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ANALYSIS OF

L&TS DIVIDEND
POLICY
Amber Gupta || IIM Raipur

PROJECT OBJECTIVE
L&T has an uninterrupted dividend payment record since
the Year 1946
Aim is to understand the key drivers behind the policy
Whether this policy maximizes the firm value overtime

BENEFIT TO THE COMPANY


A thorough analysis of the companys dividend policy
would enable the management to ascertain the costs and
the benefits associated with the current policy of regular
dividend payments. This would also help the company in
taking decisions about future dividend decisions.

BENEFIT TO THE STUDENT

Through this project I aim to understand the factors which


determine the amount of dividends to be paid and the
long term impact of the same on the company. This
internship provides me the opportunity to practically
apply the various theories in corporate finance that
explain the dividend policy.

METHODOLOGY
Step 1
Understanding L&Ts Dividend policy. Application of Lintner model
Dividend Stickiness

Step 2
Sector Regression - Impact of fundamental factors on the Dividend
Payout Ratio.

Step 3
How much can the company pay?

Step 4
Assessment of Project Quality

Step 5
Dividends An effective signaling mechanism?

L&Ts
Policy

Step 2

Step 3

Step 4

Revenues (100's of crores)


1000
900
800
700
600
500
400
300
200
100
0

Step 5

Conclusion &
Recommendation

L&Ts
Policy

Step 2

Step 3

Step 4

Conclusion &
Recommendatio
n

Step 5

Dividends variation
60

35

30

50

25
40
20
30
15
20
10
10

Mar2006

Mar2007

Mar2008

Mar2009

Mar2010

PAT (100 's of Crores)


PAT Margin (%)

Mar2011

Mar2012

Mar2013

Mar2014

Polynomial (PAT (100 's of Crores))


DPR

Mar2015

L&Ts
Policy

Step 2

Step 3

Step 4

Step 5

Conclusion &
Recommendation

Dividend

Policy Options : Stable dividend policy, Constant


Dividend payout policy, Residual dividend policy
Lintner model : Future dividend payments are a function
of the lagged dividend payments and the earnings of the
company.

L&Ts
Policy

Step 2

Step 3

Step 4

Conclusion &
Recommendation

Step 5

Lintner model
100

30

80

25
20

60

15

40

10

20
0

1985

5
1990

1995

2000

EPS

R Square

0.805450823

Adjusted R
Square
f
Significance F

0.787764534
45.54097419
1.5112E-08

2005

2010

2015

2020

Dividend Per Share (Rs.)

Intercept

Coefficients
3.245477642

P-value
0.00379873

EPS

0.203498695

4.3543E-05

-0.0234084

0.55702352

Lagged dividend

L&Ts
Policy

Sector
regressio
n

Step 3

Step 4

Step 5

DPR based on fundamentals


10 firms chosen from Bloomberg
Larsen & Toubro

Gammon India

IRB Infra.& Developer

Hindustan Construction
Company

GMR Infrastructure

IVRCL Ltd.

Sadbhav Engineering

Punj Lloyd

NCC

Simplex Infrastructure

Conclusion &
Recommendation

L&Ts
Policy

Sector
regressio
n

Step 3

Step 4

Step 5

Conclusion &
Recommendation

12 Variables chosen
Independent Variable

Symbol

Profit margin

PM

Independent
Variable
Interest Coverage Ratio

Corporate Tax rate

CT

Profit after Tax

PAT

Dividend Tax rate

DT

Institutional Holding

IH

Return On Equity

ROE

Earnings per Share

EPS

Market Capitalization

MC

Sales Growth

SG

Debt to Equity Ratio

DTE

Beta

Symbol
ICR

L&Ts
Policy

Sector
regressio
n

Step 3

Step 4

Step 5

Conclusion &
Recommendatio
n

Regression Result
R Square
Significance F

Intercept
p/b
Ln (1+pm)
Ln Market cap
Ln d/e
Ln (1+tax rate)
Beta
Insider holding
Sqrt sales growth
ROE
Sqrt div tax

0.371052731
0.008915958
Coefficients
2.207140261
0.115852408
-0.672229302
0.135887306
0.104905236
0.331614611
0.262839283
0.007046709
0.051236099
0.105724992
0.563212404

P-value
0.203642
0.337327
0.000902
0.417385
0.73724
0.020813
0.430238
0.424286
0.336352
0.000563
0.090729

L&Ts
Policy

Sector
regressio
n

Step 3

Step 4

Step 5

Conclusion &
Recommendati
on

Year

Difference Between Actual & calculated DPR

2006

-2.042489387

2007

-51.88580328

2008

7.51519604

2009

-21.31550769

2010

-35.67113823

2011

2.027463255

2012

1.386567241

2013

3.033282895

2014

10.03177556

2015

6.23435

How much did the firm pay


out? How much could it
have afforded to pay out?
Dividends vs. FCFE

Firm pays out too little


FCFE > Dividends

Firm pays out too much


FCFE < Dividends

Do you trust managers in


the company with! your
cash?
Look at past project choices

What investment opportunities


does the firm have?
Look at past project choices

Firm has history of


good project choice
and good projects in
the future
Give managers the
flexibility to keep cash
and set dividends

Firm has history of


poor project choice

Justify holding cash or


return cash to
stockholders

Firm has good


projects

Firm should cut


dividends and
reinvest more "

Firm has poor


projects

Firm should deal with its


investment problem first
and then cut dividends

Step 4

Step 5

Quality of projects

Cash Deficit
Cash Surplus

Poor Projects
Good Projects

Availability of Funds

L&Ts
Policy

FCFE
Analysi
s

Sector
regressio
n

Significant
pressure to
pay out more
to
stockholders
as dividends
or stock
buybacks

Maximum
flexibility in
setting
dividend
policy

Cut out
dividends but
real problem
is in
investment
policy.

Reduce cash
payout, if
any, to
stockholders

Conclusion &
Recommendation

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Step 4

Step 5

Conclusion &
Recommendatio
n

FCFE vs Dividends
12000
10000
8000
6000
4000
2000
0

Mar2006 Mar2007 Mar2008 Mar2009 Mar2010 Mar2011 Mar2012 Mar2013 Mar2014 Mar2015
FCFE

Dividend

Over the past 10 Years (Rs. Crores)


Average FCFE
Average Dividends

6435.875556
767.57

Sector
regressio
n

L&Ts
Policy

FCFE
Analysis

Project
Quality

3 Methods used

1. ROE vs. COE

2.

3.

ROC vs. WACC

CFROI vs. WACC

Credit Suisse

Step 5

Conclusion &
Recommendatio
n

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Project
Quality

Step 5

Conclusion &
Recommendatio
n

1st Method

1. ROE vs. COE

. Beta calculated from regressing daily Market return with stock


return for a period of 10 years.
. Equity risk premium -8.65% which is the one suggested by PwC
research on equity risk premium in India.

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Project
Quality

Step 5

Conclusion &
Recommendatio
n

ROE vs COE
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Mar2006

Mar2007

Mar2008

Mar2009

Mar2010

Mar2011

Mar2012

Mar2013

Mar2014

Mar2015

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

2nd Method

1. ROCE vs. WACC

Step 5

Conclusion &
Recommendatio
n

Sector
regressio
n

L&Ts
Policy

FCFE
Analysis

Project
Quality

Step 5

Conclusion &
Recommendatio
n

WACC vs. ROCE


0.25

0.2

0.15

0.1

0.05

Mar2006

Mar2007

Mar2008

Mar2009

Mar2010

Mar2011

Mar2012

Mar2013

Mar2014

Mar2015

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Project
Quality

Step 5

Conclusion &
Recommendatio
n

2nd Method
1. CFROI vs. WACC
2. Assumed asset life 30 years ,Inflation rate 5%

Gross Investment
=Total Assets +
Accumulated Dep.+
Inflation adjustmentNon debt current
Liabilities

Cash Flow over Asset


Life
=NI+ Depreciation+
Interest+ R&D +Other

Terminal Value
Non depriciating
Assests=cash+Land+
other

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

Step 5

Conclusion &
Recommendation

CFROI vs. WACC


0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15

Project
Quality

Step 5

Quality of projects

Cash Deficit
Cash Surplus

Poor Projects
Good Projects

Availability of Funds

L&Ts
Policy

FCFE
Analysi
s

Sector
regressio
n

Significant
pressure to
pay out more
to
stockholders
as dividends
or stock
buybacks

Maximum
flexibility in
setting
dividend
policy

Cut out
dividends but
real problem
is in
investment
policy.

Reduce cash
payout, if
any, to
stockholders

Conclusion &
Recommendatio
n

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Project
Quality

Value
Creatio
n

Conclusion &
Recommendati
on

DO THE SHAREHOLDERS VALUE


DIVIDENDS?
Looked for variation is
Shareholding pattern and
Share price
Preliminary test
-Regression with DPS as
the independent variable
and Shareholding pattern
and Share price as
Dependent variable

Sector
regressio
n

L&Ts
Policy

FCFE
Analysis

Project
Quality

Value
Creatio
n

Conclusion &
Recommendati
on

REGRESSION RESULT
Independent Variable

% Institutional Holding

R squared

0.591485432

Significance F

0.000803896

FII
Institutional
Shareholding

Coefficients

P-value

Intercept

45.2469706

1.05747E-12

DPS

0.47401112

0.000803896

FII

Institutional Shareholding
1
0.383796

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

Value
Creatio
n

REGRESSION RESULT WITH


SHARE PRICE
Independent Variable
R squared

Share Price
0.786531056

Significance F

5.3232E-05

Coefficients

P-value

Intercept

114.0229

0.386389

DPS

0.098139

5.32E-05

Conclusion &
Recommendation

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

EVENT STUDY

The event in our model is the


dividend declaration date which
is treated as day 0.

The event window is +- 20 days


from the event date.
Expected return is found by
regressing the Stock daily return
over market daily return for a
period of 150 days prior to the
event.

Value
Creatio
n

Conclusion &
Recommendation

Sector
regressio
n

L&Ts
Policy
p value
Day

0.49374

0.1816

FCFE
Analysis

Value
Creatio
n

Project
Quality

0.02356 0.53274

0.1238 0.841142

Conclusion &
Recommendatio
n

0.887706

-1

-2

-3

1/6/2015

0.005637

0.004951

0.011262

0.028931

0.000714

-0.00088

0.007629

29/05/200
1

0.001094

-0.00736

0.023697

-0.04126

0.05669

0.000286

-0.01143

29/03/200
0

0.039175

0.073887

0.012392

-0.06789

0.081826

0.026956

-0.01904

AAR

-0.00293

0.007126

0.015344

0.0057

0.00977

0.000825

-0.00047

CAAR

0.035365

0.038299

0.031172

0.015828

0.010128

0.000358

-0.00047

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

AAR & CAAR


0.03
0.02
0.01
0
-0.01
-0.02
-0.03
-0.04

AAR

CAAR

Value
Creatio
n

Conclusion &
Recommendation

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

Value
Creatio
n

Conclusion &
Recommendation

The Average Abnormal return on day 1 was found to be significantly


different from 0 With a p value of 0.02356
About 2% average abnormal returns can be observed over a period
of +20 days
From day -10 a trend reversal in CAAR value can be observed. This
is around the period that the company informs BSE that a board
meeting to discuss dividend payout will be held on day 0.

L&Ts
Policy

FCFE
Analysi
s

Sector
regressio
n

Project
Quality

Value
Creatio
n

Conclusion &
Recommendation

AAR with Increasing Dividends


0.03
0.02
0.01
-25

-20

-15

-10

0
0

-5

-0.01
-0.02
-0.03
AAR

CAAR

10

15

20

25

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

Value
Creatio
n

AAR with Decreasing Dividends


0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
-0.02
-0.04
AAR

CAAR

Conclusion &
Recommendation

L&Ts
Policy

FCFE
Analysi
s

Sector
regressio
n

Project
Quality

Value
Creatio
n

Conclusion &
Recommendatio
n

Interaction Effect
DPS Increase EPS Decrease
0.06
0.04
0.02
-25

-20

-15

-10

-5

0
0

-0.02
-0.04
-0.06
-0.08
2015 AAR

CAAR

10

15

20

25

L&Ts
Policy

FCFE
Analysi
s

Sector
regressio
n

Project
Quality

Value
Creatio
n

Conclusion &
Recommendation

Interaction Effect
DPS Increase EPS Decrease
0.15
0.1
0.05

-25

-20

-15

-10

-5

0
0

-0.05
-0.1
2011 AAR

CAAR

10

15

20

25

L&Ts
Policy

FCFE
Analysi
s

Sector
regressio
n

Project
Quality

Value
Creatio
n

Conclusion &
Recommendation

Interaction Effect
DPS Decrease EPS Increase
0.1
0.05
-25

-20

-15

-10

-5

0
0

-0.05
-0.1
-0.15
-0.2
2006 AAR

CAAR

10

15

20

25

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Project
Quality

Value
Creatio
n

Conclusion &
Recommendatio
n

Thus the following conclusions can be drawn:


Dividend payouts to tend to increase shareholder value by capital
appreciation in stock price. This means that the dividends do serve
as an effective signaling mechanism to a certain extent and thus
are valued by shareholders.
An increase in dividend payout is valued much more than a
corresponding decrease as is observed from the graphs above
where there is a significantly positive abnormal return in instances
when dividends are increased.

L&Ts
Policy

Sector
regressio
n

FCFE
Analysis

Project
Quality

Value
Creatio
n

Conclusion &
Recommendatio
n

Quantifying Benefits
Regression to Ascertain value addition by Sector regression
R Square

0.344326124

47.26336099

Significance F

7.90E-10
Coefficients

P-value

Intercept

7.323330018

3.75E-60

ROE

0.098030965

7.9E-10

L&Ts
Policy

Sector
regressio
n

FCFE
Analysi
s

Project
Quality

Value
Creatio
n

Conclusion &
Recommendation

Thus the following conclusion can be drawn:


From our FCFE model it can be concluded that more dividends need to be paid.
Moreover the event study indicates that for L&T dividends serve as a good signaling
mechanism and are valued by the shareholders ,reducing them would negatively
impact stock prices.
However the real issue here is the Quality of projects the company has invested in.
Even if the dividends are cut there is no guarantee that the Capital not being
returned to shareholders would be reinvested profitably.
Thus it is recommended that the company should first focus on cutting down
investments that do not create value and improve margins and meanwhile increase
the dividends .
In view of the new tax norms share buyback should be considered

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THANK YOU
Amber Gupta
MBA 1st year IIM Raipur
B.Tech IIT Guwahati