Applying learnings of Security Analysis on Avanti Feeds : Part 1 Dividend Policy

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 About the Book:

Describe 

  • written by
  • warren's bible
  • content
  • 3 parts of the book and sub-sections of common stock
  • chapters before the dividend chapter- a brief summary

Idea: the points below summarize the chapter learnings w.r.t. dividend policy

  1. The company with a higher dividend, all other things kept the same, will be trading at a higher price compared to the one with the lower dividend. Applying it to the Indian stock market, there are many examples where this doesn't hold true. I need not even post an example here as there are many that you can find by just looking at any screener.
  2. It is always better to check if the company's earning power is sufficient enough to back the dividend policy it has adopted even in times of depression.
  3. The company should pay a greater portion of its earnings as dividends and retain the smaller portion. This is because the money returned to the stockholder now is better than money returned sometime in the future.
  4. It is justifiable for some companies to keep a conservative dividend policy if they can show superior earning power. Here I would like to introduce the concept/guidance of Warren Buffett saying that if the company is able to get superior returns that the stockholder can get from any other option then it is advisable to retain a larger portion or all of the earnings as surplus. 
Applying the above learnings on Avanti feeds means we need to check three things about the company's dividend policy i.e. how much dividend the company is paying? and how much growth the company is able to generate from its retained surplus. 

The photo was taken from Screener.in

Here you can see, the company pays out 20% of the earnings as a dividend, so the question now is whether the company is able to generate returns that justifies it keeping the larger portion of the earning for itself.



The company was generating good EPS growth until the last three years and as per what we have learned, it's better for the shareholders to get a larger portion of the earnings as a dividend rather than the company reinvesting the earnings. One point to note is that 2018 was an exceptional year with the company having an EPS of 32.78. if instead all the calculations are done taking the last three-year average then the results are somewhat different.


Now it can be said that the growth of the last three years of the company justifies it keeping the larger portion of the earnings as I don't think the shareholders have any other option providing a similar return. (If you have any stock giving more than this return and you have confidence that it will continue to do so in the future then it make sense to collect the dividend and invest the money in that company)




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