InvestorQ : What does Bajaj Auto mean by its new dividend policy announcement?
Khushi Patel made post

What does Bajaj Auto mean by its new dividend policy announcement?

Dhwani Mehta answered.
5 months ago

Bajaj Auto recently announce a new dividend policy where it made its pay out ratios contingent upon achieving certain levels of cash surplus. In short, Bajaj Auto has now finalized a structured model for dividend pay-outs in future. This is quite common abroad but it is just about coming to India. What this kind of a structured model does is to give greater certainty to the dividend policy.

As per the new structure, Bajaj Auto can declare dividends up to 90% of its standalone company profits if the surplus cash generated is more than Rs.15,000 crore. However, if the cash surplus is between Rs.7,500 crore and Rs.15,000 crore, then in that case the dividend will be restricted to 70-90% of the standalone company profits. This would still be much higher than the historic dividend pay-out rate of 50-60% of profits that Bajaj maintains.

If you look at the latest surplus cash of more than Rs.16,200 crore that Bajaj Auto has in its books, the company is likely to fall in the highest bracket of 90% of standalone profits to be paid out as dividends. Thus for the fiscal year 2021, Bajaj Auto could declare dividends in the range of Rs.131 to Rs.143 per share. That implies an attractive dividend yield of over 4%.

How will this kind of dividend policy help? Since Bajaj has limited capital expenditure options in the next few years, it is expected that the higher dividend visibility will be seen as a just reward for the shareholders. Also, when dividends are declared, it leads to reduction of cash balances and this will help to improve the return on investment on the stock. With the new dividend policy, it is expected that Bajaj Auto could get a ROE boost of 350 bps.