Hero MotoCorp or Bajaj Auto – Which is the Better Dividend Stock?

It appears that volatility is back and here to stay. The market yet again started the week on a negative note and fell over 1% today.

In times of high volatility, you need to fall back on timeless investing lessons. One of the simplest ways to tide over market volatility, and compound wealth over the long term, is by investing in dividend-paying stocks.

Last month, we wrote editorials comparing Vedanta and Nalco and comparing ITC and Coal India.

In this article, we take a look at two elite dividend-paying stocks from the automobile sector – Hero MotoCorp and Bajaj Auto.

Business Overview

Hero MotoCorp, an erstwhile JV between Honda Motor Company of Japan and Hero Cycles (owned by Munjal family) is the market leader in domestic two-wheelers with around 36% market share.

It is the world’s largest manufacturer of 2-wheelers, in terms of unit volumes sold by a single company in a calendar year, for 19 years in a row.

The company benefits from a strong dealership network and high penetration in rural areas (accounts for 45% of sales).

As the electric vehicle megatrend is catching up, Hero MotoCorp has been expanding its business towards EVs. For this, it has tied up with Ather and with HeroHatch (an internal start-up).

Bajaj Auto, the flagship company of Bajaj Group, is a two-wheeler and three-wheeler manufacturing company that exports to 79 countries across several countries in Latin America, Southeast Asia, and many more.

The Pune headquartered company is the world’s fourth-largest manufacturer of motorcycles and the largest manufacturer and seller of 3-wheelers globally.

Of the many segments it operates in, the company has a considerable market share in the mileage and sports segments of two-wheelers.

All auto majors have big plans for their EV business and Bajaj Auto is no exception. The company is focusing on the EV space by intending to house all its EV-related activities.

Dividend payout per share

Hero MotoCorp

For nearly three decades, Hero MotoCorp has been a consistent dividend payer. Starting from 1994, it has paid dividends at a growing rate in most of these years.

While the company’s stock price has underperformed at regular intervals, the healthy dividend has acted as a safety net for investors.

In 1994, Hero MotoCorp began its track record of paying consistent dividends. It paid out a dividend of ₹2.7 per share and the total payout was a mere ₹43 m.

In the latest financial year 2021-22, Hero MotoCorp paid out ₹95 per share as dividend.

Take a look at the table below to get a gist of Hero MotoCorp’s rich history of paying dividends.

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Bajaj Auto

Bajaj Auto was listed in 2008 when it was demerged from Bajaj Holdings and Investments. There hasn’t been a year post listing where Bajaj Auto has not paid dividends. The payout per share has also grown every year.

In 2008, Bajaj Auto began its track record by making a payout of ₹20 per share and the total payout was ₹2,894 m.

In the latest financial year 2021-22, Bajaj Auto paid out ₹140 per share in dividends. The payout was the same last year too.

Here’s a table showing the entire history of dividends paid by Bajaj Auto.

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If we compare both companies on dividend payout per share, it’s tough to choose one over the other.

Hero MotoCorp has kept itself ahead by declaring much higher payouts than Bajaj Auto. And over a longer duration.

The dividend payout of Hero MotoCorp saw a big jump in 2002. Since then, the company has never disappointed.

It’s the same for Bajaj Auto.

Though the company has a shorter history compared to Hero MotoCorp, it has grown the payout every year. Either the payouts have grown or have remained stable, they have never shown a de-growth.

For the past three years, the company has started to report much higher payouts which signal that big payouts could be expected in the future too. More on this later.

Here’s a table comparing the two companies on dividend payout per share.

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Dividend Yield

As interest rates rise worldwide, there is a growing concern about how it may impact various asset classes. To ride this volatile phase, people usually invest in high dividend yield stocks.

When there’s a stock market selloff, high dividend yield stocks are available at a bargain. You can invest with a huge margin of safety so when things turn around, you have the opportunity to earn high returns.

Let’s take a look at how Hero MotoCorp and Bajaj Auto compete on dividend yields.

Hero MotoCorp

Starting with a modest dividend yield of 1.3% in the financial year 1994-1995, the company’s dividend yield has increased to 5-6% over the years.

The company’s dividend yield has gone below 2% only once in 2009. In all other years, it had a dividend yield of over 2-3%. The highest yield was reported in 2003 at 9.6%.

In the financial year 2021-22, Hero MotoCorp’s dividend yield was 4.2%, taking into consideration its end-of-year (eoy) share price.

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Bajaj Auto

For Bajaj Auto, the dividend yields are somewhat similar to Hero MotoCorp. The company has maintained consistency of having yields above 2% in its entire history.

In 2020, the company reported its highest dividend yield of 5.9% as the company’s share price took a serious hit, making yields attractive.

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If we compare both companies on dividend yields, Hero MotoCorp has an advantage. While Bajaj Auto’s yields have been reasonable at over 2%, Hero MotoCorp has had several instances where it made big payouts resulting in higher yields.

The data from recent years also suggests Hero MotoCorp has had higher yields than Bajaj Auto.

Here’s a table comparing both companies on dividend yields

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Dividend Payout Ratio

The dividend payout ratio is measured by the amount of dividend a company pays in a year divided by the net profit for the year.

The market likes a payout that is high and stable or a payout that is growing.

Let’s see how both companies fare on this ratio.

Hero MotoCorp

Hero MotoCorp’s dividend payout ratio was 81.9% in the financial year 2021-22. This was also its highest in recent years. In the last 10 years, on average, Hero MotoCorp has paid out 56.7% of earnings as dividends.

The payout ratio has remained strong post the split with Honda too. Indeed, in the period FY 11-18, it has averaged at a robust 58.7%.

The following table shows the adjusted dividend paid by Hero MotoCorp to its shareholders between 2018-2022.

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Bajaj Auto

Bajaj Auto’s dividend payout ratio was 65.7% in the financial year 2021-22. The company recorded the highest payout ratio in the financial year 2020-21 at 83.4%.

In the last 10 years, on average, Bajaj Auto has paid out 50.2% of earnings as dividends.

The following table shows the adjusted dividend paid by Bajaj Auto to its shareholders between 2018-2022.

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While both companies are faring equally if we compare them on dividend payout ratio, Hero MotoCorp has averaged better.

In the past 5-year period and 10-year period, Hero MotoCorp averages a higher dividend payout than Bajaj Auto.

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Can Hero MotoCorp and Bajaj Auto continue to pay high dividends?

Dividends are only sustainable to the extent a company’s earnings are sustainable. If for some reason, earnings were to decline, the high dividends of today may count for nothing.

Also, dividend payments are highly dependent on the management policy. Therefore, even a dividend paymaster can become a dividend dud.

Let’s analyse whether Hero MotoCorp and Bajaj Auto will be able to continue their dividend-paying streak in the future.

Hero MotoCorp

If a company is unable to deploy incremental amounts of capital, it should ideally pay out whatever it is generating. Hero MotoCorp has done a good job at this as is clearly visible from its payout ratios.

After financing capex through internal accruals, the company has consistently rewarded shareholders with healthy dividends over the years.

The company has a strong balance sheet.

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A lean balance sheet, operating cash flows and its ability to grow the business with strong internal accruals have ensured a steady dividend for shareholders.

Hero MotoCorp has limited exposure to exports unlike Bajaj Auto. In the financial year 2022, exports formed 52% of the volume mix for Bajaj Auto whereas the export mix for Hero MotoCorp was only 6%.

During the pandemic, Bajaj Auto was able to cushion the blow as it had backing from exports. Hero MotoCorp on the other hand had a small presence in exports, and its sales were significantly impacted.

Similarly, if we are to see a China-Taiwan war or any possible geopolitical conflict, Bajaj Auto will be far more suited than Hero MotoCorp.

At present, Hero MotoCorp has total debt of ₹3,534.7 m against total equity of ₹158,222 m. This is negligible debt compared to equity, which is a key factor which determines dividend payout.

With the company being debt free, the reserves are likely to aid the company to continue its dividend payout.

Bajaj Auto

Despite being one of India’s leading two-wheeler manufacturers, Bajaj Auto has lost some market share in recent times. So has Hero MotoCorp.

No doubt the severe slowdown in the Indian auto industry was one reason for this. But there were a couple of other factors as well.

One is the company’s lack of presence in the scooters segment; a market that has been growing rapidly for the past few years as compared to motorcycles.

While Hero MotoCorp is rushing to cash in on the scooter phenomenon, Bajaj Auto has consciously decided to stay away from this market.

Recently, it decided to bring back its iconic scooter Chetak in EV form to gain a crucial edge in the electric two-wheeler market.

Bajaj Auto has a clean balance sheet with zero debt.

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In 2021, Bajaj Auto amended its dividend distribution policy and said it would arrive at its dividend payout ratio based on the surplus funds available with the company and that it would pay a percentage of profits after tax on the company’s standalone financials.

Prior to this, the dividend payout policy was around 50% of profits after tax.

From the looks of the balance sheet, debt levels and their capex plans, it appears both Hero MotoCorp and Bajaj Auto will be able to make big dividend payouts in the future.

Which dividend stock is better?

Despite the differences in these fundamentally strong stocks, both fare equally well when compared from a dividend perspective.

However, Hero MotoCorp has a slight advantage on the dividend yield metric and dividend payout ratio.

If we consider both companies from a growth perspective, both are taking the next big leap towards EV adoption.

In conclusion, both these companies will continue to pay higher dividends, but it will be Hero MotoCorp who will be slightly ahead.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com.