HomeBlog Understand the Corporate Action- Dividend

Understand the Corporate Action- Dividend

In my previous Blog I have written about Corporate Actions, its purpose and different type of corporate actions initiated by companies to provide benefits to their investors. One most important corporate action is Declaration of Dividend for shareholders. In all public limited company post tax profits belongs to shareholders and company broadly can do two things with these profits either retain it to invest in Business or return to the shareholders. In practice company retains part of this profit to expand the business and partially distribute among the shareholders in equal proposition. This action of the company is known as Declaration of Dividend, or it is said that the company has declared a dividend. The proportion of distribution and retention of profits will depend upon the opportunities available for ploughing back the profits into the business, nature of management, expectation of shareholders and ultimately the availability of cash in the business to distribute to the shareholders. Dividend payment and amount is decided by Board of Directors of company. A company may declare interim dividend during year and final dividend at the end of year. Company must pay the dividend within 30 days of declaration. Earlier company used to declare dividend as percentage of the face value but to avoid confusion now SEBI has mandated listed company to declare dividend in rupees terms on a per share basis. Please note that the face value of share is the price that was offered at the time of IPO.

Please let me explain it with the help of example, suppose there are two companies named ABC and DEF with face value of Rs. 2 and Rs.10 respectively and both has declared 40% as dividend then amount payable for each share held by investors are given below

 

Sl.No Company Name Face value (Rs.) Dividend Declared (%) Dividend amount per share
1. ABC 2 50 1
2. DEF 10 50 5

 

On the other-hand Dividend Yield is the dividend per share expressed in percentage of present company’s share price.

Eligibility of Investor to get the benefit of Dividend

All Investors

  • Who appear in the register of members, if the shares are held in physical form or
  • Whose names appear in the register of beneficial owners maintained by the depository, in case of dematerialized shares.

To determine this, the company announces a record date or book closure period and investors whose names appear on the records on this date become eligible shareholders to receive notice dividend benefit.

Important dates related to Dividend Declaration

Being Investor, you should be aware about the following date associated with dividend declared by the company.

  1. Announcement Date: is the date on which Dividend is announced by company management.
  2. Ex-Dividend Date: is the date on which dividend’s eligibility expires. Suppose the stock has Ex-dividend date 10th January then the shareholders who buy the stock on or after 10th January does not qualify to get the benefit of dividend declared.
  3. Record Date: is the cutoff date decided by the company to determine the eligibility of investors to get the benefit of dividend distribution.
  4. Payment Date: is the date on which money gets credited into an investor account.

Effect of Dividend on Share Price

Generally, when a company announces dividend then price of shares increases by the dividend declared per share and decreases by the same amount at the opening session of ex-dividend date as anyone buying share on ex-dividend date does not qualify for getting benefit of dividend. Suppose company named ABC is trading at Rs 100 and company announces Rs.10 per share as dividend then the price of share increases by Rs.10 as soon as news comes in public. If the share is trading at Rs. 115 before Ex-Dividend then on opening of session that date it becomes Rs. 105.

Conclusions:

Being an Investor, you always look for appreciation in your investment and the payout which you receive from your investment so obviously you always prefer high dividend paying companies, but it is not always favorable. Generally, a high dividend paying company has the impression of doing good business and generating good profit, but it is not always true. Need to be cautious, maybe the company does not have a suitable project to generate better return in the future, so it is utilizing its cash to pay the dividend to its shareholders instead of reinvesting it in expanding its business.

Similarly, a company having a long history of high dividend payment reduces its dividend or eliminates paying the same does not indicate bad news for investors all the time. The company may have plans for investing the money in a high return project which has potential to generate better returns in future for shareholders.

Hence investors should track the dividend payout history of the company in terms of Payout Ratio. Payout Ratio is calculated by dividend per share of the company divided by earning per share. In addition to this also try to find out and understand the reason behind the decision of management regarding dividend distribution.

 

 

By Bimal Chandra Jha

(SEBI Registered Investment Adviser)

Jhabimal2@gmail.com

                  

 

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