Citigroup and Bank of America reduced their dividend payouts a few weeks ago as the banking sector globally has suffered a setback due to loan defaults. But, Indian public sector banks (PSBs) are probably not sailing in the same boat and could, therefore, weather the storm with no or minimal cutbacks in dividends for financial year 2008-09.
PSBs seem to have already made a beginning with Bank of India and Indian Bank declaring first-time interim dividend of 30 per cent and 20 per cent respectively. Corporation Bank, which paid dividend of 105 per cent in 2007-08, has also announced an interim dividend of 45 per cent. A banking sector analyst at HDFC Securities expects that other PSBs may pay higher dividends as the government is faced with the prospects of a breach in fiscal targets and shortfall in revenues.
The 22 listed PSBs have managed to book large profits from both lending and non-lending activities, especially treasury operations, during the quarter ended December 2008.
The 22 government banks have earned a net profit of Rs 25,096 crore in the first nine months of the current fiscal and are hoping to achieve a growth in profit in the fourth quarter. For the current financial year, it is expected that dividend receipts from these PSBs would be higher.
In 2007-08, the 22 PSBs paid Rs 4,570 crore dividends at an average payout of 18.55 per cent. If these banks maintain the previous year’s payout, then this year they alone are expected to cough up about Rs 5,671 crore. A low payout ratio is preferable because it means a company has a cushion to pay dividends. The government has in the past directed public sector undertakings (PSUs) to pay between 20 per cent and 30 per cent of their net profits as dividends.
If these banks maintain their dividends and an investor buys their stocks at current prices, an annual return of 8 per cent (based only on dividend yield) is likely. At present, even money market mutual funds, short-term debt funds and one-year bank deposits offer returns in the range of 5-7 per cent, indicates a banking analyst at HDFC Securities.
| BUCKING THE TREND | |||||
| DPS (Rs)* More From This Section | Market price in Rs | 52-week price in Rs | |||
| Cl price | Div yld % | Highs | Lows | ||
| Bank of Maharashtra | 2.00 | 19.50 | 10.26 | 57.30 | 18.90 |
| Andhra Bank | 4.00 | 42.45 | 9.42 | 87.80 | 34.80 |
| Vijaya Bank | 2.00 | 21.45 | 9.32 | 57.25 | 20.50 |
| Indian Bank | 4.00 | 43.30 | 9.24 | 156.80 | 37.55 |
| Allahabad Bank | 3.50 | 39.00 | 8.97 | 98.00 | 36.85 |
| Syndicate Bank | 2.80 | 40.50 | 6.91 | 81.59 | 37.65 |
| Central Bank | 2.00 | 30.55 | 6.55 | 99.45 | 29.75 |
| Corporation Bank | 10.50 | 164.50 | 6.38 | 358.00 | 155.00 |
| St Bk of Bikaner | 10.00 | 174.45 | 5.73 | 558.99 | 168.00 |
| St Bk of Travancore | 10.00 | 185.60 | 5.39 | 565.87 | 176.10 |
| * dividend per share paid in 2007-08, dividend yield as on March 13,2009 | |||||
In a volatile market such as now, conventional wisdom suggests that one should buy stocks of companies with high a dividend yield. Dividend yield, which is dividend per share as a percentage of the market price, is a “value” measure that allows one to buy stocks that are only temporarily out of favour, or perhaps underpriced, says an analyst. Generally, the dividend yield strategy outperforms when the market bottoms out.
Banking stocks seem to be one such area that could, in the medium term, offer the dual benefit of a decent dividend yield (current income) and potential capital appreciation. The BSE Bankex has fallen 70 per cent from its high of 12,679 created in January 2008 versus the 61 per cent fall of the Sensex. Further, in the past one month, the Bankex has severely underperformed the Sensex.