Arjun pointed me to this article: 9000% Dividend by Tamilnad Mercantile Bank.
Hold your breath shareholders! Tamilnad Mercantile Bank (TMB) has declared an interim dividend of 9,000 per cent. Yes, you read it right.
That’s actually Rs 900 per share of Rs 10 each, for the fiscal ending March 2014.
The board of this Tuticorin-headquartered bank took a decision to this effect at a meeting held on January 18.
Bank sources said this would translate into an outgo of Rs 25.6 crore (unchanged from last year).
While this sounds good, remember that the 9000% is based on the face value of the share, which in today’s world has no meaning.
Assume I create a company with Rs. 100,000. I issue 10,000 shares at “face value” of Rs. 10 each. I have ten shareholders, each of whom own 1,000 shares.
Now we grow the company, organically, so that it becomes a massive company with over 50 crores in profits. We now have, after taxes paid, Rs. 80 crores in the bank.
We decide to issue Rs. 20 crores as dividend. How much is that?
As a percentage of my cash balance it’s 25%. As a percentage of my profit, it’s 40%.
Now the face value of the share is still Rs. 10, and the number of shares is still 10,000. So on a “per share” basis, the dividend is Rs. 20 crores / 10,000 shares = Rs. 20,000 per share.
As a percentage of the face value, that is 20,00,000 % (2 million percent)!
That’s why the face value is bullshit.
Dividend Yields should be a percentage of the share price.
If my hypothetical company were trading at a P/E of say 20, then the company would be valued at (50 cr. profit x 20 P/E)=1,000 cr.
If there were only 10,000 shares issued, then the price per share would be Rs. 10,00,000 (10 lakh, or Rs. 1 million).
As a percentage of that price, the Rs. 20,000 per share is just 2%!
The dividend yield matters only as a percentage of the share price, not the face value. In fact, in the TMB article (TMB isn’t traded):
Bank sources said TMB’s shares continue to trade at between Rs 60,000 and Rs 65,000 a share in the informal market.
That brings the Rs. 900 per share to be a less dramatic 1.5% yield.
The “percentage of face value” dividend is misleading.
Note: When a company splits a share, the face value is reduced and the number of shares increases. If the company issues bonus shares, the face value remains the same and the number of shares increases. The per-share dividend will come down in both cases. But in a split, the “dividend as percentage of face value” will be higher than in the bonus case, even if the dividend per share is exactly the same amount! Face value is complete nonsense in today’s terms.