Majesco Dividend Trap – Should I buy for Dividend?

Rs 974 dividend announced by insurance technology firm Majesco Ltd | Should you buy Majesco shares?

Should I buy Majesco stock?

Introduction

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. The company’s dividend payout ratio has surged to a 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.

Stock O Meter – A Complete Equity Research Tool by Invest Yadnya

Majesco’s Dividend Trap

Dividend Facts

• The company declared a massive dividend of INR 974/ share for FY20. This is mainly because, in July, the company sold its US arm for ~ INR 3,100 crore.
• The stock also showed a good rally in July from ~ INR 400 levels to current levels of ~INR 1000.

Majesco stock price movement

• The company has announced that it will distribute the proceeds from the sale among its shareholders mainly as the company used to derive 99% of its revenues from the US subsidiary. To implement this, Majesco also undertook a buyback for an amount of ~INR 630 crore.
• Details of the dividend stock investing – The record date for the is 25th Dec’20 and the company will go ex-dividend on 23rd December’20. The payout date for the dividend will be on 30th December’20.

Should I buy Majesco stock for dividends?

• The company has announced the highest dividend for FY20 and it might look like 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 to 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, the stock price did not inch higher mainly due to the offloading by HNIs.
• The tax levied on dividends is higher than that on long-term capital gains (LTCG)/short-term capital gains (STCG), so it is recommended for retail investors to book profits and exit the stock.
• Also, since the 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 purposes as the taxes will eat up the 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.