Understanding the role of dividends for investment decisions

Reinvesting dividends makes sense if the requirement of money is not immediate, and dividend should be used for liquidity management

The extra-ordinary dividend of Rs29 per share announced by Coal India has brought the word, ‘dividend’ to limelight once again. This is not for the first that time dividend has hogged headlines. Recently, Strides Arcolab issued dividends, which looked like a company winding up its operations and distributing the entire money to shareholders.
The Strides Arcolab announced Rs500 per share dividend. Investors have often chased high dividend yield shares. Historically, much has been written about dividends and its significance under different approaches, from dividend discount model to Miller-Modigliani approach.

So what does dividend mean for investors and how should investors analyse dividend in the process of investing?

The first step in understanding dividend is to understand the dividend policy of a company. The dividend policy will help an investor get an idea about what kind of dividend he should expect from the company. While every company many not have a well documented dividend policy, many investor-friendly company have these policies in place and an investor must go through this policy to understand what to expect from the company. Even in cases where a company does not have a well drafted dividend policy, past trends can give a good indication of what to expect from the company. Here are details of some companies which have a well drafted dividend policy.

Name of the Company

Dividend Policy

Profit making Public Sector Undertaking

As per the guideline dated February 11, 1998 from the Government of India, all profit-making PSUs which are essentially commercial enterprises should declare the higher of a minimum dividend of 20% on equity or a minimum dividend payout of 20% of post-tax profit. The minimum dividend pay-out in respect of enterprises in the oil, petroleum, chemical and other infrastructure sectors such as us should be 30% of post-tax profits.


HDFC Bank has had a dividend policy that balances the dual objectives of appropriately rewarding shareholders through dividends and retaining capital in order to maintain a healthy capital adequacy ratio to support future growth. It has had a consistent track record of moderate but steady increases in dividend declarations over its history with the dividend payout ratio ranging between 20% and 25%.

Infosys Ltd.

Currently, Infosys pays dividends to its shareholders. The current dividend policy is to distribute not more than 30% of the PAT (consolidated Indian GAAP) as dividend. The Board of Directors reviews the dividend policy periodically and on 15 April 2008 decided to hike the dividend policy to up to 30% of post-tax profits from 20% of post-tax profits earlier


CRISIL believes in maintaining a fair balance between cash retention and dividend distribution. Cash retention is required to finance acquisitions and future growth, and also as a means to meet any unforeseen contingency. CRISIL has also been conscious of the need to maintain stability in its dividend payout over the years. From 2008, CRISIL has commenced the practice of paying dividend on a quarterly basis.

Larsen and Toubro

The board of directors reviews the dividend policy periodically. L&T pays a dividend because the company’s investors in India and abroad view this as an important market signal of the management’s confidence in the future.

Source: Websites of respective companies

After having understood the dividend policy, an investor needs to understand how the dividend decision of a company impacts its share price. Very often, after an extra-ordinary dividend is announced, the concerned company’s share prices tend to go up after the announcement. Coal India shares experienced this. While this may not hold true in all cases, a company surprising investors with dividend on positive side tend to add value for investors in share price in many cases. Some of the theoretical approaches on the significance of the dividend confirm the positive influence of dividend on share price. MJ Gordon, in his dividend discount model (also known as Gordon growth model) believes that paying large dividends reduces risk and thus influence stock price, while another analyst Baskin (Baskin, 1989) says dividend is a proxy for the future earnings. An investor also needs to pay attention to dividend yield which is a relationship between dividend per share and the price of the share. Here also an occasional high dividend yield may not serve much purpose and consistency once again is the key.

Another important aspect that an investor needs to understand is where to deploy dividend proceeds. Ideally dividend can be utilized for meeting working capital requirement of one’s life. While reinvesting dividend makes sense if the requirement of money is not immediate, dividend should be used for liquidity management by an individual. In case of companies which have well drafted dividend policy, cash flow from dividend is relatively stable and helps in financial planning process. Along with other intermittent cash flows such as coupon or bank interest, an investor can combine money received from dividend to plan his finances well.

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)


Will Pakistan grant the ‘Most favoured Nation’ status to India?

If details can be worked out, there could be substantial trade with Pakistan via the land border at Wagah, instead of indirect trade through UAE

Just about twenty years ago, in 1996, India extended the ‘Most Favoured Nation’ (MFN) status to Pakistan, and it was expected that they would reciprocate this gesture soon thereafter. They have not done so, and every time this issue is raised, they have a different story to tell.


The trade with Pakistan, if there was the will and a friendly political and commercial atmosphere, could have been substantial. Instead, Pakistan’s exports to India have reached $327.496 million, while imports have gone up to $1809.867 million last year. A lot of goods that India ships to the UAE actually find their way to Pakistan, by Dhows, procured locally and shipped back to Karachi. There are a lot of goods and services that both can each offer each other, but that's not happening, more for political reasons than anything else.


Political talks start and end on the subject of Kashmir and the leaders' claim that they had "almost" come to a settlement on this highly debateable issue remain a distant dream. Now, the present excuse is that, let the new government in India tackle the issue, when it comes to power after elections in May 2014. So be it!


During his brief stay to attend the South Asian Association for Regional Cooperation (SAARC) business conclave, it is expected that Khurram Dastgir Khan will be meeting Anand Sharma, India's commerce minister, and the main topic is likely to be the issue of MFN, which according to the media, though signed in 1996, gives "market access", as stated by Khan. In addition, he has an agenda to cover, which includes greater visa facilities for business to grow and trade to flourish.


There is no doubt that the fact remains obtaining visa, to visit either of the countries, is a thorny issue, due to inordinate delays, at both ends.


It may be recalled that there was a proposal to supply electricity to Pakistan via the northern grid (at that time, when single national grid had not come into being) and a Pakistani delegation was to come to India and finalise the matter, soon after Nawaz Sharif became the prime minister. This was cancelled by Pakistan and there has been no further talk on the subject.


There are other issues such as need to abolish the negative list in Pakistan and reduction of non-tariff barriers on the Indian side, which was signed in 2012, but both have to implement them!


In fact, if details can be worked out, there could be substantial trade via the land border at Wagah, instead of a sea route.


It is imperative that, when the new government is formed after the elections in India, a serious review must take place to strengthen relations with all countries, and special attention should be paid to develop even closer trade relations with not only Pakistan, but Bangladesh, Myanmar and Sri Lanka.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)




3 years ago

Already 18 years have passed since India has given MFN status to Pakistan,& still we didn't wont to grow up & wait for them like a fool.I feel We are already Most Favoured Nation for creating problems by them.

Over-the-counter pills left out of FDA Acetaminophen limits

Federal drug regulators are moving to enforce a ban on prescription drugs with more than 325 milligrams of acetaminophen. But you'll still be able to buy pills that contain up to twice that dose over-the-counter at the gas station or grocery store

Earlier this week, the US Food and Drug Administration (FDA) urged health care providers to stop writing prescriptions for pain relievers containing more than 325 milligrams of acetaminophen, the active ingredient in Tylenol.

The agency’s announcement was aimed primarily at popular prescription medicines that combine acetaminophen with a more powerful opioid such as hydrocodone. Agency officials said they had determined that “there are no available data” to show that the benefits of having more than 325 milligrams of acetaminophen in a single pill outweighed the risks from taking too much of the drug.

The announcement followed up on a similar 2011 FDA admonition to drug makers and was the latest turn in a long-running deliberation over the regulation of acetaminophen.

As documented in a ProPublica series last year, the FDA has delayed for decades enacting tougher rules on acetaminophen. While generally considered safe when taken as recommended, relatively small overdoses have been shown to cause liver damage and even death. Each year, the drug accounts for about 150 accidental deaths, half of all cases of acute liver failure cases and tens of thousands of emergency room and hospital visits, according to federal data and scientific studies.

As far back as 1977, a panel of outside experts convened by the FDA recommended the agency set the standard dose of over-the-counter acetaminophen at 325 milligrams per pill, citing the possibility of liver damage. But the agency allowed 500 milligrams and even 650 milligrams single doses of the drug for sale. Today, the most commonly sold form of over-the-counter acetaminophen contains 500 milligrams in a single pill.

A 2008 FDA review found that the agency’s approval for such a dose was based on “few and limited” studies submitted in the 1970s by McNeil Consumer Healthcare, the Johnson and Johnson unit that makes Tylenol. Two studies showed that two 500-milligram pills were “marginally” more effective than two 325-milligram pills, while two other studies showed no difference.

Ninfa Redmond, a toxicologist who helped carry out the 1977 panel’s exhaustive, three-year study, said she was surprised that such big doses continued to be sold 40 years later.

“It never occurred to any of us that you make a product with that high a dose,” Redmond said. “I use the drug when I travel, but I use 325 milligrams,” she added.

Tuesday’s recommendation only applies to prescription drugs, not the over-the-counter products that make up about 80 percent of the market, according to the FDA. That means that you will still be able to walk into a gas station or grocery store and buy pills with up to 650 milligrams of acetaminophen, while your pharmacist is now discouraged from dispensing any product with more than half that amount.

One reason for this is that the FDA has more power to regulate prescription drugs than over-the-counter medicines.

In June 2009, an FDA advisory panel urged various limits on both over-the-counter and prescription drugs. But over-the-counter drug makers, led by McNeil, resisted efforts to reduce pill strength. In a 2009 letter to the FDA, McNeil noted that 500-milligram pills accounted for 92 percent of U.S. acetaminophen sales. McNeil suggested that removing the pills from the market would burden consumers by blocking access to pain relief.

The company also noted that reducing pill strength would require a “significant amount of time” in the over-the-counter regulatory system. If the agency decided not to pursue such a reduction, McNeil pledged it would add language to their drug labels recommending a lower total daily limit of 3,000 milligrams – or six extra strength pills.

“Other proposals could take significantly longer to implement,” wrote Lynn Pawelski, the company’s vice president for regulatory affairs.

In 2011 the company changed its label on Extra Strength Tylenol to reflect the lower recommended maximum daily dose.

McNeil, in an emailed statement, said the company still opposes any reduction in pill size for Extra Strength Tylenol and is committed to the health and safety of its patients.

“As the makers of Tylenol ... the health and safety of consumers is our number one priority,” the statement said. “Our position was on OTC medicines and that position has not changed.”

Even with prescription drugs containing acetaminophen, the FDA has moved slowly. In 2011, the agency warned manufacturers to stop making prescription pills with more than 325 milligrams by January 2014. In this week’s announcement, the agency said more than half of all drug makers had complied with the three-year deadline, but acknowledged that some continued to sell prescription combinations with more than 325 milligrams of acetaminophen.

ProPublica found that many of the largest pharmaceutical companies had dropped the amount of acetaminophen in their combination products to meet the FDA target, including the popular pain killer Vicodin, by AbbVie Inc.; Percocet, by Endo Pharmaceuticals; and Tylenol with Codeine, by the prescription drug unit of Johnson and Johnson.

In response to questions, the FDA was unable to say how many companies had failed to comply, or what percentage of the market they represented. The agency said it would now start to crack down on the remaining combination pills. “If manufacturers have not voluntarily withdrawn these products from the market, the FDA will take the necessary steps to withdraw them,” Morgan Liscinsky, an FDA spokesman, wrote in an e-mail.

When? “In the near future,” the agency announcement said.




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