• MARCH 5, 2009

Hero Honda: The dividend Maharaja

In the previous article, we discussed how it can be possible to achieve desired returns entirely from dividends, i.e. without any capital gains from stock price movement. In this article we shall discuss the dividend record of Hero Honda and apply the frame work discussed in the previous article to see whether it can be a haven for investors.

Hero Honda Motors is the largest manufacturer of motorcycles in the world. It's a joint venture promoted by Hero Cycles (P) Limited and Honda Motor Company of Japan. Each partner holds 26% stake in the company. The company is focused on the manufacture and sale of motorcycles. However, it has also made an entry into the gearless scooterette segment with the launch of 'Pleasure' in FY06. Hero Honda's initial technology agreement with Honda expired in 2004. But the company has extended its technology agreement with Honda for a further period of ten years till 2014 and has plans to introduce a series of new models/improved versions of existing ones. It commands a 55% market share in the domestic motorcycle segment.

The company has been continuously paying dividends to its shareholders for the last 18 years and is among one of the very few Indian automobile companies with such an amazing track record of dividend payout. Given this long history, there is very little chance that the company might stop paying dividends to its shareholders in the future.

Source: CMIE

At the current price level, the dividend yield for Hero Honda is hovering around 3%. Assuming the company continues to grow its dividend per share at more than 20% per annum, the investor would be able to fetch 10% returns annually on his investment from dividends alone from the 6th year onwards. This is quite an achievable goal, as the company has managed to grow its dividend per share at a CAGR of 24% between FY91 and FY08. Furthermore, the company has low capex requirements. It also has a policy of not keeping more cash than required. In fact it distributes the surplus cash to the shareholders.

Despite a low current dividend yield, the growth rate will turn Hero Honda into a dividend play for the long term investor. However, the investor should bear in mind that the above desired results can be achieved only if one stays invested in the company from a long term perspective. Moreover, it is vital that management policies and the environment in which the company operates remain unchanged.

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