Value of Dividends – A commentary on Article by Krishna Kant of ET Bureau
On this blog, I continue discussing about my thoughts about dividend investing using value approach. My interest in dividend investing is driven by my objective of generating increasing cash flow (coupled with long term capital appreciation).
Recently, there was a very good article in the context of disinvestment of PSUs. The author, Krishna Kant, presented a very good perspective about significance of dividends from PSUs and its implications on government’s fiscal needs. I am discussing few take ways from that article:
- The largest 56 listed PSUs provide Rs 26000 crore of non-tax revenues to the government (i.e. dividends).
- In last fifteen years, the dividends from these PSUs have grown at CAGR of 28.6% per year. Now has our salaries grown at CAGR of 28.6%?
- The premise of the article is that current binge for disinvestment is not in the long term interest of tax payers. The dividends from largest 56 PSU’s provides very good non-tax revenue for the government. If disinvested, government will lose the future revenue source and it will only increase the deficit.
- In order to balance current short term fiscal needs, government is sacrificing long term benefits.
- Using certain conservative estimates, the author demonstrates that net present value of the dividends, for next 30 years, is Rs. 21 lakh crore (i.e. 50% higher than the current market capitalization). This means, by disinvestment, government is going to receive less value for their investments. If the number of years is increased to 40 or 50 (instead of only 30 years), then the current value received by government will still be lower.
The article brings out very important points that (1) Dividends provide continuously increasing cash flow; and (2) Ability of dividends to fill the gap in earnings. This is what I am trying to replicate in my income portfolio. I look for yield on cost which keeps increasing.
In my analysis, I attempt to project dividend-based cash flow relative to savings interest based cash flow. I am looking for high quality companies that can help me generate increasing dividend cash flow over next 10 years and beyond. If companies that I invest in are profitable and continuously increase their dividends, means they are increasing their earnings. I expect their market values to increase over time, and hence my capital appreciation.
I do not have aptitude, appetite, and energy to continuously churn (or trade) my capital for increasing my wealth. I am following a path where I deploy my capital in such a way that it helps me generate earnings and I do not have to worry about capital appreciation. To top it off, at least for now, the dividends earnings are tax free.
Excellent article by Krishna Kant from ET Bureau.
disinvestment of PSUs, dividend growth, dividends, fiscal deficit, non-tax revenues, PSU dividends, yield on cost
TIP,
I really liked the five points excerpts. I did not understand the meaning of this phrase : “the author demonstrates that net present value of the dividends, for next 30 years, is Rs. 21 lakh crore”.
Please demystify in your free time.
Thank you.
Mahesh,
Net present value is a method that helps to understand the “present value” of future “expected cash flow”. In this case, the author projects dividend cash flow for next 30 years, and then using some conservative assumptions estimates it’s present value. This present value is 21 lakh crore. So to make disinvestment profitable, government will have to receive more than this amount. Otherwise, dividend cash flow has more value (and profitable) for the government.
Hope this helps!
Best Wishes,
Thank you so much for lucidly explaining the concept. Its quit bemusing concept[eg DCF]. I read your post on DCF and download excel sheet its very interesting to read and very clearly explained about that concept.
Thanks once again
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