Are Dividends for Journalists Only?

Jul 19, 2016

In this issue:
» Will Real Estate Prices Fall Significantly?
» Mega 4G Data War in the Telecom Sector!
» ...and more!
Rohan Pinto, Research analyst

I wanted to share an interesting story about dividends today. This happened at an IPO meet recently. Before I share the story, here's a bit of context.

IPO meetings are always fun. Every company that comes to market wants to look good. So the management usually sets up a meeting for analysts, in a conference room, at an A-list hotel. The food is good. This is another reason people show up.

Here's what happens at these meetings.

The lead merchant banker introduces the company. He urges us to support the IPO.

The management then makes their pitch. To begin, there's is usually a short video about the company. This may or may not be interesting.

The Chairman then speaks. His talk is usually about how he built the company through good times and bad. You could think of this as a warm up before a workout.

Then the CEO gets into the details about the company. The financials, strategy, growth, profitability, clients, employees, etc. This is the important part of the meeting.

The floor is then opened for questions.

This is chance for analysts to grill the management. More importantly, it gives us a peek into how they think about minority shareholders. The way they respond to questions can be illuminating.

At one of these meetings, an analyst put across a question about dividends. He wanted to know if the company's high dividend payout would continue even after getting listed. It was a reasonable question. Dividends are important to long-term investors.

Now, the management could have easily evaded the question. After all, they are not allowed to make any forward looking statements at the time of the IPO. This is what I expected, but I was in for a surprise.

The management immediately went on the defensive. They said that cash was needed for the company's growth. Thus, it would be unwise to expect huge dividends in the future.

The atmosphere in the room changed slightly. I could tell that I wasn't the only one who was surprised. The analyst probed further. He wanted the management to clarify. The chairman then said something I'll never forget.

He asked us why we thought dividends were so important. As analysts, we should be concerned about the share price. He said the management's focus would not be on dividends but on the company's marketcap!

This would have been startling enough, but he was not done.

He asked us why we analysts were talking like journalists. It was ok if journalists asked such questions because the common man relied on the financial press. However, we analysts were supposed to be knowledgeable people. We should only be concerned about the company's share price.

Several questions flooded my mind at once.

Was he joking or serious? He certainly sounded serious. Should only retail investors care about dividends? Should big institutions think only about capital gains? Do 'knowledgeable' people not care about dividends? Do analysts become journalists if we ask questions about a company's dividend policy?

This raised doubts about the management's attitude towards minority shareholders. This is certainly not an attitude that we are comfortable with.

In all our recommendations, we give due importance to the dividend yield of the stock. The latest example was our Hidden Treasure recommendation made last Friday. We believe dividends are a part of the total return one can earn from stocks. Anyone who thinks stock markets are for capital gains only, clearly does not know what he's talking about. Next time, I'll explain why...

What do you think? Should capital gains get a priority over dividends? Let us know your comments or share your views in the Equitymaster Club.

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02:35 Chart of the Day

The latest data released by the RBI on House Price Index (HPI) has thrown up interesting insights. These indices are based on the official data of property price transactions collected from registration authorities of respective state governments. The Year-on-Year growth of the index has slowed down considerably from a high of around 25% in 2011-13 to its current rate of increase which came in at 5%. Even though interest rates have reduced, thus incentivizing borrowers, high cost and abysmal rental yields continue to dampen the sectors fortunes.

Will Realty Prices Fall Soon?

The overall trend of housing prices all over India remains positive. However, the rate of this growth has witnessed a steep decline. The data confirms to what Vivek Kaul had been alluding in his posts regarding the unaffordability of Indian real estate.

  • What this number tells us is that most salaried class in 2011-2012, were not in a position to buy a home to live in, across large parts of the country. There is no reason to believe that things would have changed since then.

    The point is that the demand for real estate is in the below Rs 20 lakh market price segment. But what is being built across large parts of the country is clearly above that price. As RBI governor Raghuram Rajan said in a recent speech: "I am also hopeful that prices adjust in a way that encourage people to buy."

Increasing unaffordability and pile up of unsold inventories in metros pose a real threat to the real estate sector. We believe that prices may have run up ahead of themselves and would normalize going forward.

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There has been some semblance of normalization in the tariff war for voice related services among the telecom players. Leading telecom players have now shifted focus to its lucrative data segment. In preparation for upcoming competition from Reliance Jio, both Airtel and Idea Cellular have slashed their 3G/4G rates by over 67 percent. This move will hurt realizations of the players with their bottom-line would remain under pressure. With the commercial launch of Jio's services in six to eight weeks, the company is already out with its pre view offer to about 1.5 million test users.

In an interview to a leading financial daily, Sunil Mittal, managing director of Bharti Airtel noted that there will be a process of consolidation in the telecom sector for the next 24 months. However, we are skeptical of the price wars policy employed by the players. Any industry with no pricing power or worse where sole decision is based on price leads to value destruction. This race to the bottom will be detrimental to long term shareholders of the company.


After opening the day flat, the Indian stock markets failed to make any headway and were trading around the dotted line at the time of writing. The BSE Sensex was trading higher by about 13 points (up 0.05%), while the NSE Nifty is trading up by 3 points (up 0.04%). Sectoral indices were trading on a mixed note with energy stocks leading the gainers.

04:50 Today's Investing Mantra

"You only have to do a very few things right in your life so long as you don't do too many things wrong" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst).

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6 Responses to "Are Dividends for Journalists Only?"


Jul 20, 2016

Sir, Dividend is tax free return in the hands of retail investors, further it creates confidence in the working and in the profitability of company along with the attitude of management to its shareholders. It is just like bonus along with rise in DA component of salary. Employees will be more comfortable on getting both so the same is the case with shareholders mainly retail one. No dividend or relatively less dividend means it is sunk capital unless it get its optimum utilisation for capital gain purpose.Moreover dividend payment is purely management policy whereas capital gain depends largely on external factors.
I hereby request to send me a free copy of your small cap newsletter along with investment magazine published recently.


Anmol Singh Bhatia

Jul 19, 2016

If, the excess money is utilized by management for the growth of the company, and if they are good in this.Then, I think we should skip the dividend part.This, same thing was done by warren Buffett in the past.He, knows he can generate more wealth for his shareholders by reinvesting the money rather than distributing dividends.



Jul 19, 2016

Dividends should not be so much pursued. There are some companies which did not pay any dividend for many years during their growth phase, but delivered much better returns (e.g. Microsoft did not pay dividends for 17 years and many internet firms do not pay, in India Bharti is another example which didn't pay dividends for long, but the company performed well).

Dividends attract Dividend Distribution Tax, though it is paid by the company, it is a cost to the company and in the chain. Comparatively, long term capital gains are not taxed in India if STT is paid.

High dividend yield may not be significant when the overall stock performance is considered (for e.g. Noida Toll Bridge with yield of about 12%).

However, dividends need to be paid in cash, so it is important to judge the real performance of the company behind the scenes to know if they are generating all the cash and profits they claim to make. However, this is not a true measure (for e.g. Satyam paid dividends for a long period) as dividends are a small portion of surplus money usually.

So in my view, you should not guide your audience overly towards dividend payments.

Like (1)

G Vijayaraghavan

Jul 19, 2016

When the concept of shares in companies came into being in UK a couple of hundred years back, it was meant as a way of participating in the ownership of a company and the profits were shared in the form of dividends. Therefore companies used to pay regular dividends. This has slowly given way to the present scenario where people do not get (or even expect) any dividends but solely look for appreciation of the share price.

That would still be acceptable if the share price is more or less equal to the net asset value of the company/share since unpaid dividends will stay as reserves and thus add to the asset value. Unfortunately in India there is no relation between the NAV/share and the share price due to speculative operations (in effect reminding me of the story about the trader of monkeys). This in turn makes all equity MF investments inevitably over-valued. So the investor is caught in a trap.

I do not subscribe to the theory that the share price reflects the expectations of investors of how the company is poised to perform in the foreseeable future, because of the simple reason that humans are not gifted with the ability to predict the future (except perhaps the psycho-historians of Asimov's science fiction). Without any solid basis for predictions and driven by sentiments, the stock prices remain merely the reflection of wishful thinking.

Since the stock prices are neither based on their actual value nor on the return on investment by way of dividend, we are simply living in a shared dream-world where the dreams are common to every other investor. We may just be in for a rude awakening sooner or later.

Like (1)

Chandravadan Ajmera

Jul 19, 2016

For a long term investor who wants to keep shares even after his retirement Dividends becomes an important source of income. I know of many investors including me who might have kept shares of Bajaj Auto Wipro and many others like this even in physical forms and dividend becomes an important source of income. one of our friends had only three daughters and he used to tell me that he has one son naming him Bajaj Auto.

Like (1)


Jul 19, 2016

i think the chairman was correct..why let me explain..why one puts money in equity..i believe it is for growth..and by holding dividend money company can invest and grow a bit more..which is the purpose of a investor..doesn't matter if he is minority or a big investor..Otherwise what will the small investor do with dividend money..he may invest it in some other stock..and if existing co is doing well why not let that bit dividend money be there itself. I am assuming primary objective of a small or big investor is to grow his money..and i believe company should declare dividends only if the money is surplus and they have no plans to invest it in near term. If company is aggressive in investment and growth it is better to hold the dividends

Do let me know if i am wrong

Like (1)
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