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Dividend Payout Policy of Infosys Limited: How Much to Pay?

CASE STUDY, FINANCIAL MANAGEMENT
IIT Kharagpur, 13 Pages
AUTHOR(S) : Abhinav Kumar Rajverma, Dr. Arun Kumar Misra and Dr. Abhijeet Chandra, Indian Institute of Technology Kharagpur

Case Preview

Dividend Payout Policy of Infosys Limited: How Much to Pay?

 

The Information Technology (IT) industry has been India’s sunshine sector for quite some time now. The industry has contributed considerably to changing India’s image from a slow developing economy to a global player in providing excellent technological solutions. According to the IBEF (India Brand Equity Foundation) figures, the Indian IT industry is set to touch $225 billion by 2020. The services sector needs huge quantum of knowledge workers. According to industry experts, India large labour force has been stubborn in transition and lack adequate training. Additionally, NASSCOM submits that Indian IT workforce will touch 30 million by 2020, becoming the highest sector employer.

There is a broad consensus that the global center of economic growth is moving to Asia. Indian economy experienced a major economic crisis in 1991, but soon after that because of bold reform measures, India’s economy has experienced a rapid economic growth rate, more foreign investment, and a boom in the IT sector. IT companies are different from that of traditional manufacturing firms. It has almost no investments in tangible fixed assets and its revenues are generated by providing computer-based solutions. Because of very low fixed assets, it was tough to attract investors for these firms, share pricing was very difficult and its dividend model differs from that of traditional Indian companies. This case study delves deeper into how Infosys Limited evolved as a market leader in IT industry..................

Exhibits

Exhibit I: Promoters’ shareholding of Infosys Limited

Exhibit II: Dividend History of Infosys

Exhibit III: Bonus Issues and Stock Split of Infosys Limited

Exhibit IV: Dividend Payout Parameters of Infosys Limited

Exhibit V: Comparative Analysis: Indicators for FY2016

Annexures

Annexure I: Profit and Loss (Consolidated) of Infosys

Annexure II: Balance Sheet (Consolidated) of Infosys as on 31st March

Annexure III: Share Price of Infosys on BSE (Adjusted for Stock Splits)

Teaching Note Preview

Dividend Payout Policy of Infosys Limited: How Much to Pay?

 

Synopsis

This case focuses on dividend policy of a highly profitable company having huge cash reserves. The study highlights the reasons for frequent bonus issues, stock splits and special dividends along with its impact on the financials of the company explores and further, establishes link between dividend payout policies of the Infosys with various theories of dividends. This case compares dividend policy of Infosys with that of manufacturing firms.

Case Positioning and Setting

This case is positioned in the Corporate Finance area. This case can be of prime interest for participants interested into distribution policy and cash management strategies of a firm.

Expected Learning Outcomes

Some of the expected learning outcomes of the case study are:

1. Understand Dividend Payout Policy of Infosys Limited
2. Explore the reasons for the companies to keep large cash on their Balance Sheet
3. Highlight the reasons for cash dividend, bonus share and stock split
4. Establish link with traditional theories of Dividends
5. Compare dividend policy of Infosys with manufacturing firms

Assignment Questions

I. Comment on current dividend policy of Infosys.
II. Bonus and stock split have limited impact over financial parameters, then why does company opt for these?
III.............

Case Analysis and Discussion

The case provides an excellent opportunity to the participants to analyze dividend policy of a highly profitable regular dividend-paying firm. The Infosys has been a regular dividend payer with a mix of cash dividend, stock dividend (bonus share) and stock split. Infosys pays dividend twice a year. Infosys follows fixed payout as dividend to its shareholders. Earlier, it was up to 20% which was increased up to 30% in 2008 board meeting and then to 40%. In 2015 board meeting, it was raised up to 50% of the net profit....................

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Abstract

Infosys, a zero-debt company, almost no tangible fixed assets, large cash and cash equivalents on its balance sheet follows a stable dividend payout policy of up to 50%. However, it is still adding huge cash year after year, which is very different from that of traditional manufacturing firms. Capital structure, earning sources, etc. of a service sector firms are different from that of manufacturing firms. High profitability and huge cash on Infosys balance sheet have been the reasons for frequent bonus issues, stock splits and special dividends.

This case focuses on dividend policy of a highly profitable company having huge cash reserves and need for review when the need arises. This case compares dividend policy of Infosys with that of manufacturing firms and highlights the reasons for frequent bonus issues, stock splits and special dividend along with its impact on the financials of the company. Further, it explores and establishes link between dividend payout policies of the Infosys with various theories of dividends.



Pedagogical Objectives

  • To understand Dividend Payout Policy of Infosys Limited
  • To explore the reasons for the companies to keep large cash on their balance sheets
  • To compare dividend policy of Infosys with manufacturing firms
  • To highlight the reasons for cash dividend, bonus share and stock split
  • To establish link with Traditional Theories of Dividends



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