Airo International Research Journal February, 2017 Volume IX, ISSN:

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2 SHARING IS WHAT NOT CARING A SHAREHOLDER S WEALTH: A STUDY ON DIVIDEND DECISION TO SHAREHOLDER S WEALTH OF SELECT PHARMACEUTICAL COMPANIES D Rajitha Associate Professor, Trinity college of Engineering and Technology, Karimnagar, Telangana , Ph no rajithadornala@gmail.com ABSTRACT Dividend refers to the part of the earnings that are distributed to shareholder and the dividend policy involves the decision to pay out earnings or to retain them to reinvestment in the firm. It affects both the shareholders wealth and the long term growth of the firm. The optimum dividend policy should strike the balance between current dividends and future growth, which maximizes the price of the firm s shares. The present article is an attempt to analyze the aggregate financial variables relating to dividend policy of renowned pharmaceutical companies Dr.Reddy s, Lupin,Cipla,Glaxosmith and Glenmark by using statistical techniques like arithmetic means, standard deviation, co efficient of variation, correlation. The paper concludes that majority of the selected pharmaceutical companies have shown higher retention ratios when compared to the dividend payment ratios. The relationship is found to be significant between DPS and MPS in respect of three companies such as Dr.Reddy, LUPIN and GLAXOSMITH Companies. Which reveals that the DPS as a component not contributing to shareholder wealth maximization because the companies should adopt a optimal dividend policy. Keywords: wealth maximization, EPS, DPS, DPO, RE, MPS. INTRODUCTION Dividend policy determines the division of earnings between payments to shareholders and retained earnings. The selection would be influenced by the effect on the objective of financial management of mobilizing 2

3 shareholders wealth. Dividend refers to that part of profits of a company which is distributed by the company among its shareholders. The dividend decision should be analyzed in relation to the financing decision of a firm, given the objective of financial management of maximizing present values; the firm should be guided by the consideration as to which alternative use is consistent with the goal of wealth maximization. That is, the firm would be well advised to use the net profits for paying dividends to the shareholders if the payment will lead to the maximization of wealth of the owners. If not, the firm should rather retain them to finance investment program me. The relationship between dividends and value of the firm should, therefore be the decision criterion. Thus, dividend policy of the firm has its effect on both the shareholders wealth and long term financing. Firms dividend policy divides net earnings into retained earnings and dividends. Retained earnings provide necessary funds to finance long term growth while dividends are paid in cash generally. Dividend policy of the firm is governed by Long term financing decision: When dividend decision is treated as a financing decision, net earnings are viewed as a source of long term financing. When the firm does not have profitable investment opportunities, dividend will be paid. The firm grows at a faster rate when it accepts highly profitable opportunities. External equity is raised to finance investment. But retained earnings are preferable because they do not involve floatation cost. Payment of cash dividend reduces the amounts of funds necessary to finance profitable investment opportunities thereby restricting it to find other avenues of finance. Thus earnings may be retained as part of long term financing decision while dividends paid are distribution of earnings that cannot be profitably re-invested. Wealth maximization decision: Because of market imperfections and uncertainty, shareholders give higher value to near dividends than future dividends and capital gains. Payment of dividends influences the market price of the share. Higher dividends increase value of shares and low dividend decrease it. A proper balance has to be struck between the two approaches. When the firm increases retained earnings, shareholders dividends decrease and consequently market price is 3

4 affected. Use of retained earnings to finance profitable earnings to finance profitable investments increases future earnings per share. On the other hand, increase in dividends may cause the firm to forgo investment opportunities for lack of funds and thereby decrease the future earnings per share. Thus management should develop a dividend policy which divides net earnings into dividends and retained earnings in an optimum way so as to achieve the objective of wealth maximization for shareholders. Such policy will be influenced by investment opportunities available to the firm and value of dividends as against capital gains to shareholders. The possible aspects of the dividend policy of a firm are classified into: Dividend payout ratio Stability of dividends Legal, contractual and internal constraints an restrictions Owners consideration Capital market considerations Inflation Dividend payout ratio indicates the percentage earnings distributed to shareholders in cash, calculated dividing the cash dividend per share by its earnings per share. Stability of dividends refers to the payment of a certain minimum amount of dividend regularly. The stability of dividends can take any of the following three forms:- Constant dividend per share policy is a policy of paying a certain fixed amount per share as dividend. Constant payout ratio is a policy to pay a constant percentage of net earnings as dividend to shareholders in each dividend period. Stable rupee plus extra dividend is a policy based on paying a fixed dividend to shareholders supplemented by an additional dividend when earnings warrant it. Among the three forms of dividend, generally the first policy of paying dividend i.e. constant dividend per share or dividend rate is mostly preferred. 4

5 A firm pursuing a policy of stable dividend may command a higher price for its shares than a firm which varies dividend amount with cyclical fluctuations in the earnings. The dividend decision is also affected by certain legal, contractual and internal requirements and constraints. The legal factors stem from certain statutory requirements, the contractual restrictions arise from certain loan covenants and the internal constraints are the result of the firm s life. OBJECTIVES OF THE STUDY: 1) To present the conceptual framework of the dividend decision. 2) To identify the approach of selected companies towards dividend decision. 3) To test the relationship between Dividend per share (DPS) and Market per share (MPS). SOURCES OF DATA: The present study is based on the secondary data. The sources of secondary data consist of annual reports, circulars, research periodicals, text books, and news papers like economic times, websites and other published sources. The above data is processed, analyzed, interpreted and presented in the study of five years period i.e. from 2012 to METHODOLOGY: Aggregate financial variables relating to dividend policy of selected pharmaceutical companies have been analyzed for a period of five years i.e. from 2012 to 2016 with the help of statistical techniques like percentages, ratios, averages, standard deviation, coefficient of correlation and coefficient of variation. The dividend policies have been compared among all the selected companies. Finally conclusions have been drawn based on the facts revealed by the study. SIZE OF THE SAMPLE: The five pharmaceutical companies in India have been selected as sample for the present study viz., DR REDDY, LUPIN, CIPLA, GLAXOSMITH, GLENMARK companies. 5

6 ANALYSIS AND DISCUSSIONS: 1. Earnings per share and Growth: The profitability of the shareholders investment can also be measured in many other ways. One such measure is to calculate the earnings per share. The earnings per share (EPS) are calculated by dividing the profit after taxes by the total number of ordinary shares outstanding. EPS calculations made over the years indicate whether or not the firm s earnings power on Table: I. Earnings per share and Growth (percentage) the per- share basis has changed over that period. EPS simply shows the profitability of the firm on a per-share basis; it does not reflect how much is paid as dividend and how much is retained in the business. But as a profitability index, it is a valuable and widely used ratio. Now the trends in the earnings per share of the selected pharmaceutical companies are analyzed. Table I presents the analysis of EPS of the selected companies over the study period. Company/ Year Mean SD C.V Dr Reddy Growth (%) Lupin Growth (%) Cipla Growth (%) GlaxoSmith Growth (%) Glen Mark Growth (%) Interpretation Trend in EPS is consistently upward in the case of LUPIN and GLEN MARK pharmaceutical companies. The EPS is highly increased from Rs to Rs in LUPIN Company, from Rs.14 to Rs.17.4 in CIPLA and Rs to Rs in GLENMARK Company from 2012 to

7 It is found that a very good increase in EPS and Growth percentage from Rs.53.81, in 2012 to Rs , in 2014, but it is declined to Rs.79.39, in 2016 in respect of Dr.Reddy s company. The highest EPS and Growth percentage is generated by Dr.Reddy Company with Rs , during 2014.the GLENMARK and LUPIN companies also generated very good EPS and Growth throughout the period. The EPS is very least as Rs.9.81 in GLENMARK Company during 2012 and EPS and Growth percentage is comparatively low in CIPLA throughout the period. It is observed through the average analysis of EPS that the highest average EPS IS GENERATED by Dr.Reddy Company with Rs due to very higher EPS in initial years. The standard deviation is and with the coefficient of variation as %. The least average EPS is found as Rs in CIPLA Company which is very less compared to the earlier selected company s average. The Growth percentage is strong and positive with LUPIN and GLENMARK companies where as other selected companies are consistently fluctuating and decreasing from 2012 to ) Dividend payout (DPO) and earnings retention(er) ratios: DPO indicates the percentage of earnings distributed to shareholders in cash. Sustainability in the payment of dividend is one of the important demands from the shareholders of the company. The management always intends to create wealth to the shareholders, who are investing their hard earned money shareholders anticipated a regular and consistent dividend income as well as growth in the wealth. Finance executive face a challenge in satisfying multiple needs with limited resources. The dividend payout policy and retention policies are simultaneously important for the companies. For the growth of firms retention policy is utmost important one. In short term the companies may not face any problem of resources. 7

8 Table II Dividend Payout and Retained Earnings s (%) Interpretation: Company/ Year Mean SD C.V DP Dr REDDY's RE DP LUPIN RE DP CIPLA RE DP GLAXOS MITH RE DP GLEN MARK RE Table 8

9 II presents the data related to payout and retention ratios of the selected companies over the study period of five years. The payout ratio has been varied between 3.84% and among the selected pharmaceutical companies. The payout ratio is comparatively higher in GLAXOSMITH and Dr. Reddy s companies throughout the period. The payout ratio is highest with 100% in the GLAXOSMITH Company during 2015 and The ratio is comparatively low in GLENMARK Company during the whole period. The payout ratio is very least as 3.843% in GLENMARK Company during 2016 and 5.385% in The average payout ratio is highest in GLAXOSMITH Company with 94.27% and the standard deviation is with the coefficient of variation as 18.65%. The GLAXOSMITH Company have very higher payout ratio. In contrast to the payout ratio, retention of the earnings is high in all the selected companies. The GLENMARK Company has been observed with higher retention ratios. The payout ratio is less than 20% during the whole period expect in 2012 with 20.38%. Thus it has been ploughing back 88.77% of earnings. In this way, it has been following too conservative retention policy for the future growth and for the wealth maximization. The passive residual policies of the companies will have a positive impact of the book value and market value of the equity shares of the company. 3) Dividend per share (DPS) as a percentage on face value of share: The net profits after taxes belong to shareholders. But the income which they really receive is the amount of earnings distributed as cash dividends. Therefore, a large number of present and potential investors may be interested in DPS (dividend per share) rather than EPS (earnings per share).dps is the earnings distributed to ordinary shareholders divided by the number of ordinary shares outstanding. 9

10 Table: III Dividend per share as percentage of Face Value Dr REDDY's LUPIN CIPLA GLAXOSMITH GLEN MARK Year Face Value DP O Face Value DPO Face Value DPO Face Value DPO Face Value DPO Mea n SD CV Interpretation: The data presented in Table-III explains the amount of dividend per share as a percentage in the face value of share of the selected companies during the study period. LUPIN Company has shown constant increase in the percentage of dividend per share on the face value of the share. The percentage is increasing from 160% to 375% in LUPIN company from 2012 to 2016, while CIPLA and GLENMARK Company has shown consistency in the percentage of dividend on the face value of the share during the entire period with 100% and 200% from 2012 to Even though, GLAXOSMITH Company has shown declining trend by the end of the period, it is very higher in the initial years. The highest dividend per 625% in absolute terms Rs per share is observed in GLAXOSMITH Company during The lowest percentage i.e. 100% in absolute terms Rs. 2 per share is paid in CIPLA Company during the entire period from 2012nto The highest average dividend per 515% is paid by the GLAXOSMITH Company for the period. The standard 10

11 deviation is and 12.65% of coefficient of variation. The lowest average dividend per share is stood as 100% in CIPLA Company, the standard deviation is 0 and coefficient of variation is 0%. 4) Relationship between DPS and MPS: The data pertaining to DPS and MPS are presented in Table-IV. The purpose of this table is to examine the relationship that exists between DPS and MPS of the selected companies. For this the R (correlation) is calculated and presented between these two variables. Table :IV Relationship between Dividend per share and Market per share YEAR Dr Reddy's Lupin Cipla Glaxosmith Glen Mark DPS MPS DPS MPS DP S MPS DPS MPS DP S MPS , , , , , , , , , , , , , Correlatio n Interpretation: The data reveal that, out of five selected companies, the relationship is found to be significant between DPS and MPS in respect of three companies such as Dr. Reddy s, LUPIN and GLAXOSMITH companies. There exists a strong relationship in case of LUPIN Company as the correlation stands at 0.958followed by Dr.Reddy s Company with 0.88 and GLAXOSMITH Company with0.746, while in the case of the CIPLA and GLENMARK Company, there is no relationship between DPS and MPS as the correlation appears to be zero. CONCLUSIONS 1) Earnings per share and growth percentage has shown a consistently upward trend in the case of the LUPIN Company and GLENMARK 11

12 Company among the five selected companies while in the case of other three companies a fluctuating trend is observed. The highest EPS and Growth percentage is registered in Dr.Reddy Company with Rs during 2014 and lowest with Rs.9.81 in the case of GLENMARK Company during 2012 among the selected pharmaceutical companies. The highest average EPS is found to be in Dr.Reddy Company due to extraordinary increase in EPS during The average EPS is lowest in CIPLA Company. 2) The analysis of the dividend payout ratio and earnings retention ratios reveal that, majority of the selected pharmaceutical companies have shown higher retention ratios which reveal clearly that they are following financing approach in taking dividend decision. While in GLAXOSMITH Company is paying more dividends with lower retention ratios, which imply that they are following wealth maximization approach in taking dividend decision. The higest dividend is 100% paid by GLAXOSMITH Company in the year 2015 and The least payment i.e % made by GLENMARK Company during The highest average dividend i.e % is paid by GLAXOSMITH Company and lowest with GLENMARK Company with 11.22% for the study period. 3) The relationship is found to be significant between DPS and MPS in respect of three companies such as Dr.Reddy, LUPIN, GLAXOSMITH Companies. Among these three companies, there exists a strong relationship in the case of LUPIN Company with correlations during study period. 4) The majority selected pharmaceutical companies are not following the stable dividend policy as their dividend payout ratios are fluctuating during the study period of five years. REFERENCES: SUR, DEBASISH, (2005). Dividend Payout Trends in the Post-Liberalisation Era: A Case Study of Palmolive India)Ltd., The 12

13 Management Accountant, Vol. 40, No.3, pp Hennessy, C., & Whited, T.(2005). Debt dynamics. Journal of Finance, 60, Azhagaiah, Ramachandran and Candasamy Gavory, (2011). The Impact of Capital Structure on Profitability with Special Reference to IT Industry in India. Managing Global Transitions 9 (4), pp Das, P.K. (2006), Dividend Practices in Selected Company An Empirical Analysis, The Mangement Accountant, Vol.41, No. 4, pp Mistry D S, (2010). Determinants of Dividend Pay-out - A firm level study of major Gujarat Pharma Players, BIFT s Journalof International Management & Research, Vol. II, Issue No. 2, pp Krishnamachary, Prof. p.,(1990). Investment management in Public Enterprises (With special references to selected undertakings), Readings in Public Enterprises, Hyderabad, Vikas Publications,Volume IV. James C. Van Horne, John Martin Wachowicz,(2005). Fundamentals of Financial Management, Prentice Hall of India. Prasanna Chandra,(2008). Financial Management, Tata McGraw-Hill Education. I.M. Pandey, (2009). Financial Management, Vikas Publishing House Pvt. Ltd. Published Annual Reports of Dr.Reddy s, Lupin, Cipla, Glaxosmith, Glenmark pharmaceutical companies for the period of 5 years i.e. from Websites:

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