In the previous article, we had discussed using Infosys (NASDAQ:INFY) within a framework through which one could achieve returns entirely from dividends. In this article, we shall analyze the dividend track record of another software giant, Wipro (NYSE:WIT) through the same framework.
Wipro is India's third-largest software services exporter and has diversified business interests which include software development, hardware and consumer care and lighting. The company began its swift transformation from a predominantly hardware company to a software services company in FY99. Since then, the contribution of Wipro Technologies, Wipro's IT services business, has been consistently on the rise and has been the major driver of revenue and profit growth.
Wipro had been continuously paying dividends during the last 18 years. It managed to grow its dividend per share at a CAGR of 16% between the period FY91 and FY08. During the same period its earnings per share grew at a CAGR of 12%. If we look at the dividend payout ratio, there seems to be lot of inconsistency. This was mainly on account of the company’s string of pearls strategy wherein it executed many acquisitions. Thus between the period FY96 and FY03, a great deal of cash was diverted towards acquisitions, leaving little for paying dividends. Despite this, the average dividend payout ratio stood at 20% between FY91 and FY08. Given this track record, we believe that there is very little chance that the company will stop paying dividends to its shareholders in the near future.
It should be also noted that the company has issued bonus shares five times and has also paid a special dividend during the last 18 years. This further reiterates our belief with regard to the management’s intentions of rewarding its shareholders.
At its current price, Wipro's dividend yield is around 3%. Assuming that the company continues to grow its dividend per share at around 15%, the investor would be able to get a 10% return annually on his original investment from the ninth year of ownership onwards. This can be backed by the fact that Wipro has minimal capital expenditure. Moreover the company had a cash balance of around Rs 40bn at the end of December 2008.
Conclusion: Despite the low current yield, the company’s strong cash reserves and sustained growth are likely to make Wipro a dividend earnings source for long term investors. In fact, it is likely to become a dividend tortoise, slowly and steadily racing towards the 10% mark. However, investors should bear in mind that the desired returns can be achieved only if one stays invested in the company with a long term perspective. Also, it is important that management policies and environment in which the company operates remain unchanged - highly unlikely over the long haul.