DIVIDEND POLICY OF PAYING AND NON-PAYING CEMENT COMPANIES IN INDIA

DIVIDEND POLICY OF PAYING AND NON-PAYING CEMENT COMPANIES IN INDIA Mr. P. VEERAMUTHU, M.Com, M.Phil, B.Ed., PGDCA., (Ph.D. Research Scholar, Thiruvalluvar University, Vellore) Assistant Professor, PG & Research Department of Commerce, Srimath Sivagnana Balaya Swamigal Tamil, Arts, Science College, Mailam-607 604, Tamil Nadu, India. Mr. M. SABARIRAJ, M.Com, M.Phil, B.Ed., SET., Assistant Professor, PG & Research Department of Commerce, Srimath Sivagnana Balaya Swamigal Tamil, Arts, Science College, Mailam-607 604, Tamil Nadu, India. ABSTRACT In this paper, we investigated the prominent variables influencing the dividend policy of selected companies in Cement Industry. The models mainly relied upon are the basic Lintner s Model, Brittain s Cash Flow Model, Brittain s Explicit Depreciation Model, and Darlings Model. We used a sample of 38 cement companies chosen from 85 listed companies in Bombay Stock Exchange (BSE) on the basis of investment in fixed assets. The selected companies are classified as "small" and "large" size based on the paid up equity capital. The objective of this paper is to establish relationship among the said models with reference to dividend paying and non-paying companies. The results show that variables viz., size of the company, Cash Flow, Previous Year Dividend, Depreciation, Interest payment, and Change in sales in a year over the preceding two years affect the dividend policy of the companies. The flow of Net Debt has large influence for non-paying companies, while PAT, Depreciation, Investment, Demand and Liquidity position have greater influence on dividend paying companies. INRODUCTION Dividend policy is one of the most important financial policies, not only from the viewpoint of the company but also from that of the shareholders, the consumers, the workers, regulatory bodies and the Government. Value of the corporate securities depends to a great extent on dividend and, therefore, in deciding upon the financial structure of a company, dividend has to be given due consideration. Dividend decision in the corporate management is different from non-corporate entities. Dividend policy decision influences the financing decision of the firm through retained earnings. Financial decision would relate to the amount of funds to be raised from external sources as the investment needs of a firm can be fulfilled by a combination of retained earnings and external financing. Therefore, higher the amount of retained earnings, given the investment needs, lower will be the need for external finance and vice-versa. Dividend policy is affected by legal, tax and accounting factors of a country. These factors may substantially vary from country to country. STATEMENT OF THE PROBLEM In the Indian context, a few studies have analyzed the dividend behaviour of corporate firms. The cash flow is a major determinant of dividend followed by net earnings. The ownership structure may influence the dividend payout or finds no influence of insider ownership on dividend behaviour of firms. Therefore, the present study mainly considers the various aspects of problem and factors of dividend policy in Cement Industry in India. SIGNIFICANCE OF THE STUDY Dividend policy is an important tool of financial planning because it is related to profits. This is a general agreement on the set of factors influencing dividend policy. Different authors have used different combinations of variables for explaining the dividend behaviour. Besides, there are different approaches to the decision involving distribution or retention of net profit after taxes. Moreover, factors influencing the corporate dividend policy may substantially differ from country to country because of 85

inconsistency or variation in legal, tax and accounting policy among various countries. In view of these facts, the present study aims at identifying the factors/variables influencing the corporate dividend policy, significantly in Indian Cement Industries. OBJECTIVES To analyse the prominent variables influencing the dividend policies of the selected companies, and to examine the extent to which these variables maintain their relative dominance over the period under study. To study the applicability of the chosen dividend policy in the selected cement companies in India. HYPOTHESIS Size of the company, cash flows, previous year dividend, depreciation, sales, investment demand, flow of net debt, interest payment, liquidity position, and change in sales have no significant influence on the dividend policy. METHODOLOGY Sources of data The study used only secondary data, which are collected from CMIE prowess (package). Analytical method is used for interpreting the data. Sampling Design A sample of 38 Cement companies have been chosen from 85 listed companies in Bombay Stock Exchange (BSE) on the basis of investment in gross fixed assets of over and above Rs.100 crore. i.e. those companies whose gross fixed assets of more than Rs.100 crore as on 31-3-2016 are included in the sample. Tools used for Analysis of Data In the study, the models mainly relied upon are the basic Lintner s model in which changes in current year s dividend is sought to be explained by current year s profit after tax (PAT) and dividend payment in the previous year. The second model used in this study, called Brittain s Cash Flow Model is a variant of the basic Lintner s model by use of cash flow instead of PAT as a measure of income of the selected companies. The third model Brittain s explicit depreciation model incorporates depreciation as an additional explanatory variable in the basic Lintner s model. The fourth model called Darling s dividend model used in this study makes use of lagged profit in place of lagged dividend in the basic Lintner s model in addition to the variables such as depreciation, amortization recoveries and changes in sales. Lintner s Model: D t = a 0 + a 1 P t + a 2 D t-1 + ut Brittain s Cash Flow Model: D t = a 0 + a 1 C t + a 2 D t-1 + u t Brittain s Explicit Depreciation Model: D t = a 0 + a 1 P t + a 2 D t-1 + a 3 A t + u t Darling s Model: D t = a 0 + a 1 P t + a 2 P t-1 + a 3 A t + a 4 ΔS t-2 + u t Where in all these equations D t & D t-1 = Total equity dividend in period t and t-1 respectively. P t & P t-1 = Net profit after tax in period t and t-1 respectively. C t = Cash flow in period t. A t = Amount of depreciation in period t. ΔS t-2 = Changes in sales in a given year over the preceding two years u t = Error term. Further, Canonical Discriminant Function Analysis has been used for factor determining Dividend Paying and Non-Paying Cement Companies. PERIOD OF THE STUDY The data used for the analysis are relating to the selected Cement companies for the period of five years ranging from 2014-2015 to 2015-2016. ANALYSIS AND FINDINGS Average Dividend shows an increasing trend. Number of dividend paying companies have shown an increasing trend up to 2015 and has fallen in 2016. Average PAT has shown a negative trend. Average Dividend per Share shows a fluctuating trend i.e., high variation in dividend per share. Average Dividend Payout ratio shows a triggering trend i.e., highly volatile in dividend Payout Ratio. Table 1 Regression Results for Cement Industry Based on Lintner Model Explanatory Variable Small Companies Large Companies All Companies Intercept 0.2417 0.2899 0.0409 (1.27) (0.40) (0.12) Profit after tax (PAT) 0.0094* 0.0151* 0.0128** (1.79) (1.69) (2.27) Dividend Lag 1 0.9462*** 1.1583*** 1.1658*** (13.32) (29.33) (46.04) R 2 0.7222 0.9607 0.9600 Adjusted R 2 0.7164 0.9598 0.9596 F Value of the Model 123.49*** 1062.40*** 2221.70*** 86

Lintner s model has shown that changes in current year s dividend is sought to be explained by current year s PAT and dividend payment in the previous year. Brittain s cash flow model has shown that the results of the above models have shown that previous year's dividend is one of the most determinant factors for paying dividend in the current year. Brittain s Explicit Depreciation Model has envisaged that the small size firms seem to be dependent on all the three factors, viz., PAT, previous year dividend and depreciation for paying dividend, whereas the large companies depend on only PAT, next to previous year dividend. Table 2 Regression Results for Cement Industry Based on Brittain s Cash Flow Model Intercept 0.2599-0.0826-0.1766 (1.51) -(0.13) -(0.56) Cash Flow 0.0186*** 0.0166* 0.0149** (3.82) (1.93) (2.71) Dividend Lag 1 0.7923*** 1.1258*** 1.1323*** (9.71) (22.51) (34.78) R 2 0.7512 0.9610 0.9605 Adjusted R 2 0.7459 0.9601 0.9601 F Value of the Model 143.38*** 1073.10*** 2248.60*** Table 3 Regression Results for Cement Industry Based on Brittain s Explicit Depreciation Model Intercept -0.1310-0.3463-0.3602 -(0.78) -(0.35) -(0.86) Profit after tax (PAT) 0.0130*** 0.0158* 0.0141** (2.96) (1.76) (2.48) Dividend Lag 1 0.4968*** 1.1137*** 1.1183*** (5.51) (18.54) (28.83) Depreciation 0.0796*** 0.0256 0.0243* (6.60) (0.98) (1.61) R 2 0.8102 0.9611 0.9606 Adjusted R 2 0.8042 0.9597 0.9599 F Value of the Model 133.76*** 708.36*** 1494.70*** Darling s model has shown that change in sales is not the matter for cement companies of both small and large for paying dividend. Whereas both, net profit and depreciation have been important factors for them. Further, it is understood that the small companies seem to be dependent on the previous year s net profit for dividend payment. Flow of net debt has no significant impact on the dividend policy. Liquidity position seems to have influenced the decision on dividend policy. 87

Table 4 Regression Results for Cement Industry Based on Darling s Model Intercept 0.1934-3.9197* -2.6076*** (1.06) -(1.84) -(2.76) Profit after tax (PAT) 0.0148*** 0.0778*** 0.0745*** (3.11) (3.48) (5.06) PAT Lag 1 0.0228*** 0.0327 0.0374** (4.02) (1.52) (2.56) Depreciation 0.1192*** 0.3560*** 0.3233*** (12.13) (8.45) (12.36) ΔSAL t-2 0.0012 0.0124 0.0119* (0.51) (1.33) (1.83) R 2 0.7569 0.8142 0.7934 Adjusted R 2 0.7777 0.8055 0.7889 F Value of the Model 85.84*** 93.14*** 175.72*** Brittain s cash flow model along with changes in sales through its impact on working capital needs or growth in earnings has an adverse relationship with the dividend policy of the cement industry. Dividend paying companies PAT, Depreciation, Investment Demand, and Liquidity are large in magnitude in group 2 and the Magnitude of FND is larger in group 1. Table 5 Results of Canonical Discriminant Function Eigen value Canonical R Wilks Lambda Chi- Degrees of Significance Square Freedom 1.0554 0.7166 0.4865 132.21 5 p < 0.01 Table 6 Results of Standardized Coefficients and Wilks Lambda for Each of the Independent variables in the Functions Variables Standardized Coefficients Wilks Lambda F Value p Level Profit After Tax (PAT) -0.3628 0.5110 9.14** 0.00 Depreciation -0.4604 0.5254 14.56** 0.00 Investment Demand (ID) -0.3539 0.4933 2.52 0.11 Flow of Net Debt (FND) 0.3786 0.4935 2.60* 0.10 Liquidity -0.8537 0.7448 96.63*** 0.00 *Significant at 10% level; ***Significant at 1% level **Significant at 5% level 88

Table 7 Results of Classification Function Variables Non Paying Paying (Group 1) (Group 2) (Code = 0) (Code = 1) Profit After Tax (PAT) -0.0173-0.0056 Depreciation 0.0393 0.0687 Investment Demand (ID) -0.0082-0.0010 Flow of Net Debt (FND) 0.0067 0.0000 Liquidity 1.0843 2.5029 Constant -1.8081-6.7096 CONCLUSION In the present study, 38 companies are chosen on the basis of Gross Fixed Assets i.e., companies having Gross Fixed Assets of more than Rs. 100 crore. The data have been collected from the corporate database CMIE Prowess maintained by Centre for Monitoring Indian Economy. The data used in the analysis relate to cement manufacturing companies listed on Bombay Stock Exchange (BSE). The selected companies are categorized under Small and Large size based on the paid up equity capital. The companies paid up equity capital of >Rs. 50 crore are considered as large and up to Rs. 50 crore are considered as small. Regression analysis, based on the four models, is done and the model of good fit (with high R 2 value) among the four models is selected (i.e., Brittain s Cash flow model) and the following variables are individually added to the selected model to ascertain the impact of the added variables on dependent dividend. Variables are: Investment Demand (Plant and Machinery, other fixed assets and Inventories) Flow of Net Debt, Interest Payment, Liquidity and Changes in Sales. All the said determinants have been used in the present study as additional explanatory variables in the Brittain s Cash Flow Model. It is found from the analysis that Size of the Company, Cash flow, Previous year Dividend, Depreciation, Interest Payment, Change in Sales in a year over the preceding two years, are the variables which affect the dividend policy of companies, whereas Sales performance, Investment demand, Flow of net debt, and Liquidity position have no significant influence on the dividend policy. On carrying out Canonical Discriminant Function Analysis for determining variables influencing the Paying and Nonpaying Companies, it is found that Flow of Net Debt has large influence for Non-paying companies, whereas PAT, Depreciation, Investment Demand, Liquidity Position have larger influence on Paying companies REFERENCES: 1. Brealey (1992) poses the dividend policy decisions as what is the effect to a change in cash dividends, given the firm s capital budgeting and borrowing decisions?. In other words, he looks at dividend policy in isolution and not as a by product of other Corporate Financial Decisions. 2. Linter (1956) finds that the firms pay regular and predictable dividends to investors, where as the earnings of Corporate firms would be erratic. This implies that shareholders prefer smoothened regular income. 3. Bernstein (1998) observes that given the concocted earnings estimates provided by firms, the low dividend payout induces reinvestment risk and earnings risk for the investors. 4. Black (1976) notes that in the presence of taxes, investors prefer smaller dividends or no dividends at all. 5. According to kalay (1982), in the absence of restraining covenants, shareholders can transfer wealth from bondholders by paying off dividend to themselves either by selling existing assets or by reducing investment or by using proceeds of a senior debt 6. Baske, Powell and Veit (2002) survey different streams of research work on dividends. 89