In this week's FinMail we are going to take a look at an unusual incident that happened, probably for the first time - A 19480% dividend on a share. We will simplify the story for you, and also discuss should you grab this quick money minting opportunity?
Majesco Ltd on 15th December announced that it is going to give an interim dividend of ₹974/- per equity share to its shareholders. This huge dividend - almost 19500% of its face value of ₹5 per share comes from the fact that the company sold its complete stake (74%) in its subsidiary Majesco Ltd. USA for $421 Million.
The sale deal happened in July and the company was looking for options to distribute the sale proceeds of the deal to the real owners of the company i.e. shareholders and thus this dividend. And hence here it is to be noted that, this dividend is not from the operating profits but from the sale of the company's major business part (The US business of Majesco accounted for 99% of the total business). Post this deal, the company now only has its Indian Business and a real estate property. The record date of the dividend is set on 25th December 2020 and the ex-dividend date is set on 23rd December. Before we understand these terms, let us quickly look at what is a dividend?
What is a dividend?
Let's assume you are the owner of a business. A business can make profits in some years and in some years it can make fewer profits or even losses. As an owner, you have two options on how to use the profit:
1) You can take the profit to your home i.e distribution.
2) You can invest the profit to grow the business further.
In the same way, if you hold equity shares, you are a part-owner of the company. And when the company you own makes a profit, it does two of these things,
It will invest back in the company and/or will distribute the profits to the owners.
And when the company distributes profit to its owners, it is called a Dividend.
The record date is the date on which the company that has declared the dividend, will open up their books to check who owns how many shares of the company to start the dividend distribution process.
The ex-dividend date is the date before which you need to own the share to be eligible for the dividend.
So as the ex-dividend date of Majesco Ltd. is 23 Dec 2020, that means for you to be eligible for receiving the mega dividend of 974, you need to own the shares before 23 Dec. The price of one share of Majesco closed at 973.8 (NSE) on Friday.
Money Minting Opportunity?
Now you might be thinking, what if I buy the shares of Majesco Ltd. before 23rd December to be eligible for a dividend of ₹974 and then sell it again to receive 2x of my money within 5-10 days. This is really going to be 10 Din Me Paisa Double. But is it?
Well, not exactly. And if you really believed that, you could have ended in a trap. And if you already have bought the shares after the dividend declaration, SELL ASAP.
Thanks to us, you are now safe from being doomed ;)
Why it is a trap?
Let's not acknowledge for a minute that it is a trap. So if it was not a trap, people would be going gaga over the share. And because the demand would be high, obviously the share price would have also jumped, right? But that is not the fact. The share price actually dropped after the declaration of the dividend and in the past 2 sessions, it reached nearly the same as the dividend price of ₹974.
Why did it happen?
We can think of two possible reasons:
1. People's willingness to pay a price for a company's share.
Let us understand this factor with a simple example:
Assuming you are a baker and you want to buy an oven for your store. The price for an oven that you are willing to pay would be equal to or near to the value, you're planning to generate from it. So if you think you can sell more, you will buy a larger oven at a bigger price and vice versa. Thus, the willingness to pay for the oven is derived from the future value to be received from it.
The same goes for stock prices. The quoted price of any stock is the price that people are paying to own it. However, the prices largely depend on the demand and supply of the stock. If more people are willing to buy at a certain price and fewer people are willing to sell, prices will rise and if more people are willing to sell and few are ready to buy, the price will fall. It is because generally, the buyer of a share is ready to pay a price which is determined by considering the future expected dividends and profit from the sale of the share or as we understood with an example above,
The current price of the share is determined by the expected future value to be received from it.
2. Dividend and its effect on the Share price.
After a company declares a dividend on its share, it encourages investors to buy the share as they are getting a guaranteed dividend, and thus generally after dividend declaration, the stock price rises. The amount of increase is generally equal to or less than the dividend amount but actual change can vary depending on market conditions. And as we discussed, those who purchase the share after the ex-dividend date, are not eligible for dividends and so, investors won't pay a higher price. Thus the share price decreases by the amount of dividend after the ex-dividend date but actual change can vary.
Going forward, these are the takeaways for the above explanation,
Buyers will pay a price for the share which is determined by the expected future value to be received from it.
After the ex-dividend date, the share price generally decreases by the amount of dividend. If the dividend is 5 and the share price is 100, after the ex-dividend date, the share price will fall to 95.
Back to the Majesco story, the price is around 974 which was less before the dividend declaration, and after that, it rose to an all-time high of 1009.90 and then fell back to its current price which is 974. Now, in regards to the future value expected from the shares of Majesco, it is not more than 40. It is because the company now doesn't have a major business and amongst assets, it only has ₹103 Cr cash in hand and land as discussed earlier. So if we consider the future value that the share will provide, it is roughly ₹36 per shareholder. (₹103 crores/total number of shares)
So if we consider both these effects, the share price after 23rd December 2020 will be in the range of ₹1-40 ultimately and this is the reason why you won't be able to benefit from the profits that you thought you could earn with this deal. So in reality, the maximum profit which could be earned is ₹40 per share! But that too, before TDS deduction and taxation of the dividends. And after considering that, it might not seem a good deal to you.
Tax effects on Dividend
As per the current taxation guidelines, Dividends are taxable in the hands of the shareholder as an additional income and are taxed at your slab rate. So if you are in the 30% slab rate and you receive a dividend of ₹5000, you will have to pay ₹1500 on the tax excluding cess. Also if your dividend amount is above ₹5000, it will be subject to a 7.5% TDS. So even if you don't have any taxable income, you will receive your dividend after deducting 7.5% TDS and you will need to claim it by filing your taxes.
Doesn't seem a good deal now, eh?
What should you do then?
You should not consider buying those shares just for the sake of claiming the dividend. It is only worth a profit of up to ₹40 per share and that too if you're income tax exempt. If you have already purchased the shares, you should consider selling the shares and not claiming the dividend. Because capital gains will be taxed at a maximum of 15% and dividends at a max of 30%.
Seeing a huge profit blinds our eyes and we don't see what is the catch behind that and we often end up losing our own money and regret doing that.
But don't worry we got you covered!
That is it for this week's FinMail and we will see you next week.
Things we learned from this week's Newsletter:
What is a Dividend?
Dividend's Effect on Share Price
How are Share Prices determined fundamentally?
Taxation of Dividend Income.