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Retained Earnings V/S Dividends?

Team MoneyWorks4Me May 27,2009 2263 2 min read

Which one do you choose? A company that declares dividend or a company that retains the profit???

This is always a tricky question & there are always different views on this topic.

Let’s see what they are:

The general perception people have is that by not paying dividends or not increasing the dividend policy the company is doing no good for the investors. This may or may not be true.

The good side about retaining the money is that the company may be investing the money in a fruitful project which may give you better returns a little later. The company may have intentions of launching a new product/service or building a new plant or probably is going in for expansion.

And the bad side?? There a few cases when a company does not benefit from the retained earnings. When does that happen?

When the management piles up cash far beyond its present or short term needs.
The next is when the management has been getting a sub standard return on its capital and uses the retained earnings to enlarge the effect.
Also, when there has been a fraud in the accounting method followed, the retained earnings prove to be of no benefit.
In some cases the retained earnings may be needed but they are of no use to the investor. In cases where the retained earnings is a necessity but in no way increases the operational efficiency. For example: A large retail mall investing in a central air conditioning system. It requires a large investment but it does result largely in an increase in sales.

Hence, the only way you can take a call on whether dividends are better or retained earnings is by checking the difference in the benefit of both. This analysis & decision is very company specific.

Now, how will you figure out the difference in the benefit of both?

A company retaining its earnings can be checked by looking at its ROE & ROIC. If the return gained on the retained earnings is higher than the dividend it would have declared you are obviously at a benefit. When the company declares dividend how do you check your benefit? Find out if the company has any growth & expansion plans. If not, then why? If yes then probably the company did not need more of the retained earnings to implement the growth plans. Check what kind of plans are those and why the company did not need more of the retained earnings to implement the growth plans. Whether it is due to the nature of the industry or is it because of the size of the company.

Hence, don’t jump to conclusions regarding a company’s dividend policies. Study the company properly, its objectives & its plans.

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Team MoneyWorks4Me

A team of business leaders, equity research analysts & investment counsellors. Started in 2008; experienced in equity research, financial planning and portfolio management. Passionate about providing institutional quality research and advice to Retail Investors in a simple easy-to-understand-and-act manner.

SEBI Registered: Investment Adviser - INA000013323

Name of the IA registered with SEBI:	The Alchemists Ark Pvt. Ltd.
Logo:
Trade/Brand Name of IA:	MoneyWorks4Me Investment Advisers
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SEBI Registration Number:	INA000013323 Validity - May 16, 2019 - Perpetual
Registration:	Non-Individual
BSE Enlistment No:	1187
Address:	B-101, Signet Corner Building, Balewadi Phata, Baner, Pune, Maharashtra 411045
Compliance officer Details:	Name: Shrikant Jagtap Email: shrikant.jagtap@moneyworks4me.com Telephone: +919860359463 Address: Same as IA
Grievance Officer Details:	Name: Mukta Vaze Email: mukta.vaze@moneyworks4me.com Telephone: +91 98609 19463 Address: Same as IA
Principal Officer Details:	Name: Atharva Bhide Email: atharva.bhide@moneyworks4me.com Telephone: +91 91758 99463 Address: Same as IA
Standard Warning:	Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
Disclaimer:	Registration granted by SEBI, enlistment with exchange and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Warning: Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Disclaimer: Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provides any assurance of returns to investors.

Compliance Officer:

Name: Shrikant Jagtap

Email: shrikant.jagtap@moneyworks4me.com

Mobile No: +91 97638 00745

Grievance Officer:

Name: Mukta Vaze

Email: mukta.vaze@moneyworks4me.com

Mobile No:+91 98609 19463

Principal Officer:

Name: Atharva Bhide

Email: atharva.bhide@moneyworks4me.com

Mobile No:+91 91758 99463

SEBI regional/local office address -

Plot No. C 4-A , G Block, Near Bank of India, Bandra Kurla Complex, Bandra East, Mumbai, Maharashtra 400051

Address:

The Alchemists Ark Pvt. Ltd., B-101, Signet Corner Building, Balewadi Phata, Baner, Pune, Maharashtra 411045

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*Number is average 3 year rolling returns

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