Tata Consultancy Services

Tata Consultancy Services (TCS), the country’s largest software company and also the most valuable company with market capitalization of Rs 4.86 lakh crore. The stock is currently offering a dividend yield of 3.2% based on dividend of Rs 79 per share paid for the financial year ended 31 March 2015 (FY 2015). The dividend is on the higher side owing to the special dividend of Rs 40 paid last fiscal. Sans the special dividend, the dividend yield works out to mere 1.6% considering the dividend per share (DPS) of Rs 39. What is the point in investing in TCS for such pathetic dividend yield? This will be the obvious question popping up in the minds of investors.

Now if one digs a little bit deeper, what emerges is the fact that it makes tremendous sense to invest in TCS. Here is the hidden story. The software company came out with an initial public offering (IPO) in August 2004. The shares were offered at Rs 850 per share. In mere two years after listing, the company issued bonus shares. Subsequently, it again issued bonus shares in June 2009. The bonus shares were issued in the ratio of 1:1 on both these occasions.

Considering these bonus issues, the adjusted IPO price comes to Rs 212.5 per share. The dividend yield works out to 37.2% based on this price and DPS Rs 79. This means those investors who had invested in TCS at the time of IPO, the dividend yield works out to 37%. This is 4.5 times higher compared with the interest rate of around 8% currently offered on bank fixed deposits. Even if one removes the special dividend, the dividend yield based on DPS of Rs 39 will be around 18.4%. Not a bad deal at all.

In March 2005, the stock was offering a lowly dividend yield of 1.35% is based on IPO price of Rs 850 and DPS of Rs 11.5 for FY 2005. But those who had invested at that point in time must be reaping a rich harvest. TCS has been taken as an example because it is the country’s most valuable company and also trading at high absolute value or price of Rs 2483.4. Small individual investors prefer to stay away from such stocks. But what matter is quality and not quantity in the equity market.

The superior high dividend yield offered by TCS to its long-time shareholders is no less than magic. This is on account of several reasons such as long-term investment, consistent rise in turnover and profit and bonus issues. Last, and important, patience is the crucial factor. The DPS (adjusted for the bonus issue) has increased 23.4 times over the last one decade from Rs 3.38 to Rs 79. This was driven by a consistent rise in earnings per share (EPS) adjusted for bonus from Rs 15.16 in FY 2006 to Rs 101.35 in FY 2015.

With an army of 3.36 lakh employees, TCS has presence in 46 countries. The firm derives 52.7% of its revenues from North America, followed by the UK (16.4%) and the Continental Europe (10.8%). The banking, financial services and insurance (BFSI) vertical is the bread-and-butter segment, contributing 40.6% to its top line. Other key verticals include retail and distribution (13.8%), manufacturing (9.9%), telecom (8.6%) and life sciences and healthcare (6.9%).

Reacting to the second quarter results for FY 2016, TCS has taken a beating on the trading floor. However, if one takes long term view, the company has established a business empire based on a resilient business model. TCS is not the only alluring story of dividend emerging as a major source of income for the long-term investors. There are many such fascinating stories.

Taking TCS as the base case, Capital Market picked up 35 companies. First, companies to have reported profit on a consistent basis over the last one decade were selected. Second, and importantly, firms that have paid dividend in each of the last 10 years were picked. Third, to ensure reasonable returns on invested shareholders’ capital, companies reporting return on equity or return on net worth of minimum of 10% were short listed.

Also, companies issuing bonus shares at least once in the last 10 years were only considered. Last, those to have reported capital appreciation over the last five years were assembled. This condition was applied to ensure that the market had adequately appreciated the consistency in profit and dividend.

Of these 35 companies, 21 are large caps, 12 mid caps and the remaining two small caps. Large-cap companies are defined as those with market capitalization of over Rs 10000 crore. Companies with market cap between Rs 1000 crore and Rs 10000 crore are classified as mid caps and firms with market value below Rs 1000 crore as small caps.

If investors manage to pick small- and mid-cap companies with a scalable business model and fairly good track record of profit and dividends, it would be icing on the cake. This is because such companies can deliver higher capital appreciation over the medium to long term. .