With tough economic conditions and falling interest rates, investing in high dividend yield stocks with a consistent track record is a good strategy
The current challenging times and the sharp correction in the equity markets have led to a dramatic fall in stock valuations. However, picking a stock for investment has also become an equally difficult task, given the increasing risk as corporate performance becomes unpredictable. Little wonder then that stock markets have turned volatile and sentiment is weak. Investors have turned wary and their appetite for risk has almost vanished.
Simultaneously, interest rates have started falling and bank fixed deposits now provide a return of between 3.5 and 8 per cent annually, which suggests that returns on the so-called safer assets are diminishing.
In this scenario, the strategy to invest in high dividend yield stocks would make good sense. The Smart Investor crunched numbers of all companies listed on the BSE with a market capitalisation of over Rs 100 crore and a dividend yield of about five per cent or more. In addition, factors like growth prospects, leverage (in terms of debt-to-equity), revenue track record and cash flows were also considered to arrive at the shortlist of nine investment-worthy companies (See: Dividend Stars) .
These attributes should not only ensure dividends in future, but also indicate that there is potential for capital appreciation in the longer run. Apart from these nine companies, there are 15 more that offer high dividend yield and deserve attention. (See: Consistent Performers) Read on to know more.
Deepak Fertilisers
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Deepak Fertilisers, a major player in nitrogen-based bulk chemicals (accounts for 71 per cent of total revenues), has been a key beneficiary of consistent demand from user industries like pharmaceuticals, pesticides, textiles, fertilisers, rubber and petrochemicals. It reported a 34 per cent growth in sales and a decline of 9 per cent in net profit for Q3 FY09.
The fall in profits was on account of lower operating margins (due to higher trading volumes), a 182 per cent spurt in interest costs and a shutdown of its ammonium nitrate plant for 59 days.
Going ahead, although realisations will be lower, given the 20-40 per cent correction in chemical prices, the company should benefit from higher volumes and a simultaneous fall in raw material (phosphoric acid, etc) prices. The company is increasing its capacities of diluted nitric acid (DNA) by 50 per cent and ammonium nitrate by 45 per cent this quarter.
Besides, the enhanced availability of gas from Reliance Industries' KG Basin would prove to be a positive trigger helping in producing more volumes of methanol (FY08 capacity utilisation of 31 per cent) and fertilisers. Increased capacities, restart of plant, higher utilisation levels and, the start of revenues from real estate and power generation businesses, augur well for the company, and should ensure healthy growth in financials. At Rs 53.4, the stock is trading at 3.4 times FY09 and 3.6 times FY10 estimated earnings.
Gateway Distriparks
The decline in India's exports (down 9.9 per cent) and slowdown in imports (up just 6 per cent) during November 2008 was bound to have an impact on companies like Gateway Distriparks, which generates about 70 per cent of revenue from the container freight business.
During Q3 FY09, Gateway reported a 10 per cent decline in volumes, but its standalone revenue was higher by 30 per cent on account of higher realisations earned on ground rentals. However, these concerns of slowing foreign trade may continue for some time, but, given that the company is the largest port-based container freight player with presence in all the major ports like Mumbai, Chennai, Vizag and Cochin (20 per cent market share at Mumbai port), it should benefit whenever trade revives (likely in 12 months).
Additionally, there is cushion in the form of its recent entry into the railway container business. The income from railway business increased a robust 226 per cent in Q3 FY09 at Rs 43.8 crore on account of addition of seven new rakes taking the total capacity to 14 rakes.
The company is expanding its rakes capacity and is also investing in the cold chain business as long-term growth drivers. It has plans to acquire 22 new rakes and increase the cold chain capacity from 10,000 pallets to 25,000 pallets. The cold chain business, which is growing fast and accounts for 9 per cent of total income, holds huge potential in terms of transportation and warehousing services for the agriculture and processed foods sectors.
Gateway (is virtually debt-free) provides good long-term investment opportunity in light of the prospects of businesses it operates in, consistent growth in revenues and valuable asset base in key logistic areas. Overall, while there are some near to medium term macro economic issues, which are yet to be fully priced in, the stock is a good long term investment and can be considered at dips. The stock is trading at 7.5 times FY09 and 8.5 times FY10 estimated earnings.
LIC Housing Finance
Among the leading housing finance players in the country, LIC Housing provides loans for homes as well as construction activities. In FY07 and FY08, LIC Housing has grown at robust rates; consolidated net income and profit have risen by an average 30 per cent and 37.5 per cent, respectively. Even for the nine months ended December 2008, net income and net profit was up 36 per cent and 39 per cent, respectively. Notably, the company’s net interest margins (NIMs) have been healthy and ranged between 2.6 per cent and 3.3 per cent in the last six quarters. Likewise, while asset quality has also been improving (net non-performing loans declined to just 0.7 per cent in Q3 FY09 from 0.9 per cent in Q2 FY09 and 1.6 per cent in Q3FY08), provision coverage is reasonable at over 50 per cent.
The improvement in performance (since FY07) is largely due to the internal restructuring the company undertook, including strengthening its risk management and loan recovery systems.
| DIVIDEND STARS | |||||||||||||||
| In Rs crore | Period ending | Net Sales | TTM | Price (Rs) | PE (x) | Dividend Yield (%) | Debt-Eq (x) | RoCE (%) | Dividend in % in last 3 yrs | ||||||
| % Chg | PBIDT | % Chg | PAT | % Chg | Year1 $ | Year2 | Year3 | ||||||||
| Deepak Fert | 200812 | 1,396.0 | 51.3 | 298.0 | 48.1 | 140.0 | 45.3 | 52.0 | 3.2 | 6.7 | 0.5 | 16.7 | 35.0 | 30.0 | 30.0 |
| Gateway Distpark | 200812 | 295.0 | 27.4 | 136.0 | 16.4 | 91.0 | 17.8 | 72.0 | 8.1 | 4.9 | - | 13.8 | 35.0 | 35.0 | 30.0 |
| LIC Housing Fin * | 200812 | 2,664.0 | 35.5 | 2,572.0 | 39.0 | 492.0 | 37.4 | 206.0 | 1.0 | 4.8 | NA | 22.9 | 100.0 | 80.0 | 60.0 |
| Opto Circuits(I) | 200809 | 642.0 | 74.9 | 215.0 | 79.3 | 172.0 | 62.3 | 87.0 | 10.2 | 5.8 | 0.3 | 38.6 | 51.0 | 50.0 | 46.0 |
| Paper Products | 200809 | 661.0 | 21.5 | 65.0 | 8.6 | 27.0 | -0.6 | 27.0 | 6.7 | 6.6 | 0.2 | 12.8 | 90.0 | 90.0 | 70.0 |
| Pfizer | 200808 | 697.0 | 1.5 | 422.0 | -6.9 | 291.0 | -12.9 | 515.0 | 11.2 | 5.3 | - | 37.2 | 275.0 | 225.0 | 100.0 |
| Savita Chemicals | 200809 | 1,061.0 | 24.2 | 109.0 | 33.1 | 62.0 | 20.1 | 137.0 | 3.2 | 8.4 | 0.2 | 31.8 | 115.0 | 90.0 | 125.0 |
| Thermax | 200809 | 3,344.0 | 17.3 | 453.0 | 12.5 | 271.0 | 8.4 | 154.0 | 6.7 | 5.2 | - | 66.4 | 400.0 | 300.0 | 170.0 |
| Varun Ship. Co. | 200809 | 1,000.0 | 12.5 | 471.0 | -18.2 | 107.0 | -58.4 | 42.0 | 6.1 | 11.9 | 2.4 | 13.1 | 50.0 | 45.0 | 45.0 |
| PAT= Report Profit After Tax (not adjusted for extra-ordinary items), TTM= Trailing 12 months; %Chg is over corresponding previous TTM, * PE represents Price-to-Book Value RoCE (%) is return on capital employed: * for Corp Bank and LIC Housing it is return on networth, Price, PE & Dividend yield is as on 23-January-2009 PBIDT=Profit before interest, depreciation and tax, Debt-Equity and RoCE is for latest audited year available, $= Latest audited year | |||||||||||||||
| CONSISTENT PERFORMERS | |||||||||||||||
| In Rs crore | Period ending | Net Sales | TTM | ||||||||||||
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