Bajaj Auto High Dividend Yield Stock | Good for Conservative Investor? | Yadnya Investment Academy

Bajaj Auto, India’s leading 2-Wheeler & 3-wheeler passenger vehicle manufacturing company has announced amendment in its Dividend Distribution Policy. To know more about this revised Dividend policy, go through this article.

Introduction:

• Bajaj Auto is India’s largest 2-Wheeler manufacturer by virtue of Market Capitalisation. The only brand with the Market Cap. of more than Rs. 1 Lakh Crore.
• The 2-wheeler maker on Thursday 18^th March, announced amendments in its Dividend Distribution Policy.
• Shares of Bajaj auto rosed by nearly 2.90% and marked the day high levels of Rs. 3,685 in response to the new dividend policy announcement.

What is Dividend Yield?

• Before moving ahead to the core matter of the article, we will first go through few basics about the Dividend.
• Dividend refers to that amount which is distributed among shareholders out of the total profits of the company.
• In the stock market, Investor generally comes through the news of 100% or 500% dividend declared by the company, gets fascinated and makes an investment decision. But this dividend rates are based on the Face Value of the Shares, which is quite low.
• For Ex. If a company has declared 100% dividend and face value of a company is Rs. 1, then it means company is giving 100% dividend on Rs. 1 which equals to Rs. 1 only.
• Rather Investor should basically focus on the Dividend Yield of the stock.
• Dividend Yield of a Company can be calculated by dividing Total Dividend Amount by Current Market Price (CMP) of the Stock.
• For Instance, we will use this formula in case of Bajaj Auto to better understand the concept of Dividend Yield. If Bajaj Auto gives dividend of Rs. 130 and the its CMP is Rs. 3,700, so the Dividend Yield (%) can be calculated as follows:

 = 3.5% (approx.)

• As per new Dividend Policy, Bajaj Auto may keep the Dividend Yield constant at the level of 4%-4.5%.

New Dividend Distribution Policy of Bajaj Auto:

• In revised policy, Company has stated that 90% of the Standalone Profits will be rewarded as dividend for the shareholders.
• If we take the assumption of Profit After Tax (PAT) of the company of Rs. 4,000 Cr. Rs. 5,000 Cr., then as per new policy, Rs. 3,600 Cr. to Rs. 4,500 Cr. will be distributed as dividend.
• Earlier to this modification in Dividend Policy, Company’s Dividend Payout was 50%-60% of the Standalone Profit of their Auto business.
• The new Dividend Distribution policy is associated with certain conditions as well, that are:

i) If the company have Surplus Funds of over Rs. 15,000 Cr., then Dividend Payout of the company will be upto 90% of the standalone profit, as stated earlier.

ii) If the surplus of Bajaj Auto remains between Rs. 7,500 Cr. to Rs. 15,000 Cr., then Dividend Payout Ratio will be upto 70%, at this case Dividend Yield will be 3%-4%.

iii) And, in case surplus remains below the level of Rs. 7,500 Cr., then Dividend Payout % will be upto 50%.

• Dividend Payout under the new Dividend reform will be based on capital requirement of the company.
• Among the auto companies, Bajaj Auto is one of the cash rich companies. As of Dec. 2020 (9MFY21), Company is having surplus cash of Rs 15,240 Cr.

Does Business not have Growth Opportunity?

• Since Bajaj Auto has declared a Dividend Yield of near about 4%-4.5% (as per current stats and financials), then it appears to be a decent Dividend Yielding Stock.
• Further, on utilizing the surplus funds for dividend distribution arises the question of growth opportunity of the business.
• But, that’s not the case for Bajaj Auto, as personal mobility has significantly increased and demand for passenger vehicles has increased in past quarters
• Furthermore, just like all other auto companies, Bajaj Auto has also witnessed a blockbuster 3^rd Quarter of FY21.
• Company has strong financials. Bajaj Auto has reported healthy results in the Q3FY21 which further strengthens this high dividend payout decision

Future Capital Requirements:

• With the developing scenario of Electric Vehicles (EVs) in the market, Company might require additional capital funds in order to sustain its business in upcoming EVs era.
• Currently, Company has started working on its EV project for which they need capital of around Rs. 650 Cr.
• With the presence Cash & Cash Equivalents levels of Rs. 16,000 Cr., the company will not face any kind of hurdles in its  upcoming projects

Effect of New Dividend Policy:

• Decision of high dividend payout in the case of high surplus funds will effectively improve the Return on Equity (RoE) of the company.
• Let’s understand this in detail; RoE can be calculated as:

• Since, if the company is having enough cash and the same cannot be utilized anywhere else, then dividend distribution can be better capital allocation strategy which also eliminates the unnecessary piling up of Reserve & Surplus.
• With this new dividend distribution policy, upto 90% of the surplus funds of the company will be distributed as dividend of the company in absence of any capex plan which will ultimately increase the Net Income against Company’s Reserve & Surplus and therefore increase in RoE of the company may happen.
• Approximately, Company can notice the improvement in its RoE by 2%-3% after the effect of this policy.

Conclusion:

The Announcement of New Dividend Policy by Bajaj Auto might certainly attract the Conservative Investors who seek for decent Dividend Payout of 4%-5% on their investments and a nominal capital appreciation. Individual should examine their risk profile firstly before taking position in this stock for sake of high dividends.