Should I buy Majesco stock?
Majesco , an insurance technology firm declared a dividend of INR 974 per share recently. This translates to an overall dividend of INR 2788.4 crore for FY20. Company’s dividend payout ratio has surged to whooping ~20,000% due to the announcement of such huge dividends. This definitely looks like a rosy picture and an opportunity to enter in the stock. However, let us discuss in this blog whether an investor should buy the stock based on this news.
Majesco’s Dividend Trap
- Company declared a massive dividend of INR 974/ share for FY20. This is mainly because in July, company sold its US arm for ~ INR 3,100 crore.
- Stock also showed a good rally in July from ~ INR 400 levels to current levels of ~INR 1000.
- Company has announced that it will distribute the proceeds from the sale among its shareholders mainly as company used to derive 99% of its revenues from the US subsidiary. To implement this, Majesco also undertook an buy back for an amount of ~INR 630 crore.
- Details of the dividend – The record date for dividend is 25th Dec’20 and the company will go ex-dividend on 23rd December’20. The payout date for dividend will be on 30th December’20.
Should I buy Majesco stock for dividend?
- Company has announced highest dividend for FY20 and it might look as a lucrative buying opportunity for some investors However there are some tax implications that we should take a look at, before deciding to buy the stock.
- According to the union budget 20-21, dividends will be taxable for shareholders according to their normal tax slabs. Along with this, 10% TDS will also be applicable on dividends.
- Looking at this, large investors especially HNIs who fall in higher tax slabs of (>30%) are exiting the stock as it would result in huge tax implications.
- Thus, despite the dividend announcement, stock price did not inch higher mainly due to the offloading by HNIs.
- Also , it is advisable for retail investors who are already invested to book profits and exit the stock as the Long Term Capital Gains (LTCG)/Short Term Capital Gains (STCG) tax would be lower as compared to the tax levied on dividends.
- Also, since company is distributing such huge dividends, it shows that it does not have any plans to grow and mostly it is on the verge of closure.
- Thus, to conclude, investors should avoid entering the stock only for dividend purpose as the taxes will eat up majority of the dividends. Also it is advisable for investors already invested in the stock to book profits at current levels and exit the stock.