By this logic, Colgate, Hindustan Lever, ITC are mature companies since 1960s and still given fabulous return by any benchmark comparision. It is very good to simplify things, but at time oversimplication creats its own issue. If some business grows at more than 12-14% for 50 years, when GDP of country in nominal terms would be growing at same rate, how would you call “mature” business?
We also need to seperate cashflow generating business from cashflow gallping business. Companies like Tata Steel and Reliance Industries would always raise debt/ equity capital (despite distributing dividend) as they need cash for growth. Hindustan Lever, ITC, Colgate, on the other, provide for 12-15% expendiure on brand development, which is charged to P&L and not registered as ingangible due to accounting limitation, and still have generated cashflow sufficient to provide for great dividend and also capital appreciation. Why PE of all these companies are in 40-60 times while those of commodies in 5-10 times over cycle? Growth with free cashflow is a very rare phonomena which would always valued at premium in long term.
In nutshell, valuation is important factors, in small cap companies, dividend payment over medium term (not a name sake 10 paise dividend with EPS of 3 per share for last 5 years), is a very critical point for evaluation of managment quality in my opinion.
Hi - I edited my earlier post so that it is more explanatory. From your reply I realized I wasn’t clear and very superficial.
We aren’t saying anything very different. Only point I want to stress is returning high dividends as opposed to diversification. Instead of investing in FMCG business, if ITC had returned all that investment as dividends and if investors had invested those dividends in HUL, would they have been richer?
Similarly should colgate diversify into soaps and shampoos or dental medical supplies or return dividends?
If a midcap company is returning high dividends, should it mean that its given up on its core business?
I am not an expert, rather a novice but tried to connect Dr Damodaran’s lecture to current context.
Like many of them but don’t like valuation, still have few similar businesses if not exactly FMCG. More of personal approach where valuation comes first and then company (considering mgmt premium, terminal value, longevity into considerations and going through my own learning from last 20 years of data on what has created CAGR and what has destroyed). Have held some of them in past and wont hesitate to acquire again when feel holding it gives peace
Good to see that there are investors who respect dividends. Dividends and share buybacks are the main ways a company is supposed to reward its shareholders after reaching a certain mature stage or in the absence of larger growth opportunities.
However, many growth oriented companies also pay respectable dividends and they can be much more rewarding, even from pure dividend point of view, espeically if you are able to catch such companies at right valuations.
For example, say a mature company with flat growth has an impressive 5% dividend yield. While another company has dividend yield half of that (2.5%) but also growing at 20%. Then taking growth into account, the dividend yield of that second company is actually far better and will come out around 8.33%, better than a fixed deposit . This is why companies, especilly the so called quality ones, who consistently pay dividends and also grow at a reasonable rate are much harder to fall below a certain price (or they have some sort of floor price as the market says). I think lots of accumulation goes at this floor price for such stocks in the event of broader market fall which acts like a good cushion.
I have developed a custom ratio that tries to address exactly this scenario and can help in finding the floor price. It tries to combine the growth rate of a company with its dividend yield. I will have to look it up though, will share it in my valuation thread later.
Karnataka Bank at its current stock price has a good dividend yield (6 %)
One should also look at the payout ratio to see if the dividends are sustainable
what the capital protection in this Bank? Isnt it funny for the banks to give dividends when they raise capital in some or the other form? Cash is the Raw material for bank isnt…the price that is currently is at a 10 yr low…
After the removal of DDT, dividend paying companies will be better off holding back on the dividends and have the shareholder (especially those making more than 7.5 lakhs per annum as their tax rate is 15% or more)manufacture dividends themselves by selling off a few shares if they need dividends for meeting expenses. So, it’s better to invest in companies that need the cash to reinvest in the business and not give out dividends at tax rates unfavourable to the shareholder. By manufacturing dividends, the small retail shareholders will still get dividend tax free if LTCG is less than 1 lakh. For other shareholders making more than 1 lakh in capital gains a year, they will still be taxed at a maximum of 15% and 10% for short term and long term gains respectively.
Also, would it have been better to tax the dividends at the hands of the shareholder but treat it as short term capital gains if dividends must be taxed in the first place? After all, income tax has already been paid before the dividends are paid out.
On the other hand, if the intent of the govt is to discourage companies from paying out dividends and take capital away from the company, then they need to make sure buyback tax is just as expensive as the tax on dividends for the promoter groups.
Much of promoter holding in many of the companies are structured in the name of the companies which are supposed to pay 25% income tax.
So lets say there was a 100 Rs dividend available for the company. The company was paying a tax of 17 Rs on it (83 * 1.22 = 100). And of the 83 Rs that the company gets 8.3 was being charged as ADT (additional dividend tax on 10 lakhs plus of dividend income). So net realized dividend for promoters was 75 Rs. Now the same will be much lower for holdings which are name of individuals (which in my opinion is lesser than what is held by promoter owned companies). Now this 100 rs goes to the holding company and the promoter uses this vehicle for all their purchases (real estate, cars, startups, equity investments) while not taking out the money in these companies as dividends and paying only 25% tax after showing a lot of business expense also. So the net tax may even be just 20% or lower which essentially is lower than previously.
So overall, companies with promoter holding in name of individuals might be averse to give as much dividends but they can also restructure their holdings in the name of companies going forward. Secondly buybacks will anyways be more prominent now that the taxes are lower there. So companies may do even more buybacks which in my view increases the value of many cash rich stocks favorably compared to earlier instead of decreasing the attractiveness.
On the buyback, if the company wants to add value they should refrain from buybacks unless the share price goes below the intrinsic value (as per their calculation). Many companies(Eclerx, Infosys, Kaveri Seeds to mention a few) have all taken the tender offer route offering a premium instead of buying it at the market price.
Eclerx had completed two buybacks, the last one at about Rs 1600 when the prevalent share price was Rs 1150. However, the share price is now around Rs 600.
Also, buyback tax of 20% is a frictional cost better avoided if they can instead invest in increasing their own earnings power or in other companies if they have the ability to allocate wisely. I hope companies will refrain from value eroding tender offers that only benefit those who participate in the buybacks, especially the major shareholders. However, that’s too much to ask for I guess. I hope this double taxation on dividends and the tax on buybacks will be reversed in the future so companies will have more options to create value for shareholders depending on the market conditions.
It would help all shareholders if the govt would incentivise open offers over tender offers.
If, I am not mistaken, with no DDT, the after tax payout would be Rs 56.25 (Rs 100 * 0.75 * 0.75 ) for every Rs 100 of income and 100% dividend payout.
With DDT, the after tax payout would have been Rs 60 (Rs 100 * .75 * .80).
Also, did the govt remove the tax on dividends more than Rs 10 lakh? I hope so! Can anyone confirm?
Hi Newbie_007,
The government removed DDT, so all of the dividend income after April 1st 2020, it will be taxed as per the shareholder’s personal TAX rate under the head “Income from other sources”.
. This is why companies, especilly the so called quality ones, who consistently pay dividends and also grow at a reasonable rate are much harder to fall below a certain price (or they have some sort of floor price as the market says). I think lots of accumulation goes at this floor price for such stocks in the event of broader market fall which acts like a good cushion.