Thread by @money_theory

Curious case of Bajaj Auto Ltd with respect to dividends :

•Bajaj auto Ltd, one of the largest automobile manufacturers in India has paid dividend of Rs120/share for the FY 2020

•It is 100% increase of their past dividend of Rs 60/share

Let's understand the reason

•The Govt of India abolished tax on dividends (DDT) on Feb 2020 budget applicable from Apr 1, 2020 which meant the tax liability has been shifted from co to shareholders

•Shareholders have to pay tax on the slab rates applicable to them as per Income tax Act

•Promoters come under the highest tax slab as they are the ones who receive bulky cash. They increased dividends as DDT rate is 20% whereas their personal income tax slab rate is 30% + applicable surcharge

•The prob is they declared dividends in excess of Op cash flow

Finding evidence from their CFS :

•The dividends are paid using op cash, cash from investing activities, cash & foreign currency proceeds

•The imp part is the cash they got from net investments of 1661 cr. This is the major item in investing activities

•The net investments has never been such higher before, for the company over the past years

•So they paid excess dividends by selling some investments

•If the co would have opted to pay dividend equivalent to previous year (1735 cr), then op cash + cash would have been sufficient to meet dividend requirements

•The extra dividend of 60/share translating to 1734 cr attracted tax of 340 cr

•The co would have avoided paying this tax amount if it has rolled it's investments by not selling them to pay dividends

Conclusion :

•Everyone (Promoters, FII, DII etc.,) who come under highest tax brackets have been benefitted

•The minority shareholders have been burnt

PS : Do check your portfolio companies cash flow statements & thread carefully.

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