Distribution of Incomes among the Dividend: A focus on Indian Banking sectors in

National Stock exchange.

Dr. P.Rajaa,
Asst Professor
Department of Business Administration

Abstract

Banking sector plays a vital role in formative the economic position of the country by the
way of channeling the savings and investment with respect to the national policy. Banking
structure, system, operation and their policy have close association with channel the savings in
between the individual and create investment with industrial sectors. Investing in banking sectors
fundamentally depends upon various factors such as their profit, income, operation level,
dividend, etc., The objective of this study is to identify the key determinant variables of dividend
determinant and their impact over cash payout and the total payout. Dividend payouts are the
most important signal used by corporate to pass the information to the public about the
performance of the company. Dividend decision and payout of a bank is fundamentally depends
on its Capital size, Net Profit, Cash position and retained earnings of the respective bank.
Dividend policy of a firm may laid down on decision regarding allocation of available earning by
forming formal statements accepted by board of directors and monitored on regular basis.
Dividend policy may be reexamined at every annual general meeting and published in the
company annual reports. Statistical techniques of simple regressions and multiple regressions
have been used to explore the relationships between variables.

Keyword : Dividend policy, Dividend variables, Net profit, cash position

* Author: Dr.P.Raja, Assistant Professor, Department of Business Administration, KSR College
of Engineering, Tiruchengode - 637 215, Mobile: 9003506631, Email: psrajaa@gmail.com
 Distribution of Incomes among the Dividend: A focus on Indian Banking sectors in
National Stock exchange.

Introduction:

Dividend payouts are the most important signal used by corporate to pass the
information to the public about the performance of the company. Announcement of
dividend or information are taken by shareholder as signals which are convey by the
managers of firm in an uncertain economic situation characterized by information
asymmetry Lonie et al, (1996). Now a days investors are very sensitive toward the
market information, which may reflect in the movement of particular shares. Manager
may disclose the positive information about performance and distribute the profit in the
way of dividend to show the healthy position of the company in the market.

Dividend policy of a firm may laid down by managers in deciding the size and
pattern of earning by forming formal statements accepted by board of directors. Dividend
policy may be reexamined at every annual general meeting and published in the company
annual reports.

In seminar paper, Miller and Modigliani (1961) argued that given perfect capital
markets the dividend decision does not affect the firm value and is, therefore, irrelevant.
The aim of sharing the dividend focus on two important view that the quantity of
funds/Profit to be shared with investor for their general benefits and remaining shares to
be kept for future investment by increasing the firm capital and wealth. Company used
optimal dividend policy for the benefits of receiving capital gains by investors and
balancing the risk associated with their adequate returns.

Dividend payout decision is common phenomenally influence by various internal

and external constraints such as sales, profit, interest, tax, cash position, retain earnings,
payout ratio, stability of dividend, legal, contractual, owner and shareholder interest of
control, capital market consideration and country economy and Inflation. And it also
generally influence by psychological phenomenon like investors preferences, attitude,
beliefs, opinion, culture, habit, economic life style and these constraints are perpetual
change due to nature of various characteristics and operation involved by the firms.
Accordingly, it cannot be possible to frame common mathematically model and uniform
pattern of determinant for all firms at all times. (Upananda Pani, 2002) Paying high
dividends brings high level of satisfied and reduce the level of risk associate with share
price (Gordon, 1963) and is a proxy for the future earnings.
Brittain (1966) studied the tax structure and corporate dividend policy over a
period of 1919-1960. The results indicated that the capacity of a firm to pay dividends
has been better explained in terms of cash flows as a variable, i.e., profits after taxes plus
depreciation as against the Lintners profits net of taxes, as it reflected true earnings.

Baskin (1989) suggests the use of the following control variables in testing the
significance of the relationship between dividend yield and price volatility are operating
earnings, the size of the firm, the level of debt, the payout ratio and the level of growth.
So he had tried to explain the underlying linkage between dividend policies (dividend
yield and dividend payout ratio) and stock price risk in his empirical work on USA.

The paper is organized as follows, the introduction of dividend policy described in

Section 1, Section 2 contains the methodology, Section 3 states limitation of the study
Section 4 tells about the previous literatures on the present topic of study, Section 5
includes the recent scenario of Indian banking industry, and Section 6 reports the analysis
and results. The final section summarizes and concludes the paper.

Research Methodology

This study is based on empirical in natures, which shield a number of key financial
variables used to determine the decision of dividend payout. Among these Cash Payout
Ratio are considered as dependent variables and Company Size (Revenue), Profitability
(Net Income), Earning Per Share (EPS), Liquidity Position (Cash and Cash Equivalent),
Retained Earnings are considered to be independent variables.
Data, Sample and Period of Study

The study is analytical and empirical in nature based on secondary data. The
present study focus on Bank Index consists of 10 commercial banks which have been
selected from National stock Exchange for the period of ten years i.e 2003 to 2013. The
data have been collected from secondary sources viz., annual books and accounts of
selected companies and financial journals. The list of the sample companies has been
appended to the annexure (Annexure I).

Data Analysis

This paper attempts to investigate the factors that affect the dividend policy in
particular banking sector in India. In this study, simple regression and multiple regression
test have been used.

Objective of the study

The objective of this study is to analyzing key financial (such as Earning per
share, net income, and cash position) variables and most influence variables in dividend
payout decision. For the purpose of this study different article are reviewed.

Limitation of the study

Major limitation of this study is lack of available data, the main sources data of
which are the annual reports of the sample banks. In annual reports, companies usually
give emphasis on the information that create positive impression about the company and
present the information in their own way, which may become a major constraint in
drawing the exact scenario of reality.

Previous Studies

There are a number of studies existing on the determinants of dividend decision based on
various key factors. According to Linter (1956) the dividend payout decision of a firm is
judicially determined by profit and last year dividend policy.
 Gordon (1959) analyzed four industries for two years for examining the relationship of
share price with dividend per share, book value per share, earnings per share and growth. The
study results revealed that the coefficient of growth factors was not supported. The impact of
earnings per share and book value per share on stock turned out to be statistically insignificant.
However the coefficient of dividend had a positive and significant relationship with share price.

Baker and Edelman (1986) acknowledge that the key determinants of dividend policy are
expected level of future earnings and pattern of past dividends decision. Fisher (1961) examine
the impact of dividend per share, undistributed profit per share, and size index on price per share.
The study was based on five industry sample for five years. The result of the study disclosed that
variation in the last declared dividend per share accounted for a considerable part of the
variations in share prices between companies.

Gitman (1991) reported that present and past year profits are important factors
influencing dividend policy payout. Baker and Powell (2000) concluded that dividend decision
based on industry specific and predictable level of future earnings is the major factor
determinant. Jensen, Solberg and Zorn (1992) concluded that higher profit provided by lesser
director ownership, lower growth rate and lower level of investment, resulting in higher level of
dividend payout ratio.

Reddy, Y S (2003) on dividend behavior of Indian corporate firms over the period 1990
2003 shows that companies paying dividends has declined from 60.5 percent in 1990 to 32.1
percent in 2003 and that only a few firms have consistently paid the same levels of dividends,
companies are more profitable, large in size and growth doesn't seem to deter Indian firms from
paying higher dividends.

Anand (2005) analysed that factors considered by the chief financial officer to formulate
dividend policy and the research has come out with the conclusion that faming of dividend
policy depends on the investors preference and the profile of the shareholders.

Das (2006) has made an attempt to study about the ACC dividend policy and found that
the company had a policy of pursuing conservative policy from 1985 to 2005 and he further
tested whether any close association exists among the variable like DPS, EPS and capital
employed by the way of using correlation technique and co-efficient of correlation between DPS,
EPS and capital employed showed high degree of correlation.

Sharma Dhiraj (2010) made an attempt to analyze the extremely opposite school of
thought with respect to relevance and irrelevance theory of dividend decision for which he
examined the dividend behavior of selected firms listed in BSE from 1990 to 2005, and the result
of the study was emerged with mixed reactions.

Findings and Analysis

Simple Regression Models for Axis bank Ltd

Cash payout table
Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 90.80% 70.357 0.000
Revenue
0.034+0.141Revenue
Cash Payout EPS CPR= 0.010+0.130EPS 26.70% 3.669 0.104
Ratio Net Income(NI) CPR= 0.029+0.134NI 40.90% 5.845 0.052
CCE CPR= 0.281+0.090CCE 19.10% 2.657 0.154
R Earning(RE) CPR= 0.097+0.152RE 73.70% 20.587 0.004

From the above table, observing the values of r2 (Coefficient of determination) and P
values in determining the payout decision among the independent variables revenue has the
highest value for r2 ( 90.80%) which indicates that revenue have major support in providing the
cash payout 90.80% for the sample period of time.

However, Cash & Cash Equivalents (CCE) has the lowest value of r2 (19.10%) and P
value (0.154) of F test, which indicates that this variable has very lower impact on Cash Payout
as a predictor (i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for Bank of Baroda

Cash payout table

Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 61.70% 12.299 0.013
Revenue
0.014+0.157Revenue
Cash Payout EPS CPR= 0.001+0.179EPS 67.70% 15.648 0.007
Ratio Net Income(NI) CPR= 0.024+0.197NI 71.60% 18.619 0.005
CCE CPR= 0.087+0.126CCE 14.60% 0.108 0.754
R Earning(RE) CPR= 0.017+0.235RE 69.70% 17.067 0.006
 After observing the values of r2 (Coefficient of determination) and P values of in the
above table, table indicate that the number of financial performance indicating variable has
significant impact on cash payout ratio.

Among this 5 performance indicating variables NI has the highest value for r2 ( 71.60%)
which indicates that Net Income explains 71.60% of the contribution in Cash Payout over this
eight years of time horizon(2003-2013). P- value (0.005) of F - test at 95% confidence level
states that the result is significant as it is more than 0.05.

Cash & Cash Equivalents (CCE) has the lowest value of r2 (14.60%) and P value (0.754)
of F test, which indicates that this variable has very lower impact on Cash Payout as a predictor
(i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for Bank of India

Cash payout table
Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 87.01% 47.917 0.000
Revenue
0.014+0.451Revenue
Cash Payout EPS CPR= 0.040+0.465EPS 89.99% 48.349 0.000
Ratio Net Income(NI) CPR= 0.096+0.429NI 84.80% 40.180 0.001
CCE CPR= 0.445+0.280CCE 14.70% 0.102 0.761
R Earning(RE) CPR= 0.032+0.411RE 88.60% 55.136 0.000

Observing the values of r2 (Coefficient of determination) and P values in the above table,
we identified that single financial variables will not influence the payout decision of the firm,

Among this 5 performance indicating variables EPS has the highest value for r2 (
89.99%) which indicates that EPS explains 89.99% of the variations in Cash Payout over this
eight years of time horizon(2003-2013). It shows that EPS play vital role in determining the
value of dividend decision, P- value (0.000) of F - test at 95% confidence level states that the
result is significant as it is more than 0.05.

However, Cash & Cash Equivalents (CCE) has the lowest value of r2 (14.70%) and P value
(0.761) of F test, which indicates that this variable has very lower impact on Cash Payout as a
predictor (i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for Canara Bank

Cash payout table

Dependent Independent Equation R2 F-value P-value
 variable variable
CPR= 73.40% 20.318 0.004
Revenue
0.090+0.458Revenue
Cash Payout EPS CPR= 0.030+0.484EPS 66.70% 14.990 0.008
Ratio Net Income(NI) CPR= 0.079+0.428NI 70.10% 17.431 0.006
CCE CPR= 0.209+0.221CCE 15.50% 0.061 0.813
R Earning(RE) CPR= 0.578+0.760RE 76.80% 24.323 0.003

Among sample of financial performance indicating variables revenue has the highest
value for r2 (73.40%) which indicates that revenue explains 73.40% of the variations in Cash
Payout over this ten years of time horizon (2003-2013). P- value (0.004) of F - test at 95%
confidence level states that the result is significant as it is more than 0.05.

However, Cash & Cash Equivalents (CCE) has the lowest value of r2 (15.50%) and P
value (0.813) of F test, which indicates that this variable has very lower impact on Cash Payout
as a predictor (i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for HDFC Bank Ltd

Cash payout table

Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 88.80% 56.633 0.000
Revenue
0.454+0.697Revenue
Cash Payout EPS CPR= 0.309+0.782EPS 68.50% 16.208 0.007
Ratio Net Income(NI) CPR= 0.469+0.715NI 78.20% 26.058 0.002
CCE CPR= 0.720+0.368CCE 15.10% 0.082 0.784
R Earning(RE) CPR= 0.808+0.456RE 74.50% 21.125 0.004

From the above table values of r2 (Coefficient of determination) and P values of dividend
determinant, among this sample of five independent variables revenue has the highest value for
r2 ( 88.80%) which indicates that revenue explains 88.80% of the variations in Cash Payout over
this ten years of time horizon (2003-2013). P- value (0.000) of F - test at 95% confidence level
states that the result is significant as it is more than 0.05.

However, Cash & Cash Equivalents (CCE) has the lowest value of r2 (15.10%) and P
value (0.784) of F test, which indicates that this variable has very lower impact on Cash Payout
as a predictor (i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for ICICI Bank Ltd

Cash payout table

Dependent Independent Equation R2 F-value P-value
 variable variable
CPR= 69.80% 17.188 0.006
Revenue
0.373+0.295Revenue
Cash Payout EPS CPR= 0.202+0.251EPS 43.50% 7.232 0.035
Ratio Net Income(NI) CPR= 0.113+0.243NI 68.70% 16.378 0.007
CCE CPR= 0.153+0.157CCE 23.00% 0.844 0.394
R Earning(RE) CPR= 0.345+0.225RE 25.20% 3.355 0.117

Table observe the values of r2 (Coefficient of determination) and P values dividend

determinant are based on various factors, single factors will not have majority impact in
determining the dividend.

From the sample of five independent variables revenue has the highest value for r2 (
69.80%) which indicates that revenue explains 69.80% of the variations in Cash Payout over this
ten years of time horizon(2003-2013). P- value (0.006) of F - test at 95% confidence level states
that the result is significant as it is more than 0.05.

However, Retain Earnings (RE) has the lowest value of r2 (23.00%) and P value (0.394)
of F test, which indicates that this variable has very lower impact on Cash Payout as a predictor
(i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for Kotak Mahindra Bank Ltd

Cash payout table
Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 77.20% 42.737 0.000
Revenue
0.087+0.358Revenue
Cash Payout EPS CPR= 0.002+0.370EPS 91.10% 72.363 0.000
Ratio Net Income(NI) CPR= 0.061+0.344NI 89.90% 63.986 0.000
CCE CPR= 0.126+0.293CCE 60.11% 12.015 0,013
R Earning(RE) CPR= 0.037+0.443RE 58.40% 10.807 0.017

After observing the values of r2 (Coefficient of determination) and P values in above

mention table, dividend determinant are based on various factors, single factors will not have
majority impact in determining the dividend.

Among sample of five performance variables EPS has the highest value for r2 ( 91.10%)
which indicates that EPS explains 91.10% of the variations in Cash Payout over this eight years
of time horizon(2003-2013). P- value (0.000) of F - test at 95% confidence level states that the
result is significant as it is more than 0.05.

Retain earnings (RE) has the lowest value of r2 (58.40%) and P value (0.013) of F test, which
indicates that retain earnings will not affect the distribution of dividend value, it contribute the
minimum level in Cash Payout as a predictor (i.e. independent) variable when used in simple
regression analysis.
Simple Regression Models for Punjab National Bank
 Cash payout table
Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 37.90% 5.264 0.007
Revenue
0.980+0.090Revenue
Cash Payout EPS CPR= 0.100+0.070EPS 41.10% 5.883 0.051
Ratio Net Income(NI) CPR= 0.512+0.010NI 26.40% 3.515 0.110
CCE CPR= 0.194+0.120CCE 33.00% 0.779 0.412
R Earning(RE) CPR= 0.456+0.070RE 20.80% 2.842 0.143

Above table observe the values of r2 (Coefficient of determination) and P values for the
determinant analysis, single factors will not have majority impact in determining the dividend.

Among this 5 performance indicating variables EPS has the highest value for r2 (
41.10%) which indicates that EPS explains 41.10% of the variations in Cash Payout over this
eight years of time horizon(2005-2013). P- value (0.051) of F - test at 95% confidence level
states that the result is not significant as it is more than 0.05.

However, Retain Earnings (RE) has the lowest value of r2 (20.80%) and P value (0.143)
of F test, which indicates that this variable has very lower impact on Cash Payout as a predictor
(i.e. independent) variable when used in simple regression analysis.

Simple Regression Models for State Bank of India

Cash payout table

Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 16.50% 2.384 0.004
Revenue
0.078+0.538Revenue
Cash Payout EPS CPR= 0.004+0.217EPS 13.00% 1.901 0.336
Ratio Net Income(NI) CPR= 0.050+0.531NI 21.60% 2.929 0.138
CCE CPR= 0.054+0.360CCE 13.50% 0.169 0.696
R Earning(RE) CPR= 0.099+0.566RE 17.10% 2.448 0.169

After observing the values of r2 (Coefficient of determination) and P values of in the

above table, a single financial variable has no significant impact in Cash Payout Ratio.

Among this 5 performance indicating variables NI has the highest value for r2 ( 21.60%)
which indicates that Net Income (NI) explains 21.60% of the variations in Cash Payout over this
ten years of time horizon(2003-2013). P- value (0.138) of F - test at 95% confidence level states
that the result is not significant as it is more than 0.05.

Earning Per Share (EPS) has the lowest value of r2 (13.00%) and P value (0.336) of F test, which
indicates that this variable has very lower impact on Cash Payout as a predictor (i.e.
independent) variable when used in simple regression analysis.

Simple Regression Models for Union Bank of India

 Cash payout table
Dependent Independent Equation R2 F-value P-value
variable variable
CPR= 69.40% 16.846 0.006
Revenue
0.038+0.149Revenue
Cash Payout EPS CPR= 0.322+0.184EPS 90.80% 70.480 0.000
Ratio Net Income(NI) CPR= 0.056+0.178NI 92.70% 90.096 0.000
CCE CPR= 0.262+0.085CCE 9.80% 0.377 0.561
R Earning(RE) CPR= 0.230+0.090RE 72.60% 19.575 0.003

After observing the values of r2 (Coefficient of determination) and P values of in the

above table indicated independent variables of determining the dividend, Net Income has the
highest value for r2 ( 92.70%). NI indicates a major contribution in the value of 92.70% for the
Cash Payout over this ten years of time horizon(2003-2013). P- value (0.000) of F - test at 95%
confidence level states that the result is significant as it is more than 0.05.

Cash & Cash Equivalents (CCE) has the lowest value of r2 (9.80%) and P value (0.561)
of F test, which indicates that this variable has very lower impact on Cash Payout as a predictor
(i.e. independent) variable when used in simple regression analysis.

Multiple Regression Model

Cash payout table using Multiple regression
Model D CPR= -0.35-90904 Revenue -5.074 EPS 38.57 Net Income 10.87 CCE -42.28
Other Statistics for Model -D
Cash Payout R2 70.84 %
Ratio F-test value 0.953
P-Value of F test 0.579

After observing the values of r2 (Coefficient of determination) and P

values of in the above table indicated independent variables of determining the dividend. P-
value (0.579) of F-test states that the regression is significant only at 42.2% confidence level, As
a whole, the regression is not much reliable and valid. So we concluded that selected
performance indicating variables have much impact on cash payout ratio of selected Indian
banking sectors.

Conclusion

The Indian banking sector selected as a sample for this study identified that dividend are
mostly depended on the revenue and profit with helps to increase and stabilize the dividend
yearly. Maintaining of cash and cash relevant of the firm which is used to analyze the liquidity
position is found to be irrelevant in determining the dividend policy. From the study it identified
that firm managers must be regulated with improving sale, profit and maintaining the appropriate
retain earnings without influencing the distribution of dividend level. Chances for future
development, modernization, expansion are found to be negatively related to dividend payout
policy. From the statistical regression analysis reveal that negative and insignificant relationship
with retained earnings, cash position and capital expenditure during the current year.

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(Annexure I)

List of Commercial Bank include in NSE NIFTY for the year of 2003-2013

1. Axis bank Ltd

2. Bank of Baroda
3. Bank of India
4. Canara Bank
5. HDFC Bank Ltd
6. for ICICI Bank Ltd
7. Kotak Mahindra Bank Ltd
8. Punjab National Bank
9. State Bank of India
10. Union Bank of India