Forecasting dividend may not be an easy task but it makes sense to analyse the key trends in dividend to have an idea about how good the company will deliver in terms of rewarding investors in the form of dividend
Investment in stocks is driven by two types of returns: 1) Capital appreciation; and 2) dividend given by the companies from time to time. For passive investors, dividend acts as a key factor for investments in the stock as this category of investor expects to make money from regular and frequent dividend paid by the company. While the significance of dividend in investments cannot be overlooked, stock market analysts predict only stock prices using fundamental and technical analysis. There are very few cases of dividends being predicted in India. In western countries there are models of dividend forecasting which are used for the purpose of predicting dividends of the companies. Markit uses the dividend forecasting model and some other institutions predict dividend on the basis of options pricing model.
Dividend forecasting is significant because if an investor wants to invest in stocks for long-term or short-term, factoring expected dividend payment in the investment decision is critical. While the significance of dividend is established beyond doubt, the question that needs an answer is—is it possible to forecast the dividend of the company? While the right to declare dividend remains with the company, looking at certain aspects of the company’s performance, dividend amount can be atleast estimated. The critical data to consider is the fundamental analysis, historical performance of the company and peer group comparison. The most important thing to remember is that dividend forecasting will work potentially only in cases where company has an established track record and has been constituent in its approach. Also extra-ordinary dividends need to be ignored for the purpose of this analysis. Considering these assumptions, let us look at some aspects of dividend forecasting:
Understanding dividend policy of companies: As a part of corporate governance practice, various companies announce their dividend policy. CRISIL, one such company has the following policy towards dividend. “It believes in maintaining a fair balance between cash retention and dividend distribution. Cash retention is required to finance acquisitions and future growth, and also as a means to meet any unforeseen contingency.
CRISIL has also been conscious of the need to maintain stability in its dividend payout over the years. From 2008, CRISIL has commenced the practice of paying dividend on a quarterly basis.”
This shows that from a company like CRISIL an investor can expect dividend payment every quarter which is significantly different from what other companies follow. Another company—Infosys—follows a totally different approach compared to CRISIL. As per dividend policy of Infosys, “Currently, Infosys pays dividends to its shareholders. The current dividend policy is to distribute not more than 30% of the PAT (unconsolidated Indian GAAP) as dividend. The board of directors reviews the dividend policy periodically and on 15 April 2008 decided to hike the dividend policy to up to 30% of post tax profits from 20% of post tax profits earlier”. Infosys’ dividend policy shows that an investor has to think differently when it comes to investing in Infosys shares.
Many companies do not have dividend policy in place which shows that ad-hocism to be in place as far as dividend declaration by the company is concerned.
The relationship between Dividend Per Share (DPS) and earnings of companies: What is the relationship between earnings of a company and its dividend payment. A company like ONGC probably can answer this question. The data for last ten years in case of ONGC reveals a lot about the company’s approach towards dividend:
The dividend payout ratio of ONGC shows that company has been very consistent in dividend payment. The average dividend payout ratio of ONGC during last nine financial years (2002-03 to 2010-11) has been 41.77% with a standard deviation of just 1.77%, showing a very high adherence to the mean value. Dividend payout ratio shows that part of earnings which the company shares with its shareholders. Can it be safely concluded that dividend payout ratio of the company will be in range of 40%-44% in the years to come which will be derived from its earnings?
While ONGC’s dividend payment behavior may be rubbished as an exception followed by a government company, we can look at some other company which is more independent in decision making. An Ideal example of this kind of company which has been consistently performing is HDFC Bank. The company has been a continuously performing bank and has shown that the company also cares for investors by regularly paying them decent dividend. The details of dividend paid by HDFC Bank are as follows:
Dividend paid by HDFC Bank has been growing and that company officially acknowledges that it has been maintaining dividend payout ratio of 20%-25% (Refer:
http://www.hdfcbank.com/aboutus/cg/Dividend_Policy.htm). So to expect a dividend in the range of 20%-25% won’t be unfair in the case of a company like HDFC Bank.
Dividend and Economic Growth: In a falling growth scenario, it makes sense to acquire shares of companies which have consistently paid dividend. With the growth slowdown and limited opportunity to invest, companies prefer to disburse higher dividend as investment opportunities are limited for a company.
Forecasting dividend may not be an easy task but it makes sense to analyse the key trends in dividend to have an idea about how good the company will deliver in terms of rewarding investors in the form of dividend. Study of fundamental and policies of the company can go a long way in giving an insight into dividend to be declared by the company. The second approach could be to look at the complex mathematical models which an ordinary may find it difficult to fathom.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
Nem Chandra Singhal
Can you please give me list of 10 stocks which has the highest Dividend Yield as per their Current Share Price?