741 6.33% 0.47% 9.47%

150.00% 2.00%

2009-10 (2009)

12.61552 8.29% 0.25% 6.94%

120.00% 7.00%

2008-09 (2008)

12.22383 5.99% 0.65% 8.30% 70.00% 7.00%

2007-08 (2007)

12.09292 9.69% 0.54% 8.07%

100.00%

11.00%

2006-07 (2006)

11.89083

10.70% 0.43% 8.32% 90.00% 9.00%

2006-07 (2006)

2007-08 (2007)

2008-09 (2008)

2009-10 (2009)

2010-11 (2010)

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

Maruti Suzki

Dividend RatioDividend payout

%ag

e

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2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)0

10

20

30

40

50

60

70

80

90

100

Dividend & Earnings per Share

DPS

EPS

in I

NR

Interpretations:

1. Since there is no Stock-Split in last 5 years, therefore, the shape of the graphs of Dividend Ratio and Dividend per Share is same.

2. Dividend Payout ratio, which is Dividend per share divided by Earning per share, has shown minor variation over the period of 5 years. It ranges from 6.94% to 9.47%.

3. Dividend ratio, which is Dividend per share divided by Face-Value/Par-Value of the share, has seen uphill trend except the year 2008-09. Year 2008-09 saw recessionary conditions throughout the world. Although the net sales had increased by 13.98% in 2008-09, but profits had declined by 29.58%. This decline was responded by decline in dividend ratio.

Other forms of Dividend:

1. Bonus Issue: It never issued Bonus Shares.2. Stock Repurchases: It never announced Stock-Repurchases.3. Right Issue: Maruti Suzuki India ltd. never came out with its 2nd IPO. So it never had

Right Issue.4. Stock-Split: The Face-Value of its share during IPO was Rs 5/- and today even, it is still

the same. So it never had Stock Split.

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COMPANY – 2

Name: Mahindra & Mahindra

Business: Manufacturing of 2-Wheelers, Passenger Cars, Commercial Vehicles & Farm Vehicles

Head Office: Mumbai, India

Establishment: 1947



Dividend proposed in year 2010-11: Rs 11.5 per share

Currency: Rupees

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Year/Variables

ScaleProfit % of Sales

Dividend Yield

Dividend payout

Dividend Ratio

Debt Equity

2010-11 (2010) 10.06449 11.33% 1.65% 24.89% 230.00% 23.00%

2009-10 (2009) 9.83103 11.22% 1.74% 25.02% 190.00% 37.00%

2008-09 (2008) 9.47988 6.39% 5.22% 31.42% 100.00% 77.00%

2007-08 (2007) 9.36495 9.45% 3.31% 24.87% 115.00% 60.00%

2006-07 (2006) 9.23220 10.45% 2.95% 25.47% 115.00% 46.00%

2006-07 (2006)

2007-08 (2007)

2008-09 (2008)

2009-10 (2009)

2010-11 (2010)

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

Mahindra & Mahindra


%ag

e

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2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)0

5

10

15

20

25

30

35

40

45

50


DPS

EPS

in I

NR

Interpretations:

1. Since there is Stock-Split in March 2010, therefore, the shape of the graphs of Dividend Ratio and Dividend per Share is different.

2. Mahindra & Mahindra is one of those Automobile Companies which believes in sharing major chunk of profits with its shareholders. The company distributed dividend on consistent basis with some minor variations. Its dividend payout ratio ranges from 24.47% to 31.42%.

3. Although by analyzing the above graph, one can say that company is following stable dividend policy. But on the face of it, there is 2-fold jump in Dividend ratio from year 2008-09 to 2010-11. This is due to the Stock-Split.


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1. Bonus Issue (History):

Announcement Date Bonus Ratio Record Date Ex-Bonus Date

14/06/2005 1 : 1 02/09/2005 01/09/200507/11/1995 2 : 3 23/01/1996 20/12/199529/04/1984 2 : 3 - -29/04/1980 1 : 1 - -

2. Stock Repurchases: It never announced Stock-Repurchases.3. Right Issue (History):

Announcement Date

Right Ratio

Face Value (Rs)

Premium (Rs)

Record Date

Ex-Right Date

Existing Inst. Name

Offered Inst Name

30/09/1992 1 : 5 0 0 27/08/199226/06/1992

NCDEquity Share

4. Stock-Split: The company had fixed March 30, as the 'Record Date' for the purpose of ascertaining the list of shareholders who would be entitled to receive two equity shares of the face value of Rs 5 each in lieu of every one equity shares of the face value of Rs 10 held by them. On 29th march, 2010 Mahindra & Mahindra has gained 4% at Rs 560. The stock today is traded at the ex-split price, the face value of stock is now Rs 5 paid-up from Rs 10 paid-up earlier.

.

COMPANY – 3

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Name: Tata Motors

Business: Manufacturing of Passenger Cars & Commercial Vehocles

Head Office: Mumbai, India

Establishment: 1945



Dividend proposed in year 2010-11: Rs 20 per share

Currency: Rupees


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Year/Variables ScaleProfit % of Sales

Dividend Yield

Dividend payout

Dividend Ratio

Debt Equity

2010-11 (2010) 11.71939 7.50% 8.02% 13.76% 200.00% 172.00%

2009-10 (2009) 11.42628 2.74% 9.92% 34.01% 150.00% 429.00%

2008-09 (2008) 11.17896 -3.44% 16.64% -10.95% 60.00% 673.00%

2007-08 (2007) 10.47484 6.31% 12.87% 25.88% 150.00% 134.00%

2006-07 (2006) 10.37557 6.88% 11.03% 26.22% 150.00% 95.00%

2006-07 (2006)

2007-08 (2007)

2008-09 (2008)

2009-10 (2009)

2010-11 (2010)

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

Tata Motors


%ag

e

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2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)

-100

-50

0

50

100

150

200


DPSEPS

in IN

R

Interpretations:

1. Since there is no Stock-Split in last 5 years (2006-2010), therefore, the shape of the graphs of Dividend Ratio and Dividend per Share is same.

2. In the last 5 years (2006-2010), there is huge variation in Dividend Payout ratio, which ranges from (-ve)10.95% to 34.01%. There was (-ve)10.95% Dividend Payout ratio because dividends were in year 2008 despite posting losses to the tune of Rs 2465 crores.

3. There is decline in Dividend Payout Ratio in 2010 but Dividend Ration has increased in the same year. This is because the profits, in year 2010, have increased by 266% from Rs2516.89 crores to Rs 9220.79 crores. So the Dividend Payout Ratio has decline but not the Dividend Ratio.

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1. Bonus Issue (History):

Announcement Date

Bonus Ratio Record Date Ex-Bonus Date

28/09/1995 3 : 5 01/11/1995 04/10/199529/04/1982 2 : 5 - -29/04/1979 2 : 5 - -29/04/1977 1 : 5 - -

2. Stock Repurchases: It never announced Stock-Repurchases.3. Right Issue:

Announcement Date

Right Ratio

Face Value (Rs)

Premium (Rs)

Record Date

Ex-Right Date

Existing Inst. Name

Offered Inst. Name

15/06/2001 1 : 4 0 0 -29/08/2001

Equity Share

Convertible Debenture

Note: One 7% CD of Rs.65 each on rights basis for every 4 existing Equity Shares of Rs.10 each held. (every 5 CD would also have 1 detachable and tradeable equity warrant) and One 11% NCD of Rs.100 each on rights basis for every 10 existing Equity Shares held.

28/05/2008 1 : 6 0 330 - -Equity Share

Equity Share

Note: Rights issue of Ordinary shares in the ratio of 1 Ordinary share for every 6 shares held. The Ordinary Shares would be issued at a price of Rs. 340/- per share of face value of Rs. 10/- each

29/05/2008 1 : 6 0 29516/09/2008

09/09/2008

Equity Share

Equity Share

Note: Rights issue of 'A' Ordinary shares in the ratio of 1 Ordinary share for every 6 shares held. The 'A' Ordinary Shares would be issued at a price of Rs. 305/- per share of face value of Rs. 10/- each.

4. Stock-Split: Ex-split date 12th September, 2011. Tata Motors Ltd has informed BSE that September 13, 2011 has been fixed as the Record Date for the purpose of Sub-Division / stock split of Ordinary and 'A' Ordinary Shares (collectively 'the shares') of Rs. 10/- per share of the Company into the shares of Rs. 2/- each.

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COMPANY – 4

Name: Hyundai Motor Company

Business: Manufacturing of Passenger Cars & Commercial Vehicles

Head Office: Seoul, South Korea

Establishment: 1967

Sales in year 2010: 36769426 million Won

Profits in year 2010: 5266971 million Won

Dividend proposed in year 2010: 1195 Won per share

Currency: Won

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Dividend Yield

Dividend payout

Dividend Ratio

Debt Equity

2010-11 (2010) 17.42018 14.32% 0.90% 5.96% 23.90% 96.50%

2009-10 (2009) 17.27684 9.30% 1.00% 8.13% 17.79% 103.27%

2008-09 (2008) 17.28716 4.50% 2.20% 12.28% 6.14% 114.95%

2007-08 (2007) 17.23715 5.49% 1.40% 12.41% 14.43% 96.98%

2006-07 (2006) 17.12369 5.58% 1.50% 13.64% 15.65% 89.17%

2006-07 (2006)

2007-08 (2007)

2008-09 (2008)

2009-10 (2009)

2010-11 (2010)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Hyundai


%ag

e

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2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)0

5000

10000

15000

20000

25000


DPS

EPS

in K

OR

EA

N W

ON

Interpretations:

1. Since there is no Stock-Split in last 5 years (2006-2010), therefore, the shape of the graphs of Dividend Ratio and Dividend per Share is same.

2. In last 5 years (2006-2010), Dividend Payout Ratio has consistently decline from 13.64% to 5.96%.

3. Although there is consistent decline Dividend Payout Ratio, but Dividend per Share has increased in year 2009 and 2010. This is due to the increase in the net profits of the firm.


1. Bonus Issue: It never issued Bonus Shares.2. Stock Repurchases: It never announced Stock-Repurchases.3. Right Issue: Hyundai hasn’t come up with any IPO recently. So it didn’t have Right

Issue in last 5 years.4. Stock-Split: The Face-Value of its share is 5000 Korean won and it hasn’t seen any stock

split in the last 5 years.

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COMPANY – 5

Name: Volkswagen AG

Business: Manufacturing of Passenger Cars, Commercial Vehicles & Engines

Head Office: Wolfsburg, Germany

Establishment: 1937

Sales in year 2010: 126875 million Euros

Profits in year 2010: 7226 million Euros

Dividend proposed in year 2010: 2.2 Euros per share

Currency: Euros

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Dividend Yield

Dividend payout

Dividend Ratio

Debt Equity

2010-11 (2010) 11.75096 5.70% 2.08% 14.50% - 309.80%

2009-10 (2009) 11.56349 0.87% 2.08% 67.51% - 374.00%

2008-09 (2008) 11.64227 4.12% 0.77% 16.19% - 348.00%

2007-08 (2007) 11.59816 3.79% 1.15% 17.26% - 354.00%

2006-07 (2006) 11.56052 2.62% 1.46% 17.68% - 407.60%

2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

Volkswagen

Dividend payout

%ag

e

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2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)0

2

4

6

8

10

12

14

16


DPS

EPS

in E

UR

OS

Interpretations:

1. The Dividend Payout Ratios are highly variable. Initially it is hovering around 17%, then there is evident jump of 67.51% which again decline to 14.41%.

2. Dividend per share has seen constant increase in amount. 2009 is the only year which has seen the decline in Dividend per share. This is due to the low profits of 911 million Euros which was .87% of the sales of that year.


1. Bonus Issue: No Bonus Shares in last 5 years.2. Stock Repurchases: No announcement of Stock-Repurchases in last 5 years.3. Right Issue: No Right Issue in last 5 years.4. Stock-Split (History):Since the start of trading in 1961, Volkswagen AG shares have

been subjected to two Stock Splits – the first was on 17 March 1969 when they were split at a ratio of 2:1, from a DM 100 share to a DM 50 share. The second split occurred on 6 July 1998, the DM 50 share being converted into a share of no overall nominal value, at a ratio of 1:10.

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ANALYSIS AS A WHOLE

A. Standard Deviation for the Dividend Payout Ratio, Year-Wise (Inter Companies):

Year Mean St. Dev2010-11 (2010) 13.72% 7.1412009-10 (2009) 28.32% 24.7252008-09 (2008) 11.45% 15.0892007-08 (2007) 17.7% 7.7392006-07 (2006) 18.27% 7.692

High Standard Deviation means high scatteredness of the data from the mean.

B. Standard Deviation for the Dividend Payout Ratio, Company-Wise (Inter Years for 5years):

Company Mean St. Dev.Maruti Suzuki India Ltd. 8.22% .91Mahindra & Mahindra 26.33% 2.84Tata Motors 17.78% 17.41Hyundai Motor Company 10.48% 3.27Volkswagen 26.63% 22.88

1. The Standard Deviation of Dividend Payout Ratio of Maruti Suzuki India Ltd is .91, which means there is very low variation in its Dividend Payout Ratio.

2. Whereas, Standard Deviation of Dividend Payout Ratio of Volkswagen is 22.88, it means there is high variation in its Dividend Payout Ratio.

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CONCLUSION:

There is no fixed pattern in the distribution of Dividend of the Automobile Industry. But pattern could be worked out for different Companies.

I. Maruti Suzuki India Ltd, followed a stable Dividend Payout Ratio with mean of 8.22%.

II. Mahindra & Mahindra, followed a stable Dividend Payout Ratio with mean of 26.33%.

III. In Tata Motors, Dividend Payout Ratio has varied from (-ve)10.95% to 34.01%, over the period of last 5 years. Despite losses, in 2008, it distributed Dividend Per Share of Rs. 5

IV. In Hyundai Motor Company, there is a gradual decrease in Dividend Payout Ratio in last 5 years from 13.64% to 5.96%.

V. There is Volkswagen, which in year 2009 distributed 67.51% of the profits among its shareholders despite having very low profit for that year, otherwise there DPS is hovering around 16.5%.

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