Tata Motors: The Dividend Dilemma

Tata Motors Limited (Tata Motors), an Indian automobile major with a consolidated annual turnover of more than ₹2,497 billion in fiscal year (FY) 2021, was struggling to turn profitable and reinstate dividend payments to its investors. The case discusses the dividend policy of Tata Motors, comparing it with the dividend policies of the company’s peers and examining its relevance to the investor community at large. With Tata Motors’ long history as a dividend-paying company, its sudden withdrawal of dividends in FY 2016, with no payouts in the following five years, has made investors jittery. The company was working on the turnaround plan and internal reorganization that would allow it to provide a differentiated focus on its three business verticals—the commercial vehicle segment, the passenger vehicle segment, and the electric vehicle segment. Tata Motors had already communicated its decision to conserve cash to reduce its leverage and become debt-free by FY 2024. However, with an increase in pressure from a certain section of investors, Natarajan Chandrasekaran, chair of Tata Motors, was considering when to reinstate dividends. What signal would doing so send to the market? Would the ownership structure of the company have an impact on its dividend policy? Did the company’s cash flows support the dividend payment at this stage?

The case can be used in undergraduate- and postgraduate-level courses in corporate finance, financial management, managerial finance, and investment decision. The case can effectively be used to familiarize students with the dividend policies of firms, different payout strategies, clientele effects, and the impact of ownership structure on dividend decisions. By working through the case and assignment questions, students will have the opportunity to do the following:<br><br><ul><li>Understand different dividend payout theories and their impact on a firm’s valuation.</li><li>Understand the impact of ownership structure on a firm’s dividend decision.</li><li>Understand the clientele effect.</li><li>Understand and analyze the stickiness of dividend and information signalling effects on stock price.</li><li>Analyze various factors considered by firms before making a dividend decision.</li><li>Suggest the best course of action for Tata Motors.</li></ul>

• Dividend decision
• signaling theory
• Dividend policies
• Impact of ownership on dividend
• Clientele effect