Should you buy these stocks for 'invisible' dividends? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you buy these stocks for 'invisible' dividends? 

A  A  A
In this issue:
» Should you give in to temptation of bonus shares?
» Can the BRICS Bank help fund Indian Infrastructure?
» Mumbai's Shanghai dreams looks bleak
» China is taking baby steps to disaster?
»  ...and more!

How often do you buy goods on sale? With the advent of e-commerce, buying stuff on 'sale' is no longer an annual or bi-annual indulgence. And more often than not, it's not the discount on the products but the freebies that attract you to the sale. Whether or not the freebies have enough value is something that hardly matters, because they are not to be paid for! And thus the freebies become the lynchpin for inducing you to buy stuff you may not even need.

Now the greed for freebies could extend well beyond your shopping list. It could impact your investments too! If company managements have their way, they can very well stoke prices by offering free goodies to shareholders. What we are referring to here are the extraordinary payments made to shareholders. It is not unusual for companies to offer a big one time dividend to shareholders. And such instances do often fetch premium valuations for the stock. But since the receipt of dividend is more or less a regular phenomenon, this is not perceived as a freebie.

What typically delight shareholders are the completely unexpected or 'invisible' payouts: primarily the issue of bonus shares. Since such issuance is not regular and not based on events, share holders perceive this as a rare freebie. Often dubbed as 'invisible dividend', since the bonus share comes straight from the company's reserves, it gives the perception of being invested in a cash rich company. And hence investors are often on the lookout for such freebies. Even if the underlying stock is not a great fit for their portfolio!

It is true that companies with strong cash flows and ample reserves should reward shareholders occasionally with bonus shares. However, the problem occurs when companies do so only with the intent of sub-dividing the stock price to make it 'appear' cheaper or to stoke the valuations temporarily. This is more often the case in bull markets, when along with some genuine bonus issues; companies with questionable fundamentals follow the act to appease investors.

As per Business Standard, in the first four months of 2015 alone, around 21 companies have issued bonus shares. And nearly half of them have posted just single digit profit growth for the past fiscal. The fact that the companies are using a form of accounting jugglery should be a worry for long term shareholders. On the contrary the bonus issue more often than not acts as a trigger for the stock price moving up.

Thus as potential owners of the company, you should be more worried about whether the management puts resources to the most optimum use or tends to play to the gallery as per market sentiments. If it is the latter, you would be better off staying away from buying the stocks despite the lure of invisible dividends.

Do you buy stocks purely in anticipation of bonus issues? Let us know your comments or share your views in the Equitymaster Club.

Editor's Note: We are delighted to inform you that you can now read your favourite daily newsletter, The 5 Minute WrapUp, on your Android Phone using our all new Mobile App. And not just that, you can also check the latest stock quotes, track your portfolio and read all our latest views and analysis! Go ahead, download the App now!

--- Advertisement ---
The Most Under-Rated Way of Making Big Returns from Stocks...

Most profit-minded investors stay away from blue-chip stocks because they think blue-chips are incapable of making them big returns.

But that is far from the truth!

Blue-chip stocks recommended by us have in the recent past given returns like 546% in 3 years 2 months, 771% in 6 years 6 months, 478% in 5 years 11 months, and many more.

And they did all of this with minimum risk too!

Revealed here are the full details this approach...

And also included are details of our new Special Report that reveals 3 very good stocks you could invest in right away.

So don't miss it. Click here for full details...


02:15  Chart of the day
It's no secret that infrastructure has been the Indian economy's Achilles heel. While projects are being cleared quickly under the NDA government, the sector is yet to revive. The reason is not hard to find: financing. Getting funds for large infra projects is challenging even in the best of times. In times of tight credit conditions it can be next to impossible. The chart below shows the massive shortfall (about Rs 14.61 trillion) in India's infra financing. This deficit pertains to only half of the requirement. We are assuming the government will chip in with its 50% share of the estimated US$ 1 trillion needed for India's infra development. These numbers are indeed mind-boggling. However, there seems to be a ray of hope.

Can the BRICS bank bridge this funding gap?

It has been announced that veteran banker K.V. Kamath will be the first chief of the newly formed BRICS Bank. The bank with an initial corpus of US$ 50 bn and a currency chest of US$ 100 bn holds some promise for India's beleaguered infra sector. With an Indian at the helm of affairs, large projects of national importance can certainly look forward to funding from the BRICS Bank. However, it would not be wise to expect any miracles on this front. India's infra funding gap is just too big to be filled by the BRICS Bank on its own we believe. Mr. Kamath will have a very challenging task catering the funding requirements of many developing countries.

If you reside in the city of Mumbai, the new development plan (DP) would surely have caught your attention. For a minute let us leave aside the fact that the DP was flawed. No doubt it deserved to be scrapped. However, the question that arises is, 'what next'? It will take some time for a new proposal to be made. Until then, realty developers have been left high and dry. There is no clarity regarding crucial issues like floor space index (FSI) and public transportation. Even if a new proposal is made soon, what is the guarantee that it too will not be flawed? As per an article in Livemint, the delay is likely to push the sector into further disarray. Project delays and funding problems will become even more acute. Without a clear long term development plan, Mumbai's dreams of becoming Shanghai will remain just that, a dream.

Meanwhile, China is taking baby steps to stimulate the economy. The Chinese policy makers are the central bank are hardly in an enviable position. Several competing challenges such deflation, excessive debt; currency crisis and resistance to reforms are threatening to bring the economy to a complete halt. And hence the small rate cuts are attempted at pushing the economy back on track. Interestingly economists believe that the People's Bank of China governor is being too timid. And that he should be taking lessons from Japan's deflationary situation in 1998. Burdened by a massive debt buildup, graying population and rigid industrial policies, Japan chose to cut rates aggressively. And trend it has hardly been able to reverse till date. And the US' quantitative easing (QE), which was inspired by Japanese rate cuts, has also not seen an exit yet. That neither of the economies have enjoyed any real benefit from the near zero interest rate regime is another matter altogether. Thus we believe that the critics of China's slow interest rate cuts are offering the readymade QE solution without giving enough thought to long term implications. And faster rate cuts are not going to bring in results for China that will be different from what they did to Japan or the US. Which means rate cuts or not, investors must brace for lower global GDP growth rates, with the Chinese juggernaut slowing down.

The Indian stock markets were trading deep in the red. The BSE-Sensex was trading down 573 points (2.1%) at the time of writing. Capital goods and banking stocks were leading the losers. The midcap and small cap indices were also trading down between 1.5 and 1.6%. Asian indices ended mixed today with Shanghai leading the gainers and Hong Kong leading the losers. European indices have opened on a negative note.

04:50  Today's investing mantra
"Accounting numbers are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress...Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it." - Warren Buffett
Today's Premium Edition
When it comes to operating stability, it would be hard to beat these companies!
A discussion on the importance of operating margins and its stability...
Read On...Get Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

Equitymaster requests your view! Post a comment on "Should you buy these stocks for 'invisible' dividends?". Click here!

4 Responses to "Should you buy these stocks for 'invisible' dividends?"

Vivek Shanbhag

May 31, 2015

Other things remaining equal, a bonus issue provides a good opportunity to get capital appreciation in a tax efficient manner. Of course, one needs to be wary of companies who are using the bonus route merely to get people to buy, but are lacking in fundamentals like earnings, the ability to service the increased capital, etc. The crux lies in one's ability to discern the difference between these two types of companies.



May 15, 2015

No,I buy stock looking at its fundamentals


subhas biswas

May 14, 2015

yes it creat value in time



May 12, 2015

i buy shares for bonusshares only irrespective of value

Like (2)
Equitymaster requests your view! Post a comment on "Should you buy these stocks for 'invisible' dividends?". Click here!


Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. Equitymaster has financial interest in Infosys and ONGC.
  2. Equitymaster's Associates, Research Analyst or his/her relative do not have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407