New dividend policy at Bajaj

The new dividend policy at Bajaj Auto will make the dividend declaration each year totally contingent on the surplus cash with the company. Surplus cash has been defined as the sum of cash as well as marketable securities held by the company, excluding stakes in its group companies and other long-term strategic investments. The surplus available will be the defining point for the dividend pay-out and based on such surplus that is available with the company, dividends will be paid out as a percentage of the standalone profits of Bajaj Auto. The new policy stipulates that if cash surplus was more than Rs.15,000 crore then the company would pay out 90% of standalone profits as dividends. If the cash surplus was between Rs.7,500 cr and Rs.15,000 cr, then 70% would be paid out. If the cash surplus was below Rs.7,500 crore, then dividend at 50% of the standalone profits would be paid out as dividends. As of December 2020, the company had cash surplus of Rs.16,240 crore on its books. Therefore, Bajaj Auto would fall in the highest dividend paying bracket and it can distribute 90% of its standalone profits as dividends. What would that mean in terms of numbers?

How will this change pay-outs?

That would largely depend on the what quarterly profits Bajaj Auto generates. Most analysts estimate that Bajaj Auto would report net profits of Rs.4400 cr for FY21. As per the new dividend policy it would entail a dividend payout of Rs.135 to Rs.140 per share. This would be around 70% more than what Bajaj Auto is paying out currently to investors and that is a big boost. In addition, this would also make the dividend yield for the Bajaj Auto stock very attractive at 4%. This is likely to attract retail as well as institutional investors to the stock. 

Dividend policy is a lot more

An elaborate dividend policy is not just about dividends but about clarity on how surpluses will be allocated. With its capex plans limited in the coming years, the company has rightly decided to pay out a higher share of its standalone profits as dividends to shareholders. This would lower the balance sheet size and result in improved ROE and ROI for investors. But the real issue is clarity. Companies have two choices; reinvest profits in the business or pay out to the shareholders as dividends. The former strategy works for companies that can reinvest profits in a way as to earn more than the current ROE. If there are not enough such opportunities, then it makes sense to pay out dividends. This policy clarifies that Bajaj Auto is on the right track on shareholder returns!