Why the fuss about dividend yield and debt free status

ravi_s_ghosh · #1 26th November 2007, 02:48 PM

We often hear that so and so company has a good dividend yield and hence is a good buy. When a company is paying dividend after coughing up dividend distribution tax, it implies that the company is unable to utilize the cash to generate higher returns and/or the companies doesn't have enough ideas to expand their business. If a company does not pay dividend and utilizes it for returns, then certainly that will reflect on its market price. So why people run behind such high dividend paying companies?

Secondly, it is known fact that debt is a great thing to leverage return on equity. Here is a simple example. Suppose there are 2 identical companies which have everything same with cost of setting up and running the company being Rs 1000 and operating profit being 20%, Rs 200. One is debt free with equity of Rs 1000 and another with Rs 400 of equity and rest Rs 600 of debt at 15% annual interest. Here is the comparison.

Cost of project: Rs 1000

All Equity Rs 400 equity + 600 debt @15%
PBIDT: 200 200
Interest: 0 90
PBT: 200 110
Tax @40%: 80 44
PAT: 120 66
ROE: 12% 16.5%

Clearly, the second company with debt is better since it gives higher return on equity of 16.5%. So, why there is so much of fuss about a company being debt free since being debt free simply means it is unable to leverage to give higher returns.

masterjee · #2 26th November 2007, 05:08 PM

No one is making any fuss whatsoever. Personally I would like to look at dividend yield stocks as i ride out long term weakness in markets (most of the high DY stocks in between weak years 2001-2003 became multibaggers in the subsequent bull market), and would prefer leveraged companies in bull markets, keeping one eye at interest rates. One size does not fit all.

Prices will eventually revert back to dividend yields in long term.

m

ravi_s_ghosh · #3 26th November 2007, 07:05 PM

was i wrong in that analysis????

masterjee · #4 27th November 2007, 10:06 PM

You are wrong Only if get a debit in your account - till then you are right
m

ravi_s_ghosh · #5 28th November 2007, 08:26 PM

@masterjee,
could not get your answer. Could you please elaborate.

masterjee · #6 28th November 2007, 09:05 PM

Quote:

Originally Posted by ravi_s_ghosh

@masterjee,
could not get your answer. Could you please elaborate.

U have framed yr question as dividend yield and debt free cos versus leveraged companies, implying at the same time that the latter is better. Former implies conservatism and the latter not.

Markets dont give you a straight either-or answer anytime. Both exist in the realm of possibilites and one (and many times) both will be true. Watch this in movement of prices during the day. Both bull and bear targets will be met, before prices move decisively.

Dividend yielding stocks will be right in rough times as you wait out market storms, while aggressive companies will let you ride the bull market. If u choose aggressively leveraged comanies and then your accout shows red, perhaps it is time to change.

m

yoogi · #7 29th November 2007, 08:24 AM

dear ravi_s_ghosh,

The market never remains the same. Risk appetite (debt-equity ration and divident/reinvestment ratio) are diffrent for diffrent companies, diffrent in diffrent periods, diffrent for diffrent people.

What is an opportunity for one is a threat for some one else (or am I wrong here..). I personally feel I will be safe with companies with high dividend yield. After all, all that one needs is a stable income month after month.

I am not an expert of FA, so I did an intresting analysis of which stocks all four diffrent dividend yielding MF's holds. It has shown me surprising stocks, some of which are certainly not hot stocks.

It would be intresting to know which highly liquid stocks you think as high dividend yielders vs stocks that are re-investing aggresively from same sector.

ravi_s_ghosh · #8 29th November 2007, 03:33 PM

thanks a lot for great explaination guys. getting it a lil bit.

deepsa52 · #9 3rd December 2007, 07:55 AM

Guys, do you use any Fundamental analysis stock screening software for the Indian markets, if so can you please make recommendations. I am looking for the ability to do multi factor screens.

Thanks!!

ravi_s_ghosh · #10 3rd December 2007, 06:12 PM

Quote:

Originally Posted by deepsa52

Guys, do you use any Fundamental analysis stock screening software for the Indian markets, if so can you please make recommendations. I am looking for the ability to do multi factor screens.

Thanks!!

http://www.traderji.com/fundamental-...-screener.html