The BCG (Boston Consulting Group) matrix is a tool used by companies to evaluate their business units or product lines based on two dimensions: relative market share and market growth. The matrix divides the business units or product lines into four categories: stars, cash cows, dogs, and question marks.
Stars are business units or product lines that have a high market share in a growing market. These units or lines generate a lot of cash and are considered the main growth drivers of the company.
Cash cows are business units or product lines that have a high market share in a mature market. These units or lines generate a lot of cash, but they do not contribute to the growth of the company.
Dogs are business units or product lines that have a low market share in a mature market. These units or lines do not generate much cash and do not contribute to the growth of the company.
Question marks are business units or product lines that have a low market share in a growing market. These units or lines may have potential for growth, but they require a lot of investment to catch up with the competition.
Now, let's apply the BCG matrix to Reliance, a diversified conglomerate company in India.
Reliance has several business units and product lines, including telecommunications, retail, petrochemicals, and energy.
The telecommunications unit, Jio, can be considered a star. Jio has a high market share in the growing telecommunications market in India and has been a major growth driver for Reliance.
The retail unit, Reliance Retail, can be considered a cash cow. Reliance Retail has a high market share in the mature retail market in India and generates a lot of cash, but it does not contribute much to the overall growth of the company.
It is difficult to classify the petrochemicals and energy units as either dogs or question marks because these industries are subject to fluctuations in demand and prices. However, the petrochemicals unit may be considered a cash cow due to its high market share and cash generation, while the energy unit may be considered a question mark due to its low market share and potential for growth.
Overall, the BCG matrix can help Reliance identify its growth drivers and allocate resources accordingly. It can also help the company make strategic decisions about which business units or product lines to invest in and which ones to divest.
Factors Determining the Dividend Policy of a Company.
This is how does expansion programme affect the dividend decisions. Continued Access to the Capital Market : A firm that is well established and has a record of profitability will be able to raise debt or equity capital on relatively short notice. Hence, they prefer capital gains to cash gains, i. For example, during the period of inflation, funds generated from depreciation may not be adequate to replace the assets. The business or companies that are growing require more cash to facilitate their development. Because, if a company, with stable dividend policy, fails to pay the dividend in any year, there will be a severe effect on the investors than the failure to pay dividend under unstable dividend policy. As a company grows and expands logically, it requires a larger amount of capital.
Factors determining the dividend policy of a company
Because, cash dividends are not even so attractive to the investors who are in higher tax brackets. ADVERTISEMENTS: Instead of receiving the dividend in the form of cash whatever may be the per cent , the shareholders would like to get shares and increase their holding in the form of shares. However, if a company is struggling financially, it may need to cut back on dividends or even suspend them altogether. Board Considerations for Dividend Payout Policy Here are some factors a board will consider when determining its payout policy for dividends: Opportunities to Reinvest Surplus Free Cash Flow A company in the process of expanding probably will not pay out a dividend if it can create more value by putting that capital to work through reinvestment. On the other hand, if there are liquidity problems, the Company may not make payment for the dividend despite being profitable.
In a closely held corporation with owners in the high income tax brackets, little or no dividends, which would be taxed at the normal income tax rate, may be desired. When current earnings are a primary source of funds, management may feel that internal expansion and continued growth take precedence over the payment of cash dividends. Bond indentures have contractual limits that require a company to maintain a specific ratio, e. If a certain sector is having trouble and anticipates profits falling, it's common for companies to get quite defensive when it comes to their dividends. Dividend Policy: Dividends are returns that the shareholders receive as a result of investing in a company. For a well-established and reputed company it may not be difficult to raise funds in the capital market. If the firm is currently insolvent in either way, it is prohibited from paying dividends.
In this case, the dividend amounts are generally low as excesses can be retained by the company in the case of losses. One such perk is a dividend. Newly established companies are normally not in a position to pay proper amount of dividend during few initial years. If the dividend is taxable in the hands of individual shareholders, then the companies declare bonus issues, rather than cash dividend. In India government also imposes dividend distribution tax as a result of all these shareholders prefer relatively lower cash dividend because of higher tax to be paid on dividend income and opt for capital gains to dividends because capital gains are usually taxed at a lower rate. However, if they disturb the trend and lower the dividend payment, it might signal to the market that the Company is experiencing financial problems.
With rising prices, funds which are generated by way of depreciation may fall short in order to replace obsolete equipment. Financial Policy of the Company: Dividend policy may be influenced by financial policy of the company. Hence a negative relation exists between the two. During the insolvency process, a company is prohibited to pay dividends. Many investors consider dividends as a sign of safety and financial conservatism. Future research should continue to explore this issue in order. As Irregular Dividend Policy puts it, any company has the full liberty to manage its profits in any way that it finds fit.
On the other hand, an old company with good track record and good name in the public can formulate a clear cut and more consistent dividend policy. Ability to Borrow: If a firm has the ability to borrow on comparatively short notice, it may be financially more flexible. It can be found through research investigation as to which group of the shareholders has how much income requirements and with what velocity. Regular and Extra Dividend Policy: Refers to the dividend policy, which pays a fixed amount of dividend on a regular basis, and an additional amount of dividend, if the organization earns abnormal profit. The transfer of economic value generally leads to a dip in the share price of the company. Other reason for retaining the earnings is that, issuing new share capital is inconvenient as well as involves flotation costs. Tax Position of Shareholders 15.
It is, therefore, required that adequate efforts should be made to keep the uniformity in dividends payable year-to-year. In the event that earnings fall, the dividend policy will be lowered accordingly. ADVERTISEMENTS: But when profitable investment opportunities, do not exist then the company may not be justified in retaining substantial part of its current earnings. Types of Dividend Dividends can be classified in various forms. If these shareholders are not interested in paying high rate of dividend then the company may declare a low rate of dividend. Earning retention is very important for such concerns which are following a programme of substantial debt reduction. Legal Rules: Legal rules are significant as they provide framework within which dividend policy is formulated.
Hence cannot afford to pay higher rate of dividends. So financial manager within the boundaries, at the same time, he has to consider many financial variables and constraints in deciding the amount that is paid as dividends. It is also conceivable that the firm is not left with any distributable earnings after paying interest on loans. Industries with stable and steady earnings are in a position to formulate consistent dividend policies. Studies in Economics and Finance, 26 3 , 182-197.
Moreover by an amendment of the Companies Act on December 28th 1960, it has been made compulsory, that not only depreciation, but also arrears of depreciation be also provided before declaring dividend. The part of the profit that is distributed is termed as dividend. Effect of Inflation: Inflation affects dividend decisions. It indicates how much of the total sales and profits of the company can be generated from its operations. ADVERTISEMENTS: But a growing firm which has only little access to the capital market will not be able to pay dividend often, because its financial needs cannot be completely met from the capital market. The loans have some terms and conditions that must be met.
What Are Key Factors That Influence Dividend Policies?
Companies in a financially flexible and strong position are strategically advantaged to exploit new investment opportunities with minimum delay. Regression analysis indicate that stability of earnings, profitability, liquidity and ownership all have a bearing on the dividend policy. High flotation costs discourage companies from establishing a level of dividend that would create the need to raise new equity. The companies with greater accessibility to external sources may decide to pay higher dividends because they can retain less earnings for reinvestment. The Indian Companies Act, 1956, prescribes certain guidelines in respect of declaration and payment of dividends and they are to be strictly observed by the company for declaring dividends.