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Apollo Tyres (Stable Dividend Rate Policy)

The company is pursuing a stable dividend rate policy. The dividend rate is kept constantnotwithstanding changes in the earnings. As a result the dividend payout ratio is fluctuating.

There is no target dividend payout ratio.

Year Profit After Tax

(INR Million)

Dividend

(INR. Million)

Dividend Payout

Ratio

Dividend Rate

2003 1200 184 14% 45%

2004 704 195 25% 45%

2005 674 197 26% 45%

2006 782 197 22% 45%

2007 1134 238 18% 45%

2008 2193 295 12% 59%

2009 1081 265 25% 45%

Source: Annual Reports of the company

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Bharat Electronics Limited

The company has a target dividend payout ratio of 23%. Accordingly the dividend moves indirect proportion of earnings. For the year 2009, as PAT declined, there is proportionate decline

in the dividends as well maintaining the dividend payout ratio at 23%.

Year Profit After Tax(INR Million)

Dividend(INR. Million)

Dividend PayoutRatio

Dividend Rate

2003 2606 632 24% 70%

2004 3161 903 29% 100%

2005 4464 1021 23% 112%

2006 5830 1332 23% 146%

2007 7189 1675 23% 180%

2008 8267 1937 23% 207%

2009 7458 1750 23% 187%

Source: Authors calculations based upon data obtained from the Annual Reports of the company

for the respective years

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Case: Dividend Policy of Hero Honda Motors Limited

Hero Honda Motors, the country's top two-wheeler maker, declared a dividend of 4,000 percent. The company's board of directors at a meeting considered and declared a Silver Jubilee

Special Dividend of 4,000 per cent or INR 80 per equity share of INR 2 each, Hero Honda said

in a filing to the Bombay Stock Exchange. (The Economic Times, 30th

March 2010).

Hero Honda Motors Limited (HHML) is the largest manufacturer of motorcycles in India. The

company was incorporated in the year 1984 as a joint venture between Hero Group of India andHonda Motors of Japan. In less than two decades it became the Worlds largest two wheelers

manufacturing company. The company earned a net profit of INR 12,818 Million during the year

2008-09 compared to INR 9,679 Million in the previous year. The Board of Directors of the

company recommended dividend @ 1000% on the paid up capital of INR 399 Million for theyear 2008-09.

`Over the years, the company has consistently followed a policy of paying high dividends,

keeping in mind the cash-generating capacities, the expected capital needs of the business andstrategic considerations.(Annual Report 2008-09). In the letter to the shareholders the Chairman

of the company stated We are very much aware of your unstinted support all along for thisorganization and its efforts, which are directed at creating wealth and profit. We do not believe in

holding the surplus beyond requirement and thus have been distributing them in the form of

dividend. We are happy that we have been able to declare every year an increasing rate ofdividend for our shareholders (Annual Report 2003-04).

The dividend policy of the company has two distinct phases one up-to the year 2000-01 and the

second from 2001-02 onwards. The dividend rates and dividend payout ratios of the company arestated below:

Year Dividend Rate (%) Dividend Payout Ratio (%)

1994-95 30 10

1995-96 32 24

1996-97 35 14

1997-98 40 11

1998-99 75 23

1999-00 100 23

2000-01 150 27

2001-02 850 75

2002-03 900 70

2003-04 1000 622004-05 1000 56

2005-06 1000 47

2006-07 850 46

2007-08 950 46

2008-09 1000 37

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The company increased its dividend payout ratio to 75% in the year 2001-02. However the

payout ratio has come down to 37% by the year 2008-09 due to increase in profitability in these

years. The company is able to meet all its funding requirements from retained earnings andmaintaining its zero debt status. About 55% of the share capital is held by the promoters. The

company has not used buy-back as an option to return excess cash to shareholders though it did

issue bonus shares in the ratio of 1:4 in the year 1994 and 1:1 in the year 1998. The companysplit each share of face value of INR 10 into 5 shares of face value of INR 2 each in the year

2001. The equity shares of the company closed at Rs.2,022 on 25 th March 2010 at the Stock

Exchange, Mumbai. The financials of the company are given in Annexure.

Source: Annual Reports of the company

Questions for discussions

i. Critically evaluate the dividend policy of Hero Honda Motors Limited?

ii. Do you think buy back would be a better option for HHML than cash dividends?

iii. What is the rationale behind bonus (stock dividend) and stock split? Do they reallycreate value for shareholders?

Annexure:

Profit and Loss Account

(INR Million) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Income

Net Sales 22,507 31,749 44,691 51,036 58,381 74,284 87,192 99,060 103,450 123,254

Other Income 200 74 749 918 1,666 1,382 1,605 1,977 2,163 2,221Stock Adjustments 108 182 -58 211 -216 150 150 32 -141 221

Total Income 22,815 32,005 45,382 52,164 59,832 75,816 88,946 101,068 105,472 125,696

Total Expenses 19,279 27,318 37,499 42,341 48,140 62,572 73,522 87,072 89,631 105,945

Operating Profits 3,336 4,613 7,134 8,905 1 0,025 11,862 13,820 12,020 13,678 17,530

PBDIT 3,536 4,687 7,883 9,823 11,692 13,244 15,424 13,996 15,841 19,752

Interest 309 351 329 248 230 178 156 138 135 130

PBDT 3,227 4,336 7,554 9,575 11,462 13,066 15,269 13,859 15,706 19,621

Depreciation 347 443 510 580 733 894 1,146 1,398 1,603 1,807

Other Written Off 34 124 100 149 7 0 0 0 0 0

Profit Before Tax 2,846 3,770 6,944 8,846 10,722 12,173 14,122 12,461 14,103 17,815

Extra-ordinary items 0 0 0 0 3 0 0 0 0 0PBT (Post Extra-ordinaryItems) 2,846 3,770 6,944 8,846 10,725 12,173 14,122 12,461 14,103 17,815

Tax 925 1,301 2,315 3,038 3,441 4,068 4,409 3,882 4,424 4,997

Net Profit 1,921 2,469 4,629 5,808 7,283 8,105 9,713 8,579 9,679 12,818

Equity Dividend 399 599 3,395 3,594 3,994 3,994 3,994 3,395 3,794 3,994

Corporate Dividend Tax 44 61 102 461 512 565 560 577 645 679

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Balance Sheet(INR Million) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sources of Funds

Equity Share Capital 399 399 399 399 399 399 399 399 399 399

Reserves 4,084 5,893 6,458 8,211 10,989 14,534 19,694 24,301 29,463 37,608

Net-worth 4,483 6,292 6,858 8,610 11,388 14,934 20,093 24,701 29,862 38,008

Total Debt 511 665 1,164 1,343 1,747 2,018 1,858 1,652 1,320 785

Total Liabilities 4,994 6,957 8,022 9,953 13,135 16,951 21,951 26,352 31,182 38,792

Applications of Funds

Fixed Assets 36,340 43,680 48,202 49,797 57,289 67,857 95,379 118,452 119,711 158,576

Investments 1,677 2,882 7,258 11,930 15,651 20,267 20,619 19,739 25,668 33,688

Net Current Assets -459 -665 -4,245 -7,155 -8,404 -10,468 -8,603 -6,941 -10,133 -11,838

Miscellaneous Expenses 48 202 102 115 0 0 0 0 0 0

Total Assets 4,994 6,957 8,022 9,953 13,135 16,951 21,951 26,352 31,182 38,792

Cash Flow Statement

Cash Flow Statement 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(INR Million)

Net Profit Before Tax 2846 3770 6944 8846 10725 12173 14122 12461 14103 17815

Net Cash From OperatingActivities 2054 3384 6538 6190 9729 7468 9361 6251 12118 13590

Net Cash (used in)/fromInvesting Activities

-1433 -2743 -4666 -4847 -3764 -5629 -3235 -2731 -7810 -8612

Net Cash (used in)/fromFinancing Activities -485 -283 -1235 -2189 -5836 -2035 -4712 -4743 -4323 -4999

Net (decrease)/increase InCash and Cash Equivalents 136 354 638 -846 129 -195 1414 -1224 -16 -21

Opening Cash & CashEquivalents -43 93 451 1090 243 371 176 1587 167 152Closing Cash & Cash

Equivalents 93 447 1089 244 373 176 1590 363 151 131

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Case: Dividend payout ratio of SENSEX companies

SENSEX is the oldest stock index in India. It is made up of 30 component stocks representinglarge, well-established and financially sound companies across key sectors. These 30 companies

account for over 42% of the market capitalization and over 16% of the market turnover. Thedividend payout ratio and dividend yields for these 30 companies are given below:

CompanyDividendPayout Ratio

Dividend Yield ason 1st April 2010

ACC 31.44% 2.10%

BHARTI AIRTEL 5.74% 0.66%

BHEL 31.02% 0.70%

DLF 23.76% 0.64%

GRASIM INDUSTRIES 19.20% 1.06%

HDFC 43.55% 1.08%

HDFC BANK 22.17% 0.52%

HERO HONDA MOTORS 36.46% 1.03%

HINDALCO INDUSTRIES 12.04% 0.73%

HINDUSTAN UNILEVER 76.61% 3.25%

ICICI BANK 36.61% 1.15%

INFOSYS TECHNOLOGIES 27.03% 0.88%

ITC 50.06% 1.40%

JAIPRAKASH ASSOCIATES 15.91% 0.65%LARSEN & TOUBRO 20.59% 0.64%

MAHINDRA & MAHINDRA 10.74% 1.86%

MARUTI SUZUKI 9.71% 0.25%

NTPC 42.31% 1.73%

ONGC 49.66% 2.95%

RELIANCE COMMUNICATIONS 4.02% 0.47%

RELIANCE INDUSTRIES 14.50% 1.19%

RELIANCE INFRASTRUCTURE 16.20% 0.69%

SUN PHARMA INDUSTRIES 26.33% 0.76%

STATE BANK OF INDIA 22.90% 1.38%

STERLITE INDUSTRIES 23.46% 0.41%

TATA CONSULTANCY SERVICES 34.21% 1.73%

TATA MOTORS 34.53% 1.61%

TATA POWER CO. 31.13% 0.85%

TATA STEEL 27.16% 2.45%

WIPRO 23.05% 0.55%

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Source: Authors calculations based upon data obtained from the Annual Reports of the

company for the respective years and the prices on the Bombay Stock Exchange on 1st April2010 obtained from www.bseindia.com

The dividend payout ratio has been calculated as

Dividend)PreferencelessTaxAfter(Profit

Dividend)onTaxDividend(EquityRatioPayout

+=Dividend

The dividend yield is equal to dividend per share divided by the current market price.

Questions for discussions:

i. The average dividend payout for the SENSEX companies is 28%. What does it

indicates?ii. How do you explain the wide variations in the dividend payout ratios of different

companies?iii. The average dividend yield is about 1%. Do you think dividend still matters?

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