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L&T: Dividends to be relied upon

Mar 5, 2009

A company’s attitude about dividends usually depends on the dividend policy it follows. There always are some companies that are very particular about paying out dividends to their shareholders. They ensure that through good years and bad, they pay out a part of their profits to the shareholders as dividends. L&T is one such company. By the company’s own admission -"L&T's dividend payout ratio is around 40%. The board of directors review the dividend policy periodically. L&T pays a dividend because the company's investors in India and abroad view this as an important market signal of the management's confidence in the future."

Some investors in stocks too have a proclivity for dividends. With a long term investment horizon, they prefer to receive a steady stream of dividends from the companies’ shares they hold, to the extent that they may be relied upon as a source of income. If you are such an investor, you would be delighted to know that L&T finds a place in this category by virtue of its stable dividend policy over the past many years.

As L&Ts historical dividend payments show, the company has not only being paying dividends regularly, it has also made an attempt to steadily grow the amount paid out to its shareholders every year. Its dividends have grown at a compounded annual growth rate of 12% over the last 10 years since FY98. This despite the fact that the company has been through some rough patches in earlier years; it witnessed a decline in its profits in FY99, FY01, FY02 of 11%, 7% and 26% respectively. Not only that, it also had a subdued growth of only 16% during FY03.

L&T's : dividend per share over the years
Source: Company, Equitymaster

As can be seen from the above chart, the company has gradually increased its dividend over the past decade. During this period, the dividend payout has averaged around 28%. The payout ratio is basically the percentage of the company’s annual profits that it chooses to pay out as dividends in that year. That enabled the company to grow its dividend payments in such a smooth manner irrespective of the business environment in any given year.

This historical pattern, along with the company’s favorable dividend policy, inspires a lot of confidence about continued dividend payments in future even if the global economy continues to languish for some time to come. Thus if you are one of those investors who relies on regular and growing dividend payments, L&T’s track record can surely be relied upon.

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