Is Paying Dividend, a Healthy Reinvestment favouring Shareholders

 

Paying dividend may not always be the best option. Many investors are very serious about dividends and they consider receiving Dividends is very important part of their Investing. They invest only in companies that have a good dividend history and avoid other that are not generous enough with their dividends payouts. But a high dividend-pay-out ratio may not always be the best take for investors. A healthy dividend pay-out is often lapped up by markets. The stock gets a thumps up and all parties, the company and its shareholders are happy about the outcome. But dividend largesse may not always be in the favour of investors value creation mechanism. Companies could deploy that cash into existing growth opportunities to remain competitive and best in the game. According to our investing matrix, a company can utilise its cash in four ways.

First, Reinvest the proceeds back into the business

Second, Go in for related acquisition

Third, Repurchase shares and…

Fourth, finally pay out dividends

See how paying no dividend could impact the fortunes of companies; If Infosys had paid no dividends and simply repurchased shares, or developed new software and IT centres, it would have created more value for its Stakeholders, since ROI of their funds / business management is much higher that money in the hands of shareholders. Since investors will use their dividend money to buy other shares, or to buy bonds or to make bank FDR or spending. Other than spending, all other modes of reinvestment by shareholders will be lower than using that money by companies for betterment of their businesses. This concept that Utilising cash for other than dividends, is not the standard thing that is taught in the corporate finance department of our major universities. Why do we debate negatively, rather than applying this simple idea to make business stronger with internal accruals. Fund manager’s preference for no dividends do’not mean that they disapprove dividends that they gets from their investments…. but they vote in favour of more deeper value creation for shareholders.

The one thing I will tell you is the worst investment you can have is Cash. Everybody is talking about cash being king and all that sort of things. Cash is going to be come worthless over time, but good businesses are going to become worth more and costlier over time.

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

Investment with Moats Risk Management

 

While investing in equity, How to safeguard a Good story suddenly going bad, leaving no profitable exit…. lets choose companies with #unbreachable_moats. Capital flows to the point of maximum returns. When a company delivered outsized profits, its success attracts #competition. Other entrepreneurs enter the field with their own setup, often with #lower_priced_offerings, and take away the #first_movers market share. Competition forces the leader to cut prices and this whittles down his margins, impacting their bottom line directly.

Thus, over the time, the profits of most companies tend to regress to the mean. Legendry investors liked to invest in, the companies with big moat surrounding their business model and brand equity. Wealth creators in equity market guide big moats consists of following #matrix of

#early mover advantage

#high switching costs

#intangible assets

#network effect

# economies of scale.

If investors choose a company based on these moats, and do keep a close watch to ensure that the stocks script unfolds along the expected lines. One reason is that over the time lot of moats got breached, so timely moat tracking is must to keep value alive in equity. Next is to keep a watch on competitive advantage, other things could go wrong, say the management could slip up on execution, thus when you invest in a company with a visible economic advantage, you still cannot afford to let your guards down and let bottom line screwed up unknowingly. Its like building your investment castle, surrounded with big moats, having crocodiles within to create real value for your portfolio. One build, keep #tracking developments on the matrix of five, as mentioned above.

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com