Hero Honda's Dividend Policy

Abstract

Hero Honda is India's largest two-wheeler manufacturer. The company has a history of rewarding shareholders handsomely. The case discusses Hero Honda''s dividend policy and how it is linked with other aspects of the company's financial strategy.

We did look at buyback but we are not convinced that it would enhance shareholders value. Only the promoters will benefit. It is better to earn the shareholders goodwill by giving them higher dividends.

Brijmohan Lall Munjal, Chairman, Hero Honda.

INTRODUCTION

In 2004, India's largest two-wheeler manufacturer, Hero Honda Motors Limited (Hero Honda) had announced a huge 1000% dividend following a 25% increase in its net profits and 14.3% increase in net sales. The company had declared a final dividend of Rs.10 per share and a special dividend of Rs.8 per share, representing almost 70% payout of profits in 2003.

In 2001-02, the company had paid 850% dividend amounting to about $75 million, or about 76% of its net profits. The company's high dividend payouts had attracted significant media attention. Many analysts wondered whether it was prudent to make such high payouts at a time when competition was intensifying.

The Indian Two-wheeler Industry

Two-wheelers had become the standard mode of transportation in many of India's large urban centers. Use of two-wheelers in the rural areas had also increased significantly in the 1990s.

The birth of the Indian two-wheeler industry could be traced to the early 1950s, when Automobile Products of India (API) started manufacturing scooters in the country. While API initially dominated the scooter market with its Lambrettas, it was Bajaj Auto Limited, which rapidly emerged as the unchallenged leader in the scooter industry. A number of government and private enterprises who had entered the scooter segment, disappeared from the market by the turn of the century.

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        Case Code   FINA005
   Case Length    11 Pages
              Period    2003 - 2004
 Organization     Hero Honda
        Pub Date     2004
Teaching Note    Not Available
     Countries    India
      Industry    Automobile

Issues

Hero Honda, Dividend Policies, Financial Strategy

Indian two-wheeler industry; Hero Honda Motors Limited; Honda Motor Corporation; Financial management; Cost management; Working capital management; Capital structure; Dividends; Dividend policy; Dividend pay out

Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.