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