InvestorQ : How does Bajaj Auto propose to improve its ROE through the new dividend policy?
Aashna Tripathi made post

How does Bajaj Auto propose to improve its ROE through the new dividend policy?

Aditi Sharma answered.
1 year ago

Let us first look at what numbers Bajaj Auto can pay out as dividends. As per the new dividend policy it would entail a dividend pay-out of Rs.135 per share. This would clearly mark a spike of 70% over what Bajaj Auto is currently paying out to investors. This would also make the dividend yield for the Bajaj Auto attractive at 4%. Moreover, it is also expected that this new policy would attract retail and institutional investors to the stock.

The reality is that the dividend policy is a lot more than just the pay-out of dividends. An elaborate dividend policy by a company like Bajaj Auto is not only about dividends but also provides greater clarity on how company surpluses will be allocated. With capex limited in the coming years, Bajaj Auto has opted to pay out a higher share of its standalone profits as dividends to shareholders.

This would have the impact of lowering the balance sheet size and that would result in improved levels of return on equity or ROE and return on investment or ROI for investors. Companies have two choices; they can either reinvest profits in the business or pay out to the shareholders as dividends. For cash rich companies like Bajaj Auto, the assurance of solid dividends can be a solid fool-proof bet on the future shareholder returns.

The strategy of continuous capital spending works will for companies that can reinvest profits so as to earn more than the current ROE that it earns on the business. If there are not enough such opportunities available to the company to allocate funds to capital spending, then it makes sense to pay out dividends, as much as possible. It clearly implies that the dividend paid out will reduce the balance sheet size and improve the jobs.