Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Dividends: There's more to it... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 11, 2005

    Dividends: There's more to it...

    FY05 was another good year for India Inc. as far as the financial performance was concerned. Similarly, it was good time again for investors, as stockmarkets gained further ground during the fiscal with the BSE-Sensex notching gains of over 16%, post the 83% rise witnessed in FY04! Apart from the capital appreciation witnessed by investors of their portfolios, they were also rewarded in another way. This was the continued dole out of strong dividends by corporate India in FY05, which was the icing on the cake being enjoyed by investors. In this article, we try to throw some light on this very aspect of dividend payouts and how should investors understand the same.

    Most of the industry honchos maintained/increased their dividend payouts during FY05. To consider a couple of these for explanation assistance, while two-wheelers major, Hero Honda, maintained its dividend payout at 1,000% (Rs 20 on face value of Rs 2 per share), others like foods major, Dabur, and aluminium major, Hindalco, increased their dividend payouts. While Dabur hiked its dividend from 200% in FY04 (Rs 2 on face value of Re 1 per share) to 250% (Rs 2.5), Hindalco increased the same from 165% (Rs 16.5 on face value of Rs 10 per share) to 200% (Rs 20 per share). While this is a positive development from the investors' point of view, as it indicates investor friendliness of the company and the managements' intentions of sharing its profits with its shareholders, investors need to look beyond dividend payoffs while investing in stocks on the premise of attractive dividends. This is because there is more to dividends than just the dividend per share (DPS).

    A couple of the important financial parameters that need to be considered, before zeroing in on a particular investment candidate (stock) on the basis of DPS, are dividend yield and dividend payout ratio. Apart from these two, there are others that will be discussed in brief below. Let us begin.

    Dividend yield: This is the dividend declared by a company in a year divided by the current market price of the company's stock. Thus, in the case of Hero Honda above, at the current market price (CMP) of Rs 550, the dividend yield works out to 3.6%. Similarly, for Dabur and Hindalco, the dividend yield works out to 2% and 1.6% respectively. This is an important factor that an investor should consider, primarily for two reasons. One, when the dividend yield is high i.e. above the return on a fixed or savings deposit, the stock becomes an attractive proposition for investment. High dividend yielding stocks are generally those where growth prospects are very slow and companies distribute a larger share of the profits, as they find no opportunity to invest excess cash. Secondly, if the dividend yield is low, then the stock is not a 'value play' in most cases. Thus, none of the stocks mentioned above are strictly strong dividend (yield) plays.

    Dividend payout ratio: This is another important parameter that must be kept in mind. This ratio is basically to gauge how much of the earnings (net profits) are distributed by the company to its shareholders. Thus, in the case of Hero Honda and Dabur above, while their dividend payout ratio works out to about 0.5 each, i.e. almost 50% of the net profit was distributed as dividends; Hindalco distributed only 14% of its net profits as dividends. So, from this point of view, the former two are more investor friendly than the Birla group company.

    However, judging a company only on the basis of the above two parameters would not be enough and few more points need to be considered, which are discussed below in brief.

    Dividend history: This is basically the dividend-paying trend of the company over the last few years. Thus, needless to say here that those one-off special dividend payoffs by companies need to be stripped off and then the dividend trend needs to be considered. A consistent/increasing dividend history indicates that the company is largely confident of its future growth prospects and prefers to share its profits with shareholders rather than hoard cash in its balance sheet.

    Don't forget the fundamentals: Dividend or no dividend, this is the most important aspect for every company and its stock price. This is because, dividends are part of profits and if the profit earning capability of the company is at risk then expecting consistent dividends would be na´ve.

    Further, investors must also remember that labeling a company as investor unfriendly on the basis of dividends would be unfair. This is because, typically, if a company needs consistent cash flows to grow, it would withhold its profits, rather than take on debt from the market, to fund its business expansion activities (Hindalco).

    Thus to conclude, while the above checklist may not be exhaustive in nature, keeping a close eye on these would mitigate risks to a great extent. Moreover, considering just one of the factors listed above in isolation and deciding upon an investment candidate would not be the most sensible thing to do.



    Equitymaster requests your view! Post a comment on "Dividends: There's more to it...". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    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.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 10:02 AM