STUDY OF DIVIDEND PAYOUT PATTERN OF AUTOMOBILE COMPANIES

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STUDY OF DIVIDEND PAYOUT PATTERN OF AUTOMOTIVE COMPANIES.
1. MARUTI SUZUKI INDIA LTD.
2. TATA MOTORS
3. MAHINDRA & MAHINDRA
4. HYUNDAI MOTOR COMPANY
5. VOLKSWAGEN GROUP

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STUDY OF DIVIDEND PAYOUT PATTERN OF AUTOMOBILE COMPANIES

  1. 1. STUDY OF DIVIDEND PAYOUTPATTERN Benu Singhal MSIL, Gurgaon 2/29/2012
  2. 2. ABSTRACTDividend policy has been an issue of interest in financial literature since Joint Stock Companiescame into existence. Dividends are commonly defined as the distribution of earnings (past orpresent) 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 andpattern of cash distribution to shareholders over time. Managements’ primary goal isshareholders’ wealth maximization, which translates into maximizing the value of the companyas measured by the price of the company’s common stock. This goal can be achieved by givingthe shareholders a “fair” payment on their investments. However, the impact of firm’s dividendpolicy 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 seemslike a puzzle, with pieces that just don’t fit together”. Why shareholders like dividends and whythey reward managers who pay regular increasing dividends is still unanswered.2|Page
  3. 3. INDEXS. 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 224 Analysis as a Whole 255 Conclusion 263|Page
  4. 4. INTRODUCTIONIn the words of Ezra Salomon, “In an uncertain world where verbal statement can bemisinterpreted 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 ofcorporate 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 thosedividends when simply cash is paid out of the profits.2. Share Repurchases: The Company repurchases the stock. Shareholders pay tax only on thecapital gains portion.3. Stock Split: It increases the number of shares in a public company. The price is adjusted suchthat the before and after market capitalization of the company remains the sameand dilution does not occur.4. Bonus Issue: It is a free share of stock given to current shareholders in a company, basedupon the number of shares that the shareholder already owns. While the issue of bonus sharesincreases the total number of shares issued and owned, it does not change the value of thecompany.5. Right Issue: With the issued rights, existing shareholders have the privilege to buy a specifiednumber 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 payingsame 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 makesdesirable investments using NPV rule. The rule is- if the company does not have any positiveNPV projects to invest in, then it should pay shareholders dividend.Normally, the amount of dividend is highly variable. If the manager believes dividend policy isimportant to their investors and it positively influences share price valuation, they will adoptmanaged dividend policy. Firms generally adopt dividend policies that suit the stage of life cyclethey are in. For instance, high- growth firms with larger cash flows and fewer projects tend topay more of their earnings out as dividends. The dividend policies of firms may follow severalinteresting patterns adding further to the complexity of such decisions. Also, there are distinctdifferences in dividend policy over the life cycle of a firm, resulting from changes in growthrates, cash flows, and project investments in hand. Shareholders wealth is represented in themarket price of the company’s common stock, which, in turn, is the function of the company’sinvestment, financing and dividend decisions. Among the most crucial decisions to be taken for4|Page
  5. 5. efficient performance and attainment of objectives in any organization are the decisions relatingto dividend. Dividend decisions are recognized as centrally important because of increasinglysignificant role of the finances in the firm’s overall growth strategy. The objective of the financemanager 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 firmsshare prices. Generally, announcements of dividend increases generate abnormal positivesecurity returns, and announcements of dividend decreases generate abnormal negative securityreturns. This is due to the fact that the company’s management has access to private and superiorinformation 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 dividendpayout ratio.Dividend policy of a firm has implications for investors, managers and lenders and otherstakeholders, specifically the claimholders. For investors, dividends – whether declared today oraccumulated and provided at a later date are not only a means of regular income, but also animportant input in valuation of a firm. Similarly, managers’ flexibility to invest in projects is alsodependent on the amount of dividend that they can offer to shareholders as more dividends maymean fewer funds available for future investments. Lenders may also have interest in the amountof dividends a firm declares, as more the dividend paid less would be the amount available forservicing and redemption of their claims. The dividend payments present an example of theclassic agency situation as its impact is borne by various claimholders. Accordingly dividendpolicy can be used as a mechanism to reduce agency costs. The payment of dividends reducesthe discretionary funds available with the management for perquisite consumption andinvestment opportunities and requires them to seek financing in capital markets. This monitoringby 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 andreveal a preference for it. Shareholders may want a stable rate of dividend payment for a varietyof reasons. Risk-averse shareholders would be willing to invest only in those companies whichpay high current returns on shares. Similarly, educational institutions and charity firms preferstable 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. Thisclustering of stockholders in companies with dividend policies that match their preference iscalled clientele effect.5|Page
  6. 6. SCOPE 1. Study of the annual reports of different automobile companies: I. Maruti Suzuki India Ltd. II. Mahindra & Mahindra III. Tata Motors IV. Hyundai Motor Company V. 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. Sales II. Profit III. Interest charges IV. Earnings per share V. Total number of issued shares VI. Dividend proposed VII. Cash & Cash equivalents VIII. Market prices of share IX. Face value of share X. Bonus Issue XI. Right Issue XII. Stock Repurchase XIII. Stock-Split 4. Following ratios have been worked out: I. Scale of firms operation by taking Natural Log of Net Sales II. Profit as a %age of sales III. Dividend Yield IV. Dividend Payout Ratio V. Dividend Ratio VI. Debt Equity Ratio6|Page
  7. 7. THE STUDY7|Page
  8. 8. COMPANY – 1Name: Maruti Suzuki India LtdBusiness: Manufacturing of Passenger CarsHead Office: New Delhi, IndiaEstablishment: 1981Sales in year 2010-11: Rs 36128 croresProfits in year 2010-11: Rs 2288 croresDividend proposed in year 2010-11: Rs 7.5 per shareCurrency: Rupees8|Page
  9. 9. Data for Cash Dividend: ProfitYear/Variables Scale % of Dividend Dividend Dividend Debt Sales Yield payout Ratio 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% Maruti Suzki 160.00% 140.00% 120.00% 100.00% %age 80.00% Dividend Ratio Dividend payout 60.00% 40.00% 20.00% 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11 (2006) (2007) (2008) (2009) (2010)9|Page
  10. 10. Dividend & Earnings per Share 100 90 80 70 60 in INR 50 DPS EPS 40 30 20 10 0 2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)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.10 | P a g e
  11. 11. COMPANY – 2Name: Mahindra & MahindraBusiness: Manufacturing of 2-Wheelers, Passenger Cars, Commercial Vehicles & Farm VehiclesHead Office: Mumbai, IndiaEstablishment: 1947Sales in year 2010-11: Rs 23494 croresProfits in year 2010-11: Rs 2662 croresDividend proposed in year 2010-11: Rs 11.5 per shareCurrency: Rupees11 | P a g e
  12. 12. Data for Cash Dividend: Profit Year/Variables Scale % of Dividend Dividend Dividend Debt Sales Yield payout Ratio 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% Mahindra & Mahindra 250.00% 200.00% 150.00% %age Dividend Ratio 100.00% Dividend payout 50.00% 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11 (2006) (2007) (2008) (2009) (2010)12 | P a g e
  13. 13. Dividend & Earnings per Share 50 45 40 35 30 in INR 25 DPS EPS 20 15 10 5 0 2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)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.13 | P a g e
  14. 14. Other forms of Dividend:1. Bonus Issue (History): Announcement Date Bonus Ratio Record Date Ex-Bonus Date 14/06/2005 1:1 02/09/2005 01/09/2005 07/11/1995 2:3 23/01/1996 20/12/1995 29/04/1984 2:3 - - 29/04/1980 1:1 - -2. Stock Repurchases: It never announced Stock-Repurchases.3. Right Issue (History): Face Existing Offered Announcement Right Premium Record Ex-Right Value Inst. Inst Date Ratio (Rs) Date Date (Rs) Name Name Equity 30/09/1992 1:5 0 0 27/08/1992 26/06/1992 NCD Share4. 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..14 | P a g e
  15. 15. COMPANY – 3Name: Tata MotorsBusiness: Manufacturing of Passenger Cars & Commercial VehoclesHead Office: Mumbai, IndiaEstablishment: 1945Sales in year 2010-11: Rs 122932 croresProfits in year 2010-11: Rs 9221 croresDividend proposed in year 2010-11: Rs 20 per shareCurrency: Rupees15 | P a g e
  16. 16. Data for Cash Dividend: Profit Year/Variables Scale % of Dividend Dividend Dividend Debt Sales Yield payout Ratio 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% Tata Motors 250.00% 200.00% 150.00% %age Dividend Ratio 100.00% Dividend payout 50.00% 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11 (2006) (2007) (2008) (2009) (2010) -50.00%16 | P a g e
  17. 17. Dividend & Earnings per Share 200 150 100 DPS in INR 50 EPS 0 2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010) -50 -100Interpretations: 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.17 | P a g e
  18. 18. Other forms of Dividend: 1. Bonus Issue (History): Announcement Bonus Ratio Record Date Ex-Bonus Date Date 28/09/1995 3:5 01/11/1995 04/10/1995 29/04/1982 2:5 - - 29/04/1979 2:5 - - 29/04/1977 1:5 - - 2. Stock Repurchases: It never announced Stock-Repurchases. 3. Right Issue: Face Existing Announcement Right Premium Record Ex-Right Offered Value Inst. Date Ratio (Rs) Date Date Inst. Name (Rs) Name 29/08/200 Equity Convertible 15/06/2001 1:4 0 0 - 1 Share 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. Equity Equity 28/05/2008 1:6 0 330 - - Share 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 16/09/2 09/09/200 Equity Equity 29/05/2008 1:6 0 295 008 8 Share 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.18 | P a g e
  19. 19. COMPANY – 4Name: Hyundai Motor CompanyBusiness: Manufacturing of Passenger Cars & Commercial VehiclesHead Office: Seoul, South KoreaEstablishment: 1967Sales in year 2010: 36769426 million WonProfits in year 2010: 5266971 million WonDividend proposed in year 2010: 1195 Won per shareCurrency: Won19 | P a g e
  20. 20. Data for Cash Dividend: Profit Year/Variables Scale % of Dividend Dividend Dividend Debt Sales Yield payout Ratio 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% Hyundai 30.00% 25.00% 20.00% %age 15.00% Dividend Ratio Dividend payout 10.00% 5.00% 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11 (2006) (2007) (2008) (2009) (2010)20 | P a g e
  21. 21. Dividend & Earnings per Share 25000 20000 in KOREAN WON 15000 DPS EPS 10000 5000 0 2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)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.Other forms of Dividend: 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.21 | P a g e
  22. 22. COMPANY – 5Name: Volkswagen AGBusiness: Manufacturing of Passenger Cars, Commercial Vehicles & EnginesHead Office: Wolfsburg, GermanyEstablishment: 1937Sales in year 2010: 126875 million EurosProfits in year 2010: 7226 million EurosDividend proposed in year 2010: 2.2 Euros per shareCurrency: Euros22 | P a g e
  23. 23. Data for Cash Dividend: Profit Year/Variables Scale % of Dividend Dividend Dividend Debt Sales Yield payout Ratio 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% Volkswagen 80.00% 70.00% 60.00% 50.00% %age 40.00% 30.00% Dividend payout 20.00% 10.00% 0.00% 2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)23 | P a g e
  24. 24. Dividend & Earnings per Share 16 14 12 10 in EUROS 8 DPS EPS 6 4 2 0 2006-07 (2006) 2007-08 (2007) 2008-09 (2008) 2009-10 (2009) 2010-11 (2010)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.Other forms of Dividend: 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 1:10.24 | P a g e
  25. 25. ANALYSIS AS A WHOLEA. Standard Deviation for the Dividend Payout Ratio, Year-Wise (Inter Companies): Year Mean St. Dev 2010-11 (2010) 13.72% 7.141 2009-10 (2009) 28.32% 24.725 2008-09 (2008) 11.45% 15.089 2007-08 (2007) 17.7% 7.739 2006-07 (2006) 18.27% 7.692High 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% .91 Mahindra & Mahindra 26.33% 2.84 Tata Motors 17.78% 17.41 Hyundai Motor Company 10.48% 3.27 Volkswagen 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.25 | P a g e
  26. 26. CONCLUSION:There is no fixed pattern in the distribution of Dividend of the Automobile Industry. But patterncould 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. 5IV. 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%.26 | P a g e

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