Showing posts with label dividend. Show all posts
Showing posts with label dividend. Show all posts

Monday, May 1, 2017

Debt Funded Dividends?

Borrowing, Dividend Payment and a shocked man

A recent research report by India Ratings and Research, a Fitch group of companies has shown that though the quantum of debt funded dividends have come down still many of the corporates are paying dividends out of borrowed funds.

The study is based on the study of the top 500 corporate borrowers. Of these 500 corporates 65 companies account for 85-88% of the total dividends paid since FY 2010, and hence these 65 companies have been studied.

The 65 companies are classified into three categories:
  1. Category A: Free Cash Flows (FCF) are positive and greater than the dividends paid (FCF +ve & > Dividend)
  2. Category B: Free Cash Flows (FCF) are positive but less than the dividends paid (FCF +ve but < Dividend)
  3. Category C: Free Cash Flows (FCF) are negative and the entire dividends paid id funded by debt (FCF -ve & entirely funded by debt)


The summary of the research report reveals:


Debt Funding of Dividends (DFDs) Shows Downward Trend:

From a level of 22% of the total dividend in the financial years 2010-16, DFDs will decline to an estimated 13%. 

two pie charts showing decline of debt funded dividends
In absolute terms too the DFDs are estimated to come down from an absolute figure of Indian Rupees 90 billion to 58 billion.

Capital Intensive Sectors to be the Main Culprits:

Capital intensive sectors like infrastructure, telecom and power are the main contributors. The reason being the profits are fully absorbed for creation of capital assets and therefore are forced to borrow to pay dividends.

DFDs of capital intensive sectors which contributed 42% of the total in FY 2010-16 are likely to steeply climb to 77% in FY2017-18.

Healthy Corporates to Pay Higher Dividend

Ind-Ra expects the Category A companies to pay higher dividends than focus on growth (at the cost of dividends).

The CAGR in dividends grew at 21% compared to the CAGR growth of 6% in free cash flows.


Unwarranted Dividends by Riskier, Category C Companies

The riskier, Category C companies, wherein dividends are 100% financed by debt, the dividend payout grew at a 11% CAGR between FY 2016 and FY 2010.

Ind-Ra predicts that the possible reason for growth in debt funded dividends is to defend the market capitalisation. It is observed that the market capitalisation of the Category C companies increased 2% despite their free cash flows being negative since the financial year 2012.

In conclusion, debt funded dividends is a horrendous practice and value investors should shun investing in such companies.

Sunday, December 18, 2016

Dividends are Wages of Investor Slide

Investor Happy at the Raining Dividends from His Investments
Investor Happy at the Raining Dividends from His Investments

Wednesday, November 30, 2016

10 Best Dividend Paying Companies

Actual Question

What are some reliable investments with steady returns?

I own some stocks in security tech companies but the returns are sporadic at best. I need something that has solid return rates. Plus i hate jumping through hoops for my money.

Answer

Dear Friend!
Thank you very much for raising a very important and useful issue through your question.

As far as dividend returns are concerned there are three vital factors to be considered as follows:
  1. Percentage of net profits distributed as dividends by the company as a policy - good companies distribute 25–30%
  2. Dividend Yield - or simply the rate of dividend on your investment and
  3. Uninterrupted Dividend paying track-record of the company - you have hit the nail on its head when you mentioned sporadic - after all, dividends are the wages of an investor

Here I present 10 good and regular dividend-paying companies:

Sl.No. Company % of Net profits Distributed as Dividends Dividend Yield Uninturrpted dividend paying track-record Download Investment Research Report
1 NMDC Ltd. 25-144% 10.78% 23 years NMDC Ltd.
2 Larsen & Tubro Infotech Ltd. 54-62% 5.25% -- L&T Infotech Ltd.
3 Rural Electrification Corporation Ltd. 20-30% 12.86% 19 years Rural Electrification Corporation
4 Power Finance Corporation 20-30% 11.12% 10 years Power Finance Corporation
5 National Aluminum Company Limited 30-70% 3.85% 18 years National Aluminium Company Ltd. (NALCO)
6 Hindustan Zinc Limited 18-22% 1.61% 19 years Hindustan Zinc Ltd. (HZL) 
7 SJVN Ltd. 25-37% 3.44% 7 years --
8 MOIL Ltd. 20-48% 1.38% 6 years --
9 ONGC Ltd. 33-45% 2.98% 18 years --
10 Great Eastern Shipping Co. Ltd. 33-78% 3.81% 20 years --

Suggested Related Articles:

Saturday, September 17, 2016

Dividends Rain Poem


Dividends Rain;
Stocks Paint Portfolio Green.
Its Two Harvest a Year – Here.

So, Invest Dear – Year after Year!


Sunday, September 11, 2016

What Should Investors Do When A Cash Rich Company Refuses to Pay Handsome Dividends?

When a cash rich company refuses to pay handsome dividends, nor does it undertake share buyback, then there could be two possible reasons:
  1. The company’s management may be accumulating cash for a major acquisition or an internal expansion plan.
  2. The management is downright ignorant and lethargic, though the probability for this is extremely low and remote - such a management will not be able to generate so much cash in the first place.

Even when the company is planning a major acquisition or expansion, it is not justified in not paying handsome dividends to the shareholders. For after all ‘Dividends are the Wages of Investors’ and, the investors should relentlessly pester the management to pay more dividends. This is what Warren Buffett does. He attends the annual general body meetings of the companies in which he has investments and exerts pressure to pay more dividends.


The argument that the company is holding on to cash for a major acquisition or expansion also does not hold any water for history shows that many such acquisitions/ expansions were designed more to pamper the egos of the Chairman or CEO and destroyed precious capital; in a few rare instances top managements had undertaken acquisitions in downright self interest, as their pay is invariably linked to the turnover (top-line) of the company rather than to net profit (bottom-line). In such situation, investors / shareholders are the ultimate sufferers.

In conclusion, not paying handsome dividends in the face of continuous surplus cash generation, for whatsoever reasons, is totally unjustified. The shareholders have to be always vigilant and ensure that ill-conceived acquisition plans are shelved. They should always keep the directors on their toes and constantly pester them to pay more dividends.


Wednesday, September 7, 2016

All Investors Ever Wanted to Know About Dividends

Dividend is the reward or return a company compensates to the shareholders for the money they had invested in its share capital. It is somewhat similar to the interest a borrower pays to the lender for the money lent, though in reality there is a vast difference between both.



Following table depicts the difference between the two:

Dividend vs Interest
As generally there are two broad categories of share capital, namely equity and preference, the dividend payable on these two categories is also classified into equity and preference dividend.


Preference dividend:
  1. The rate of preference dividend is specified at the time of issue. Dividend is limited to the rate specified.
  2. Even though the rate is specified it is not compulsory for the company to pay the preference dividend. It becomes payable only when it is declared.
  3. If the terms of issue so specify, the unpaid dividends may be accumulated. The shares that prescribe such accumulation are called cumulative preference shares.
  4. Even though preference dividends may be skipped, dividends cannot be paid to equity shareholders unless the preference shareholders are paid first.


Equity Dividend:
  1. The rate of equity dividend is not fixed. Equity shareholders have the right to participate in all the profits of the company after payment of preference dividend, if any.
  2. Even though equity shareholders have the right to participate in the entire profits of the company, it is usually up to the management to propose the amount of profits to be distributed as dividends. In India the private companies are generally miserly in paying dividends, with only about 15% of the net profits being distributed. On the other hand owing to a government order to boost their revenues, government companies are required to distribute 30% of their net profits as dividends.
  3. As far as equity dividend is concerned, there is no question of accumulation of past, unpaid dividends. The only way the company can remedy the situation is declaring a handsome dividend in the present to compensate for the missed dividends in the past.

Example:


Conclusion:
In summary, dividend is the recompense companies do to shareholders in return for the latter’s investment in the share capital of the companies. Dividends are the wages of investors and corporations shall never miss dividends in any year and further shall be generous in distribution of dividends.