I won’t be sure if dividend payment is a better approach. If they are selling stocks to reduce debt why not do the same to raise money for new venture? Or why don’t they increase dividend payout to pay off their debt? It’s the same thing.
The reason is capital allocation.
Let me expand on this with an example.
Let’s say, taking a highly simplified example, you are getting 100 INR in profits from your company, out of which you pay yourself and your shareholders 10 INR in dividends and remaining 90 you put in different investment if you don’t have any other use for that money. Your treasury should be able to generate 15-17% return in a good market cycle. If market cycle is bad you will perhaps do a buyback.
Now you have got another venture planned for which you need money and you decide to double your dividend payout. Cost of capital for that extra dividend is 15-17% which your treasury was generating. So question is why would you do that unless your cost of debt is more or you are sure your new venture will generate 20% in ROCE adjusting for delayed cash flows from new venture?
Plus when interest rates are bound to fall, increasing dividend payout to fund diversification will be a poor capital allocation. On the other hand selling stocks to raise money is not a capital allocation decision.
If Vedanta does it (and they do) it’s fine as their corporate governance is shady. Tata too might have done all kind of things before Chandra took over but I don’t think they have done it post his taking reins.
Not sure if my argument here makes sense.
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