Sunday, July 08, 2012

Is the Dividend Really Special???


Have used the case of Numeric Power Systems as an example to analyse a particular special situation - "Slump Sale Cases with Special Dividend in Sight"

1) Event 
The company has sold off its major business to Legrand for a consideration of Rs 837 crs.
The company has announced a board meeting to consider interim dividend on 9th July 2012.

2) Risk Reward Framework Process
Now in such cases, have tried to use a risk reward framework which could be useful in highlighting
a) the odds one has of making some money.
b) whether you want to bet money and 
c) how much capital you would like to allocate to such an opportunity ....

2.1) Probability of a Payout could depend upon the following factors :-

1. Governance Standards of Promoter - No discernible acts of misgovernance 

2. Past Dividend Payouts - Not very high in this case - 8% payout ratio in last few years

3. Promoters interest to come back to markets - Does the promoter want to raise future capital in the 
    market and hence keep a good image in markets      
    - Difficult to judge in this case as Rs 650 cr is a good warchest.  

4. What does he plan to do with the money - in this case the promoter wishes to expand in the solar 
     UPS area - Question is how much money do u think the promoter will invest?

5. How many shares does the promoter group have - Higher the holding, Higher the chances of a 
    reasonable payout - as the majority of money comes back in the hand of promoters - 65.12% in this 

6. Cues from corporate action - Promoters buying etc. could be useful cues - Here holding increased 
    from 63.39 to 65.12% via off market transfer 

7. Promoter Communication - In this case promoters had mentioned their intention in the postal ballot 
    however there was a delay in announcement of the board meeting post completion of deal on 31st 
    May 2012. 
    Also, current omission of the word "Special" in the dividend announcement may be a mere clerical   
    omission or the above activities may be the deliberate attempt of the promoters to moderate dividend 
    Regarding Media Interviews - promoters have not been very media friendly from the start 
    In this video, the body language in the interview again implied a focus on solar as core and   
    some special dividend to be paid...

2.2) Calculation of discount to be applied for valuation of residual cash
Seeing some past cases of Slump Sales 
a) where dividend was paid - JB Chemicals, Smart Link etc. - ~60%
b) where dividend was not paid - Kanoria Chemicals etc. - ~70% 

3) Calculations 

4) Conclusion
In such cases, with an immediate downside risk, it all boils down to estimation of probabilities and then deciding on the basis of the corresponding expected return.

Though one who doesn't wish to take the event risk, could have also deployed the strategy of buying earlier and selling out on the dividend board meeting  announcement rally (would explain it in another detailed post sometime later)...

  • Nothing in this article is, or should be construed as, investment advice.
  • This is not an offer (or solicitation of an offer) to buy/sell the securities/instruments mentioned.
  • All the posts on this blog, including this one, are for educational and discussion purposes only.
  • Please do not take buy/sell or any investment decision based on articles you read on the blog. These are only meant to provide information and initiate discussion. Final decision is and always should be, yours and only yours.
  • I may or may not have a position in the stocks discussed on this blog.