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Manufacturing: The dividend experience - Views on News from Equitymaster
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  • Sep 19, 2003

    Manufacturing: The dividend experience

    With the interest rates currently ruling at their historic lows, dividend tax being scrapped (only a distribution tax is levied now) and market volatility putting to test the bravest of hearts, it makes sense for an investor to look at stocks that give consistent returns i.e. dividends. In this article, we try to look at how well the manufacturing sector has rewarded its shareholders. A good indicator of this would be to look at the dividend payout of the manufacturing sector over the last few years.

    Source: CMIE

    Dividend payout, in simple terms, is that part of the profits earned by the company, which is distributed to shareholders. As can be seen in the chart above (Manufacturing Dividend Payout), it is encouraging to see that the dividend payout during the period 1996 to 2002 has increased from 22% to 29%. It must be noted here that the manufacturing sector includes textile, metals, machinery, chemicals, auto, cement, etc. to name a few. The key contributors to the overall dividend payout growth has been companies from sectors like cement, steel, aluminium, fertilisers, auto, paper, etc. On the contrary, the laggards have been primarily consumer electronics and appliances, computer software and hardware and also textiles.

    Further, in the chart above (year of incorporation vs dividend payouts), it can be seen that the ‘old generation’ companies (incorporated before 1950) have increased their dividend payouts over the last 7 years from 28% in FY96 to over 36% at the end of FY02. Whereas, the newer generation companies (incorporated after 1991), have reduced their payout from 18% to 16% during the same period.

    Now, if we look at the segregation of the dividend payout of the manufacturing sector, which has been done on the basis of ownership i.e. government, private and foreign, interestingly, it is the government sector manufacturing companies that have outperformed the rest, at least on growth terms! On second thoughts, it seems possible due to a couple of reasons. First, as can be seen in the chart above, the dividend payout by the government manufacturing companies was at relatively lower levels in FY96 (16%) as compared to the private (23%) and foreign (35%) companies. The government has actively rewarded ‘itself’ by declaring higher dividends, as, by virtue of having a majority stake holding, the money comes into the government’s own chests. Secondly, with divestment being one of the key agendas on the government list, it has preferred to ‘relieve’ the companies off the huge reserves before they are divested. This has led to an increase in dividend payouts (32%) by FY02 as compared to the private sector manufacturing companies (28%) and foreign private sector manufacturing companies (41%).

    All said and done, this is a healthy trend of increasing ‘overall’ dividend payouts, as it assures the investors of steady returns and ‘indicates’ that the companies are ready to share their profits with the true owners of the companies i.e. shareholders. For those who believe in relatively risk averse investing, dividend-paying stocks could always be an advisable investment strategy to follow.



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