We believe that the track-record of dividend-payment by companies has an insignificant influence on their stock-price performance, irrespective of bull/bear markets. As per our analysis, companies that do not have such track records outperformed in nine of the past 13 years.
However, the trend has slightly changed in recent years
• Companies with such track records have outperformed for the past three years, albeit marginally. Also, this trend is not significantly impacted by the bull/bear markets
• Companies with track records have outperformed for two of the seven years, when markets saw a significant positive movement, and also outperformed for two of the three years, when markets saw a significant downward movement.
The objective
Our key question was: Does a significant dividend-paying track record guarantee outperformance of a company? To resolve this, we analysed past years’ dividend data of key companies to estimate stock-market performances of the ones that have extensive dividend track records.
The methodology
We opted for current constituents of the BSE-100 as our universe for the analysis. We classified this universe into two sets of companies – those with dividend-paying track records and those without. Further on, we measured stock price performances of companies in both sets over various time spans, 1996 onward to date. Also, we define a dividend-paying track record as one where dividends have been consistently paid by companies over the past eight years.
Conclusion #1 – Divided track record does not matter
Companies without the eight-year dividend-paying track record have outperformed over 12 months for nine of the past 13 years (Table 1). Between 1996 and ’06, such companies outperformed for nine of the ten years. The trend has slightly changed in the recent past, with companies with a dividend-paying track record seeing outperformance in the past three years, albeit marginally.
So why has the trend changed? We believe investors now see equal opportunity in nascent sectors that promise high growth as well as in more mature companies that will still benefit by the huge opportunity from attractive domestic growth and India’s infrastructure requirements. On the other hand, in the late 1990s, there was a shift in preference from the so-called “old-economy” names to those perceived to be in nascent, high-growth sectors, including technology, telecom and private sector banking.
Conclusion #2 – Trend not impacted by bull/bear markets
We do not see any trend, which has been specific to a bull/bear market since the past 13 years. For example, there have been seven years in the past 13, where markets have witnessed significant positive returns (Chart 1). Companies with dividend-paying track records outperformed in two of these seven years. Similarly, companies without such a track record outperformed for one of the three years, where stock markets saw significant negative returns.
Generally, it is believed that investors favour companies with a dividend-paying track record during a bearish market environment. However, such companies outperformed only marginally in ’08, when the Sensex more than halved. This set of companies outperformed the bull market of ’07, when the Sensex spiked up around 50%; this set has also outperformed year-to-date (YTD), as the Sensex has soared over 50%.
No single company has significantly driven outperformance in the past few years Historically, while stocks such as Infosys and ICICI Bank have considerably influenced performance for their respective set of companies, this has not been the case since the past three years, with no single company contributing over 20% to the overall performance.
The authors are with ICICI Securities
