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Question 1: Analyze the dividend policy of RIL for shareholders’ wealth maximization and advise on an optimal dividend policy to ensure shareholders’ wealth is maximized

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Question 1: Analyze the dividend policy of RIL for shareholders’ wealth maximization and advise on an optimal dividend policy to ensure shareholders’ wealth is maximized. Please discuss following questions in your response:

- What type of dividend policy has RIL been following? (Constant payout, constant dividend per share, or long-run residual policy?)

The constant payout approach is a dividend strategy in which a company determines a level of dividend payout and applies this to net income. Here, a certain percentage of profits is paid to the shareholders every year. But when profits decline, shareholders may become concerned, as the constant dividend payouts may affect the stock price. Companies prefer the constant payout policy because it indicates their ability to pay dividends. Firms “smooth” their dividend payments over time to try to maintain a stable dividend payout ratio.

The long-run residual policy is intended to build trust in shareholders by offering to pay a regular, or even increasing, dividend; hence it signals to shareholders that the company looks out for their financial well-being. Companies first anticipate the applicable factors on the dividend size for a given period, typically five years, and then decide on the payout ratio. Dividends over the years may vary, as long as the target payout ratio is in line with the absolute income over the same period. This policy is most suitable for companies experiencing fluctuated earnings.

In the constant dividend per share strategy, companies pay a steady dividend per share regardless of their earnings per share, i.e., any change in their net profit will not influence the dividend paid to shareholders. Companies that have minimal development potential and are expecting stable earnings in the future adopt this type of policy.

- Does RIL look after its shareholder’ interests? How?

- What factors should a company consider when planning its investment budget?