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Infosys: A dividend technocrat - Views on News from Equitymaster
 
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  • Mar 24, 2009

    Infosys: A dividend technocrat

    In the previous article, we had discussed the application on ONGC, of a framework through which one could achieve returns entirely from dividends. In this article, we shall analyse Infosys' dividend track record through the same framework.

    Infosys has come to be the hallmark of the Indian IT industry's success. From humble beginnings in 1981, the company today is the second largest exporter of software services from the country. The company is recognised globally for its world-class management practices and work ethics. It has been making conscious and constant efforts to move up the software value chain and offers services like software development, maintenance, technology consulting, testing and package implementation. The company offers all these services through its highly integrated and widely acclaimed global delivery model.

    Infosys has been continuously rewarding its shareholders during the last 16 years. The company has been able to grow its dividend per share at CAGR of 23% between the period FY94 and FY08. During the same period, its earnings per share grew at a CAGR of 9%. This points out to the management's commitment to rewarding its shareholders. Furthermore, it should be also noted that the company offered it shareholders special dividends for three out of the last five years. Given this long history, there is very little chance that the company might stop paying dividends to its shareholders in the future.


    Source: CMIE
    ** Bonus   * Special dividend

    It would be also worthy to mention that the average dividend payout ratio stood at around 21% during the period between FY94 and FY08, while the average RONW was around 40%. Apart from paying regular dividends and special dividends, the company issued bonus shares. Infosys issued bonus shares five times during the last fifteen years. This further reiterates our belief with regard to the management's intentions with regard to rewarding its shareholders.

    At current price, the dividend yield for Infosys is around 3%. Assuming that the company continues to grow its dividend per share by 20% per annum, the investor would be able to get a 10% return annually on his investment from dividends alone from the 6th year onwards. This can be backed by the fact that Infosys has minimal capital expenditure requirement. Moreover, the company had cash balance of around Rs 78.5 bn in its books at the end of December 2008 (cash per share Rs 137).

    Conclusion
    Despite a low current dividend yield, the company's healthy cash reserves and sustained growth is likely to make Infosys a dividend earning stream for long term investors. However, investors should bear in mind that the desired returns can be achieved only if one stays invested in the company with a long term perspective. Moreover, it is important that management policies and environment in which the company operates remain unchanged.

     

     

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