Price of 1 share of ITC is Rs 257 (as of 14/10/2021)

The share represents part ownership in the business (not a piece of paper or line in the demat account)

In FY2019, the share generated Rs 7.60 in cash
In FY2020, the share generated Rs 9.90 in cash
In FY2021, the share generated Rs 8.70 in cash

All the cash generated belongs to the owner of the share. It is paid out as dividend or retained in the company. Difference is:

  • Dividend is credited in the share owner’s personal bank account.
  • Retained earnings is with ITC for new investments (capital allocation is the cool-sounding term)

In FY2019, the share generated Rs 7.60 cash. 5.75 was paid out as dividend & 1.85 was retained by ITC. (7.60 – 5.75 = 1.85)

In FY2020, the share generated Rs 9.90 cash. 10.15 was paid out as dividend & 0 was retained.

In FY2021, the share generated Rs 8.70 cash. 10.75 was paid out as dividend & 0 was retained.

(In FY20 & FY21, dividend is more than cash generated. Where did the excess come from? It came from past retained earnings.)

In the 1980 letter, Warren Buffet explains “the value of those retained earnings is determined by the use to which they are put and the subsequent level of earnings produced by that usage”. Later in the 1990 letter, he calls it “forgotten-but-not-gone” earnings.

Majority in the markets are not happy with ITC’s use of the retained earnings. The perception is forgotten-and-gone, up in the smoke of a cigarette! Hence the stock price has under performed in the past 5 years.

What about the minority in the markets? They have, in Tom Russo’s words, the capacity to suffer. A necessity to win in auction-driven markets.

Disclosure: Invested since pre-Covid times.