Dividends And Bonuses: Understanding The Framework

Understanding the factors that influence dividend and bonus issuance helps investors make informed decisions. Mature companies with consistent profitability continue to reward shareholders through dividends, while growth-stage firms prioritise reinvestment for expansion. Manoj Reddy Sama explains the differences and how they impact an investor’s portfolio 

Bonus shares and dividends are key tools through which companies reward their shareholders, reflecting profitability and a commitment to sharing financial success. Dividends represent periodic cash returns to the shareholders, while bonus shares involve issuing additional equity without any change in the market value of the company. Investing in companies that pay regular dividends and issue bonus shares offers a unique combination of stability, income, and long-term growth potential. Dividend-paying companies provide a steady income stream, signalling financial health and offering lower volatility, making them attractive to income-focused and risk-averse investors. 

On the other hand, companies issuing bonus shares enable wealth creation by increasing the number of shares held without requiring additional investment, reflecting the management’s confidence in future growth. Together, these attributes enhance the total returns, improve liquidity, and amplify compounding, making such investments a balanced choice for those seeking a blend of consistent income and long-term capital appreciation. Let’s look at how one can predict if a company is likely to offer dividends or bonus shares. 

Dividends
Dividends are rewards distributed by publicly-listed companies to their shareholders, typically paid from the profits remaining after covering the essential expenses. The decision regarding the dividend rate is made by the company’s board of directors, with input and approval from the majority of shareholders. Companies may also choose to retain their profits to reinvest in the business or reserve them for future use. Paying dividends is an integral part of a company’s capital allocation strategy. If opportunities exist to reinvest profits for a favourable return on capital, the board may prioritise reinvestment. 

Conversely, if no such opportunities are available, the company may opt to distribute dividends. The practice of paying dividends also reflects the company’s corporate governance standards. If a company with substantial capital reserves refrains from paying dividends despite a lack of viable reinvestment opportunities, it may signal weak governance practices or other unknown issues. Announcements of dividend declarations often result in significant changes in the company’s stock price depending upon the trajectory whether dividend is increased, decreased or maintained. 

Key Metrics for Predicting Dividends
Several factors determine whether a company pays dividends, but two fundamental metrics investors can monitor are the company’s dividend payment history and its dividend payout ratio. The dividend payout ratio is calculated as total dividends divided by net income or dividends per share divided by earnings per share. A high dividend payout ratio typically indicates that the company is mature and stable, with less need for reinvestment, and therefore opts to distribute earnings to shareholders. 

Businesses generally follow a lifecycle. During the launch and growth phases, companies have limited cash flow, which is often reinvested to fuel expansion. In contrast, during the mature and decline phases, businesses tend to generate surplus cash, enabling them to pay consistent and sizeable dividends. Mature companies are also characterised by high dividend yields. Dividend yield is calculated as the dividend per share divided by the price per share or the total annual dividend payments divided by the company’s market capitalisation. 

An analysis of Nifty 200 stocks—which includes a mix of mature, well-established companies and those in their growth or reinvestment phases—revealed that 170 companies declared dividends in FY23. This number increased to 174 in FY24. Notably, companies with high dividend yields in FY23 continued to distribute significant dividends in FY24. Conversely, companies in the growth phase prioritised reinvesting in their businesses and refrained from paying dividends. Well-established companies that paid dividends in the past five fiscals are listed in the table below: 

An analysis of dividend trends reveals that mature companies with a consistent history of paying dividends continued to distribute significant amounts to their shareholders. In contrast, companies in the growth phase tend to reinvest their profits into business expansion, focusing on increasing operations, sales, and profitability. 

Special Dividends During specific circumstances, companies distribute special dividends in addition to regular interim and final dividends. These dividends are typically declared when a company has surplus cash and decides to share it with its shareholders. For example, Aster DM Healthcare declared a substantial special dividend of `118 per share following the sale of its GCC business. Approximately, 80 per cent of the USD 907.6 million proceeds from the sale were distributed to the shareholders as a special dividend. 

Bonus Shares Bonus shares are issued by companies as a strategic method to reward shareholders and make their stock more affordable to a broader investor base. By utilising accumulated reserves, companies issue bonus shares at no additional cost to the shareholders. For instance, if a company announces a bonus issue in the ratio of 1:2, shareholders receive one additional share for every two shares held. The primary objective of issuing bonus shares is to make high-priced stocks more accessible, particularly to retail investors by reducing the per-share price. This practice also rewards loyal shareholders and reflects the company’s confidence in its future growth and profitability. 

The decision to issue bonus shares rests with the company’s board of directors. For example, despite its high share price of `1,27,288, MRF has not issued bonus shares or undergone a stock split. On the other hand, Reliance Industries announced a bonus share issue on August 29, 2024, at a 1:1 ratio when its stock price was over `2,650. Following this issue, the stock price halved, and the number of shares doubled, maintaining the company’s market capitalisation. Based on the assumption that companies with reserves and surplus at least 20 times their paid-up equity share capital are more likely to issue bonus shares, and considering that companies with a history of issuing bonus shares are generally inclined to do so again, the following companies may have a higher probability of announcing bonus shares in 2025. 

Latest Guidelines for CPSE Dividend and Bonus Issuance 

On November 19, 2024, the Finance Ministry of India revised the 2016 guidelines governing dividend payments, share buybacks, and bonus share issuance for the central public sector enterprises (CPSEs). The updated rules are a result of CPSEs’ improved balance-sheets and market capitalisation in recent years. The key points from the revised guidelines issued by the Department of Investment and Public Asset Management (DIPAM) include: 

1. Minimum Dividend Requirements - All CPSEs must pay an annual dividend of at least 30 per cent of their profit after tax (PAT) or 4 per cent of their net worth, whichever is higher. Financial sector CPSEs, such as NBFCs, are required to meet the same 30 per cent of the profits criteria.
2. Bonus Share Issuance - Bonus shares must be issued if the defined reserves and surplus of a CPSE are at least 20 times its paid-up equity share capital. This threshold has been increased from the previous requirement of 10 times.
3. Additional Revisions - Changes have also been introduced for share buybacks, stock splits, and interim and final dividend payments. 

These guidelines are effective from the financial year 2024–25 but do not apply to public sector banks (PSBs), insurance companies, or entities restricted from profit distribution under the Companies Act. DIPAM emphasised that these measures aim to enhance the value of CPSEs and deliver better returns to shareholders. 

Conclusion Understanding the factors that influence dividend and bonus issuance helps investors make informed decisions. Mature companies with consistent profitability continue to reward shareholders through dividends, while growth-stage firms prioritise reinvestment for expansion. Meanwhile, companies issue bonus shares to make high-priced stocks more accessible to retail investors. This corporate action also indicates a company’s confidence in its future growth and profitability.