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Dividend Decisions By Reliance IndustriesDocument Transcript
1 out of every 4 investors in India is a Reliance shareholder"
. Reliance has more than 3 million shareholders, making it one of the world's most widely held stocks.<br />Reliance Industries Limited has a wide range of products from petroleum products, petrochemicals, to garments (under the brand name of Vimal), Reliance Retail has entered into the fresh foods market as Reliance Fresh and launched a new chain called Delight Reliance Retail and NOVA Chemicals have signed a letter of intent to make energy-efficient structures. The primary business of the company is petroleum refining and petrochemicals. It operates a 33 million tone refinery at Jamnagar in the Indian state of Gujarat. Reliance has also completed a second refinery of 29 million tons at the same site which started operations in December 2008. The company is also involved in oil & gas exploration and production. <br />DEVIDEND DECISIONS<br />The term dividend refers to that part of profit (after tax) which is distributed to the shareholders who are the real owners of the company. The amount which is undistributed part rest out of the profits of the company is known as Retained earnings. Higher the dividend payout, lower will be retained earnings.<br />The dividend policy of a company refers to the views and policies of the management with respect of distribution of dividends. The dividend policy of a company should aim at shareholder-wealth maximization but it also moves according to the sentiments of the market as well as to the prospects of the company as Reliance Industries Limited is doing from last many of years to provide wealth maximization to the shareholders with providing dividends as well as the prices of their shares in stock market has also been increasing which is benefitting the owners with capital gains in their shares.<br /> 2008-092007-082006-072005-06 Net worth114520.3980577.3461255.0245154.07Capital Employed188494.12117057.0289140.8967019.68 Market capitalization (Rs. In crores)309984.75331541.82186067.02142492.51 Net Sales (Rs. In crores)141959133805.78111699.0380877.79PBIDT25373.7528934.6420524.5114982.01PAT(Rs. In crores)15309.3219458.2911943.49069.34 Earning Per Share(Rs.)95.24131.9784.2863.7Market Per Share(Rs.)2132.462280.81280.6980.24Payout (%)12.668.512.2714.7Retention (%)87.3491.587.7385.3 Dividend (annual) %130130110100dividend (Rs.)13131110 Return on investment (%)13.6619.323.5923.18<br />WALTER MODEL<br />Prof James E. Walter devised an easy and simple formula to show how dividend can be used to maximize the wealth of shareholders. He considers dividend as one of the important factors determining the market valuation. According to Walter, in the long run, share prices reflect the present value of future stream of dividends. Retained earnings influence stock prices only through their effect on further dividends.<br /> 2009200820072006EPS95.24131.9784.2863.7Rate of ROI (%) ( r )13.6619.323.5923.18retention rate (b)87.3491.587.7385.3cost of capital( k )4.465.786.566.49Dividend13131110Walter Model (p) (E-D)r/k251.88397.25263.52191.80P5939.087097.804184.723109.36<br />According to this model if the ROI from retained earnings is higher than the market capitalization rate then the value of its shares would be high even if the dividends are low. As given in the case of RIL the dividends are very less and retention rate is very high , nearly 90% of the profits but still the company’s share price is increasing which is due to their difference in returns rate and market capitalization rate as given in above table the difference is around 10-15% on positive side. <br />This Walter model is showing a fact that why market prices of shares of growth companies are high even if dividend payout is low, so it is proved that Walter model of dividend is very accurate in proving relation of dividend with market prices. <br />GORDON MODEL<br />Myron Gordon has developed a model that dividends are relevant and the dividend decision of the company affects its value. There are many assumptions taken for this approach, like rate of return on investment is constant, retention ratio is constant, cost of capital is also constant and higher than growth rate of the firm, corporate taxes do not exist. <br />GORDON MODEL(P0) br11.9317.6620.7019.54k-br-7.47-11.88-14.14-13.05P01100.711005.3693517.109406.5843<br /> <br />DIVIDEND TREND <br />
From last 4 years, the sale of RIL has been increased by huge amounts and the profit of the company is also increasing in huge amounts and dividend paid by RIL is also increasing year by year.
As the trend is given there, 100% of the face value had been declared as dividend in 2005-06( previous to this, in 2004-05 that was 75% i.e. Rs. 7.5/.share) and then RIL is declaring more dividends in the further years, like 110%, 130% for two years.
This shows the company’s strong prospects for their future profits as they are declaring more dividends year by year. It also provides a sense of benchmark for the dividends to the shareholders of Reliance Industries.
RELATION B/W EPS & DIVIDEND<br />
There is always a relation between earning per share and dividend declared by the company to its shareholders. Companies like to keep earnings and dividends pretty stable. This is because changes in these elements indicate broader changes for the company related to their profitability, current position and future prospects.
Earning per share of three years, i.e. 2006,07,08 are increasing from Rs. 63 to Rs. 131 and in response to this company had given dividend @ 100%, 110% & 130%, at increasing rates. This shows that company is giving much return to their shareholders as their part of profits.
But if we take a look at the Earning Per Share of 2009 i.e. Rs. 95, which is less than the previous year’s EPS and the company had not increased its dividend as it was doing from last 3 years, but still they maintained to gave them the same dividend as to the related previous year i.e. 130%. That may be some tactics to meet the expected demands of the shareholders that is the dividend paid by RIL in related previous year i.e. 130%.
This shows about the relationship between EPS & dividends as company generally tries to trace the EPS and move towards giving the increased value to the shareholders and also provides the good indication of the profitability & cash position of the company to the market.
RETENTION RATE, DIVIDEND & MARKET PROSPECTS<br />The percentage of earnings credited to retained earnings is known as retention rate. In other words, the proportion of net income that is not paid out as dividends is referred as retention rate. Generally, Company retains a part of its earnings as reserves which is used for expansion of the company whether in terms of scale, scope, markets etc.<br />
In the case of RIL, company’s retention rate is very high in all of its previous years like, it is more than 85 % in 2006, 07, & 2009 and in 2008, RIL retain 91% of their income and the company is paying just 8 % to 15 % of its income to their shareholders as dividend. But still the share prices are increasing time to time. All this happens due to company’s growth and prospects. If such type of huge company is retaining 90 % of their profits that definitely have strong prospects with them.
Following are some of RIL’s expansion plans which was also assisted with such internal finance (retained earnings)-
In 2004-05, RIL acquired the polyester major, Trevira GMBH, headquartered in Frankfurt, Germany which has the capacity of 130,000 tonnes per annum of polyester staple fibers, polyester filament yarns and polyester chips.
In the year 2006, the company set up a new export-oriented refinery through its subsidiary, Reliance Petroleum Limited (RPL).
In the year 2007, Indian Petrochemicals Corporation Limited (IPCL) merged with the RIL. Also, Reliance Retail entered the organized retail market in India with the launch of its convenience store format under the brand name of 'Reliance Fresh'.
During the year 2007, the company commissioned their largest expansion project. The company expanded its polypropylene (PP) capacity by 280 KTA at Jamnagar that increased the combined capacity to 1,710 KTA.
During the year 2007-08, the company signed an agreement to certain polyester (capacity) assets of Hualon, Malaysia. It took over the majority control of Gulf Africa Petroleum Corporation (GAPCO) and started shipping products to the East African markets. RIL also signed MoU (Memorandum of understanding) with GAIL (India) Ltd to explore opportunities of setting up petrochemical plants in feedstock rich countries outside India.
There are many other expansion of RIL in these years, this is the only reason that even after declaring 15 % of profits as dividends, the company’s share price is increasing after announcement date because the shareholders and the market knew of such capability of the company to invest in expansion plans from where shareholders would get more benefits that’s why the share price of Reliance Industries Limited have positive movement even after declaring their dividends due to market & future prospects.<br />SHAREHOLDERS’ WEALTH MAXIMIZATION<br />Reliance is that company which is providing maximum values to their shareholders, the form could be different as it has already been mentioned that company’s dividend payout ratio is very low( less than 15%) but still shareholders are having benefits in one way or other. Shareholders are receiving Rs. 10, 11, 13, 13 as dividends in last 4 years, but their capital gain from the increase in value of shares was remarkable which had created much wealth for their shareholders. Their retention of profits generally provide a positive effect to the market because market prospects of this company is very wide and that is the thing which affect its share price and directly attain the main goal of the company i.e. wealth maximization.<br />ANALYSIS OF 2009-10 DIVIDEND DECLARATION<br />The result of 2009-10 has not been fully disclosed by the date, but some of the related information is available below- <br />FACE VALUEBOOK VALUEDiv(%)Net profit (rs in crores)EPS (rs.)M. Cap (crores)10392.5701623649.6341279.5<br />The board of Reliance Industries in its meeting on 23 April 2010 has recommended dividend at the rate of Rs. 7 per share (70%). <br />DATEOPENLOW CLOSE23-Apr-1010881081.251087.35<br />
On the date of declaration of dividends, the market share price was not having any movement in its prices, as the volumes were traded on higher side. Volume of shares traded on the date of declaration of dividend was 10, 63,400 but their movement in price range for that date was very low as given in the above table.
Reliance Industries is declaring just 70 % of their profits as dividends for this year, which is almost half of the previous dividend of 2008-09, that was 130%. Company’s declaration is not according to the markets’ sentiments but still the share price of RIL have not any downside on its share prices that mayb be due to their good profits which is giving an indication of further investment by the company as they are retaining 93 % for their reserves.
Here the EPS is also very low than previous 4 years’ EPS. The average Earning Per Share for last 4 years was Rs. 93.75 but the EPS of 2009-10 is just Rs. 49.6 which is approximately half of the previous figures. ‘It is not a good sign for the company’, generally people consider this, but the reduction in their EPS is only due to increase in number of equity shares due to bonus issue in 2009 which increased the number of shares and due to which EPS got reduced, this is the one of the drawback of bonus issue as it affects the indicators (EPS is one of the profit indicators) of the company. But still the profits are more than Rs. 16,000 crores which is a positive value for the shareholders and that assist in maintaining the share prices stable in the market.
BONUS SHARES<br />Bonus shares are those shares which are actually free shares of stock given to the current shareholders, based upon the number of shares that a shareholder owns. These bonus shares are issued to the existing shareholders by converting free reserves or share premium account to equity capital. A company also issue bonus shares if they don’t have much cash reserves to meet the payment of dividend in cash, that’s why some companies issue bonus shares.<br />But if we see the case of Reliance Industries Limited, it is not the reason because at the same time company is also announcing the 130 % cash dividend to their shareholders which shows that they have much amount of cash reserves with them.<br /> BONUS ISSUE YearmonthratioRecord date2009october1:0127/11/2009<br />Company had announced this bonus on 17th of November and the record date was set to 27th of November, 2009, this announcement has been made after 12 years as the last bonus was issued in October 1997. <br />Due to their announcement of the record date the flow was moving towards negative. The share price of RIL got affected and in next three days, it flowed under negative sign, as shown in the following table-<br />DATEOPENLOW CLOSEDIFFERENCE19-Nov-092,099.952,072.252,081.95-18.0018-Nov-092135.452095.12102.45-33.0017-Nov-092163.0121062133.75-29.26<br />This proves that market sentiments move with declaration of bonus shares, but afterwards it come back to same level.<br />On the date of issue of bonus shares the market price of RIL shares got a dip by approximately half to its prices, as it is clearly shown in the graph below that the share price in line of Rs. 2000s dipped to Rs. 1000s. this mechanism automatically make no effect of bonus share issue to the market capitalization or the wealth of the shareholders in terms of increasing numbers of shares because the price got reduced and the value of their holdings still have the same value.<br /> Following is the graph showing the movement of share price of RIL in stock market<br />EFFECT OF BONUS SHARES ON MARKET PRICE OF RIL SHARES.<br />This bonus issue was declared by the company as their part of reward to shareholders at the time of completion of two global projects.<br />At the time of this bonus issue, CFO of RIL gave a statement that "
Reliance is now ready to invest in the future. It has a strong balance-sheet, large cash reserves and substantial financial flexibility owing to its treasury stock holding, which have a current value of nearly Rs 40,000-crore (Rs 400 billion)”.<br /> It depicts the strong position of the company at current level as well for long term position. At that time, when RIL is announcing 130% dividend with 1:1 bonus share, the statement having such strong prospects for the company that they are ready to invest in the future shows the very proficient position for the future growth. <br />RIL’s bonus issue had following major effects- <br />
Share capital gets increased according to the bonus issue ratio.
Liquidity of RIL’s shares in the market increases.
This issue also reduces the Earnings per share, Book Value and other per share values.
As we have seen in above graph, the market price gets adjusted on issue of bonus shares.
All the above explanations, relations and dependency of one aspect on other states that market price depends upon many aspects like dividend, retention ratio, company previous performance, expansion prospects, growth opportunities, prospects of shareholders, intention of the company with their dividend declaration policies. <br />