ABSTRACT
On a Saturday in February 2020, Anjali Mehra, Head, Business Development and Clients Relations at InvestmentWaves, attended a one-day conference organised by a large private bank in association with a leading stock exchange in India. One of the keynote speakers highlighted the need to force Indian listed companies to distribute at least 30% of their net profit in cash dividends. In other words, the company must maintain at least a 30% dividend pay-out ratio. The speaker cited the famous Graham and Dodd model from the 1950s and claimed that other things being equal, the firm paid higher dividend benefit in terms of the higher valuation of stock in the marketplace. The reasons were simple. First, the higher the cash dividend paid, the faster the payback period; after few years, your stock would become free. Second, cash dividend payment was evidence that the firm earned real cash profit. Third, it also served as a proxy measure for prudent management as high dividend means managers chose to return surplus capital to owners rather than investing in inferior business opportunities.
