Corporate India has opened its purse strings to shareholders with interim dividends and bonus shares. At least 60 companies have declared an interim dividend or announced plans to do so in the first weeks of January. Also, around 12 companies have announced bonus share issues this month, about three times more than January 2006.
There is a range of things that a company can do for maximising shareholder value, and the dividend is the most direct and simple form of it. Ideally, companies need to balance the value of the stock for total shareholder returns.
This trend of dividends and bonuses is in synchronisation with the good profits being posted by companies. It is a way of rewarding shareholders. Many companies have also announced plans of bonus shares for their shareholders. Most of the companies who have already declared bonus issues or announced that they would be taking it up in their next board meeting are small or mid-sized companies.
What factors are considered while taking this decision?
Corporate India has opened its purse strings to shareholders with interim dividends and bonus shares. At least 60 companies have declared an interim dividend or announced plans to do so in the first weeks of January. Also, around 12 companies have announced bonus share issues this month, about three times more than January 2006.
There is a range of things that a company can do for maximising shareholder value, and the dividend is the most direct and simple form of it. Ideally, companies need to balance the value of the stock for total shareholder returns.
This trend of dividends and bonuses is in synchronisation with the good profits being posted by companies. It is a way of rewarding shareholders. Many companies have also announced plans of bonus shares for their shareholders. Most of the companies who have already declared bonus issues or announced that they would be taking it up in their next board meeting are small or mid-sized companies.
What factors are considered while taking this decision?
Factors affecting Dividend Decision are:
(i) Amount of Earnings: Dividends are paid out of current and past earnings. Thus, earnings are a significant determinant of dividend decision.
(ii) Stability in Earnings: A company with higher and stable earnings can declare higher dividends than a company with lower and unstable earnings.
(iii) Growth Opportunities: Companies with good growth opportunities retain more money out of their earnings to finance the required investment. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies.
(iv) Cash Flow Position: Dividend involves an outflow of cash. Availability of enough cash is necessary for payment or declaration of dividends.
(v) Taxation Policy: If the tax on dividends is higher, it is better to pay less by way of dividends. However, if the tax rates are lower instead, then higher dividends will be declared. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. However, shareholders prefer higher dividends, as dividends are tax-free in the hands of shareholders.
(vi) Access to Capital Market: Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than smaller companies.
Factors affecting Dividend Decision are:
(i) Amount of Earnings: Dividends are paid out of current and past earnings. Thus, earnings are a significant determinant of dividend decision.
(ii) Stability in Earnings: A company with higher and stable earnings can declare higher dividends than a company with lower and unstable earnings.
(iii) Growth Opportunities: Companies with good growth opportunities retain more money out of their earnings to finance the required investment. The dividend declared in growth companies is, therefore, smaller than that in the non-growth companies.
(iv) Cash Flow Position: Dividend involves an outflow of cash. Availability of enough cash is necessary for payment or declaration of dividends.
(v) Taxation Policy: If the tax on dividends is higher, it is better to pay less by way of dividends. However, if the tax rates are lower instead, then higher dividends will be declared. This is because as per the current taxation policy, a dividend distribution tax is levied on companies. However, shareholders prefer higher dividends, as dividends are tax-free in the hands of shareholders.
(vi) Access to Capital Market: Large and reputed companies generally have easy access to the capital market and, therefore, may depend less on retained earnings to finance their growth. These companies tend to pay higher dividends than smaller companies.
