Relationship between the dividends and stock performance: Is it good to add high dividend paying company in your portfolio? Decide from the detailed analysis

Mon, Oct 15, 2018 4:38 PM on Exclusive, Latest, Stock Market,

~Krishna Khatiwada

In Nepal, the practice of dividend distribution is prominent and investors' gets fascinated by the company that provides high dividends as well as issue right shares on regular basis. We often hear a suggestion that "the company "A" provides low dividend instead go with the company "B" that has a high dividend paying prospect". Are these suggestion worth applying for?

We have research on the relationship of Compound Annual Growth Rate (CAGR) with the bonus share, cash dividend, total dividend, regularity of dividend, type of dividend, total right issue and the total float of shares and cash altogether of the development bank sector, since 2012.

The company that has distributed the highest dividend in the considered period is Excel Development Bank.

EDBL: The Excel development Bank has distributed 166.12% bonus share and 8.73% cash dividend making it 174.85% in total. If we had invested in Excel development bank in 2012, then we would have earned 38.17% of annual return from it. Our investment would have grown by more than 4 times in the period of six years including the investment for the right shares. EDBL has regular dividend paying history.

MNBBL: Muktinath Bikas Bank had provided 143% bonus share and 12.18% cash dividend since 2012, making 155.18% in total. If we had invested in MNBBL in 2012 then our investment would have grown by more than 6 times with 62.44% CAGR. MNBBL has not skipped any dividend payment during the said period.

The table below shows the dividend distribution by the development bank since 2012, in descending order of total dividend.

SBBLJ: Sahayogi Vikash Bank Limited stood at 3rd position in dividend distribution from development bank sector. It has distributed a total of 147.63% dividend including 122% bonus share and 25.63% cash dividend. CAGR of SBBLJ in past 5 years is 29%.

MDB: The Miteri Development Bank stand at a 4th position when it comes to paying a dividend to its shareholders. Miteri has distributed 136% bonus share and 11% cash. If we had invested in Miteri Development Bank in 2012, then our investment would have grown by 52% annually.

The lowest dividend-paying companies are KSBBL and SKDBL.

Analysis Based on CAGR.

The table below shows the investment year, type of dividends, CAGR, etc. Arranged in the descending order of CAGR value.

(The pink color cell represents the highest value of the title, while the green cell represents the lowest value of the title)

Sahara Bikas Bank(SHBL) has outperformed all the stocks from the development bank sector with the CAGR of 116%. The company was listed in NEPSE in the year 2014 and if we had invested Rs 1 lakh in this stock in the year 2014 then we would have made Rs 21.7 lakhs by now. However, the company has a record of irregular dividend distribution. The company has not distributed dividends from the profit of 2073/2074 and 2069/2070. The company had issued the humongous right share of 400%. The Deva Bikash Bank (DBBL) is in the process to acquire SHBL.

The second best performer from the development bank sector is Mount Makalu Development bank limited (MMDBL), interestingly the company was listed in NEPSE on 2014 as well. If we had invested 1 lakhs in MMDBL in 2014, then we would have made Rs 12.7 lakhs by now with a CAGR of 89%. The company had distributed dividends only two times out of four years of its operation in NEPSE. The company had distributed dividends from the profit of 2072/73 and 2071/72. The company had issued 110% right share in the last 4 years.

The highest dividend paying company, EDBL stands at 10th position out of 29 companies in the list, with the CAGR of 38%.

The top two performer stocks from the development bank are listed in the superlative period of the NEPSE.

The worst performer from the development banks are the stocks that have listed in the year 2017. So we exclude them from the discussion as during that time market was strongly bearish. 

We have calculated the Correlation of the CAGR with, Total Bonus, Total Cash, Total Dividends, Total Right share and sum of total right issue and dividends. The result is shown below.

The correlation between the CAGR and other quantity is below 50% which means the relationship is not strong but interestingly the correlation of cash dividend is negative.

Further, we have rectified our list to the stocks that are available in 2012.

We have noticed quite interesting things from the list below.

The best performer is MNBBL with CAGR of 62%, it has a good dividend paying history and has not skipped dividends in past 5 years.

We can see from the table that only three companies have irregular dividend paying history (BHBL, KEBL, and KRBL). The KEBL stands at 13th position when it comes to dividend distribution with a total of 80%, additionally, it had issued a 136% right shares. Interestingly it has distributed only bonus shares. Despite the relatively weak dividend history, KEBL is the 4th best performer from the development bank sector since 2012.

SADBL had given the highest cash dividend of 35% and has a regular record of dividend distribution, however, SADBL is the worst performer with the CAGR of 7.71%. The company has also issued the decent amount of right shares of 105%.

The three worst performer from the development bank sector has the good dividend and right shares history.

The highest and lowest issuer of right and dividends altogether is KRBL and KBBL. Interestingly, KRBL listed in no 14 and KBBl is in no 15 which shows that both companies performance is similar, despite the huge difference in their issues.

We have calculated the Correlation.

The table above shows that there is no correlation between the right issue and CAGR. The correlation between the total bonuses is above 50 that shows the moderate relationship. Correlation between the cash dividend and CAGR is negative that shows the investors are distracted by the cash dividend.

Now we will check the performance of non-dividend paying development banks.

The banks that never paid dividends are:

  1. Corporate development bank limited (CORBL): The stock was available in 2012 and the annual CAGR of the company is -3.16%.
  2. Green Development Bank (GRDBL): The stock was available in 2016 and the CAGR of the company is -24.18%.
  3. Lumbini Bikash Bank(LLBL): The stock was available in 2017 and the CAGR of the company is -6.63%.

The amount of data we have used here is not enough but still, we can draw some conclusion

  • The bonus share is relatively attractive to the investor.
  • In recent time, there is a charm of right share issue among the investors.
  • Cash dividend paying companies' are not attractive.

We have not got any concrete relationship between these parameters but staying away from the non-dividend paying company could be a good choice and selecting a decent bonus paying stocks could be a better choice. However, we must not include or exclude stocks from our portfolio just based on the dividend distribution number.