Wednesday, September 9, 2009

Dividend

I may be writing too much nowadays :(

I have thought about 'dividend' for a long time now. I never gave it much importance and felt that a company should withhold dividends if they can use that money in a better way.

Let's take an example.
Ex date for the last dividend was 3rd August 09 - where they declared a dividend of Rs. 6. For the purpose of discussion, we say that the closing price was approx. Rs. 400.
So the investor received a dividend yield of 1.5%
My problem is simple.
Over the last year, Tata Motors has had sincere problems regarding its debt obligations.
There were rumours, last Feb / March that it may default on interest / principal payments.
The company had also issued debentures in May - which I believe is called 'raising capital'.
Many had commented that the purchase of Land Rover and Jaguar was, unfortunately, at the peak (trough) of the credit cycle.

So, to put this in simple terms -
The company reduced its equity and raised its debt portion.
If the company has approx 420 mln shares outstanding; that implies a payout of approx. Rs.2.5 Bln.
Non convertible debentures in May amounted to Rs. 42 Bln.

The company paid shareholders, raised more capital through debt - when in fact, they could have reduced their debt burden by that amount by simply not paying out dividend.
People generally call this 'leverage'.


The other thing about dividend is - how MUCH does it matter if the company pays you a dividend.
If the share price is $100 and a dividend of $1 is declared - realistically, the share price will reduce by $1.
Cum-dividend, the share price includes the dividend.
Ex-dividend, the share price is reduced by the dividend.
In both cases, the wealth of the shareholder is the same.

We have to accomodate dividend distribution tax if applicable, and whether the company can use the dividend to earn a return substantially higher than the general expectation of return on equity investments.

What I write serves as a note to me and as a thought to the readers - if I have any.

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