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The term "dividend" usually refers to a cash distribution of earnings. It is nothing but a part of profit (earning per share) which company decides to share with its shareholders in form of cash on a regular basis, usually annually (sometimes semiannually). My study is all about the DIVIDENDS and its effect on the price fluctuations of the stock, i.e. how individual investor perceives dividends and how corporate world perceive their payouts. The controversy is that there are two school of thoughts with respect of Dividends, one shows that dividends has no effect on market pricing and other explains that how dividends positively influence the market pricing of particular stock.
In U.S, earnings are doubled taxed i.e. firstly company pays the corporate tax on its earnings and secondly when the same amount is distributed among the members it is taxed as their personal income. The rate of tax in U.S on capital gain is less than income from dividends. Thus to avoid this double taxation, generally investor are reluctant towards dividends and hold the shares for long term prospective. But what if the dividends are not taxable in the hand of investor and capital gains is taxable at higher rates than that of dividends, as in case of India.
Taking these views, in Indian scenario, I have started this project, and tried to explore the payout mechanism and tried to scrutinize the consequence on stock pricing with respect to the dividends paid by the companies.
Why companies paying dividends is still a controversy. In Indian scenario if we take some top traded 50 companies in Bombay Stock Exchange, there is hardly any company which is not paying dividends, moreover a thorough study shows that even those companies which were making losses, also paying some nominal dividends, using their prior reserves (subject to The Companies (Transfer to reserves) Rules -1975). Here are some illustrations that represent the dividend policy of selected companies and its effect on its stock pricing in stock market.
Wipro ltd is one of the renowned IT company in India but still if we compare the stock price of Wipro and Infosys we find that Wipro is lagging behind owing to conservative dividend policy (@ 25% continuously) unlike as Infosys Technologies ltd, having an excellent payout (continuous growth in dividends).
The market risk of any security depends on its Beta (b), which shows the relation ship between the Sensex Returns and Security returns and measure the relative risk associated with the security with respect to market. Higher the beta, greater the risk associated with the security. Theoretically if the Beta of security is less than one, the security will be affected lesser than proportion with market Sensex.
Companies like Novartis, NIIT, Satyam Comp, Glaxo, P&G Health Care, Wipro, Infosys, etc representing 37% of the sample size, performed as per the market (Sensex) movement. All these companies have a very good track record of dividend payment, and were appreciated by investors. But since April 2000 our Stock Market is bearish, caused by continuous chain of negative sentiments i.e. U.S Slowdown, TAHALKA Issue, Ketan Parekh Scam, GTB and UTI debacle and now UTI's failure, these stocks price also came down drastically.
Companies like HLL, ITC, Ranbaxy, Dr.Reddy's Lab, Reliance Ind. Etc representing 26% of sample size, performed extraordinarily well, even after all the debacle in Sensex (BSE). These are the stocks that are continuously paying handsome dividends and showing positive trend in the price movement and had never experienced any significant downfall in past 6 years. It is the excellent dividend payout record of these companies owing to which these companies are still showing positive trend in the price fluctuation even after the shambles in Sensex in recent past.
Study of companies revealed that about 26% companies in sample size, consisting BSES, L&T, ACC, Nirma, Voltas etc, having a very fluctuating price movement in last 6 years. Mostly all the company in this group is paying dividends from last 8-12 years continuously. The reason of their uneven fluctuating movement may be due economic reasons. For example, L&T and ACC's price fluctuation does due to the liberalized industrial policy and strict Govt. policy in Cement sector, against the cartel formed by the cement manufacturing companies in recent past. Company like Voltas has an average record of dividend payment, paid dividend even after posted loss for the financial year 98-99. BSES having a continuous dividend payment record find no appreciation in its stock price for last 5 years the stock price is continuously traded in between Rs 270 to Rs 350, we can say that only dividend is not sufficient for the investors, along with it they want good performance by the company so that they can earn some capital gains also. Moreover investors do consider the overall performance of sector, and its future prospects, despite of good dividend by BSES there is hardly any appreciation in the stock price because of the industry specific factors.
Companies like MTNL, TELCO, etc representing 11% of sample size, performed negatively. All these companies, having different Business segments, performed haphazardly owing to different reasons. The similarity to be considering for all these companies is that all of them are paying dividends continuously. MTNL is paying dividends at fixed rate, TELCO is paying dividends even after having declining trend in PAT and EPS since 96. These companies are paying regular dividends and even then the stock price is declining continuously from last 5 years, which shows that investors are very rational about their current as well as future earnings. They cannot accept any window dressing.
To sum-up the investors make equity investments with the expectation of capital gains irrespective of whether they are short term or long term investors. Typically there is no company, which can ensure capital gains to investors with out declaring continuously dividends.
In other words the investors do care about dividends how ever small its impact on their wealth. Its not only the investors care about dividends, but also growth in dividends and profitability of the companies in which they maid investments. The technical analysis and the survey conducted amply prove this point. Unlike U.S markets where treatment of tax is a major concern for the investors for accepting dividends, Indian investors do not give greater weightage for the tax matters since the dividends are taxed in the hands of the companies but not in the hands of investors.
"Beware Corporate, Investors do need Dividends and their Continuous Growth"
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