Buying stocks that provide high dividend yield is an investment strategy that has worked well for many years. It will work well even now – when stocks have taken a heavy beating.
“It is a good time to buy dividend stocks but it should be an approach of basket buying. One should select companies with say, 4-5% dividend yield,” says Raamdeo Agrawal, joint managing director, Motilal Oswal.
Agrawal adds that even if there are issues about earnings growth in the near-term, one should not worry till business fundamentals are good and debt is low.
Of the listed companies on BSE, we looked at companies with dividend yield (taking into account dividend as per latest audited annual results) of over 3% and further filtered the list by considering the past track record, those with low debt and healthy return ratios.
Here are five companies with good growth visibility.
Cairn India’s prospects are improving on the back of rising crude oil prices, weak rupee and its efforts to enhance output. Its prolific oil and gas producing Rajasthan-based fields are expected to reach daily oil production of 210,000-215,000 barrels compared to 173,000 in the June 2013 quarter. To expand production and its reserve base, Cairn is investing Rs 16,000 crore over three years, of which nearly Rs 13,000 crore will be in the Rajasthan Block.
For now, analysts estimate Cairn’s production to rise by 16.5% to 54.4 million in FY14 and further to 59.1 million barrels of oil equivalent in FY15. Though FY13 is the first year in which Cairn has paid dividend, since its initial investment phase is over and it has paid its debt in full, expect cash flows to be used to drive growth and pay dividends. In April 2012, its Board approved a dividend (pay-out) policy of around 20% of annual consolidated profits. With return on equity of 19-20% and valuations at a discount to peers, there is upside for the stock given analysts’ price target range of Rs 370-443.
The stock of Coal India had corrected sharply from its 52-week high of Rs 396 to an all-time low of Rs 238.35 last week in the backdrop of government mulling options on divestment. But, expectations of a special dividend and share buyback have led a recovery to Rs 288. Operationally, the company which saw a profits growth of 17.4% in FY13 is on a sound wicket.
It has been able to raise prices for its fuel supply agreements in May end is a positive. This would take care of higher wage costs as well as improve profitability. Analysts at Morgan Stanley had estimated Coal India’s average realisations to rise by 5.3% in FY14 and by 6.4% in FY15. On the volumes front, the company plans to dispatch 492 million tonnes (MT) in FY14 compared to 465 MT in FY13. Analysts see production rising to 467 MT in FY14 (452 MT in FY13). However, volumes are seen rising at faster pace moving forward.
Analysts at HSBC believe post a moderate 3% increase in volumes in FY14, growth in volumes will pick up to 5.2% in FY15-16. The company has committed to increase production to 615 MT in FY17 (8% CAGR). Analysts at HSBC conservatively forecast production of 554 MT in FY17 (5.2% CAGR). Thus, profits are expected to grow 11% CAGR over FY15 & 16.
Despite the power sector facing several problems, NTPC is in a better position considering that its 41,184mw of projects is generating over Rs 15,000 crore of operating cash annually. A large part of this growing cash is redeployed in upcoming projects, and thus, is aiding growth. “We expect that over FY12-14, commercial capacity would grow at 8% annually, which would drive regulatory equity block growth of 14% annually,” says V Balasubramaniam, who tracks NTPC at Citi Research.
The growing equity base and a regulated return on equity of 14-16% will ensure that cash generation remains strong and NTPC pays more dividends. As against the per share dividend of Rs 3.5 in 2008, NTPC paid Rs 5.75 for FY13. And, the yield will only improve on the back of higher cash flows led by new capacities and improvement in existing operations on higher coal availability. Also, current low valuations of 1.1 times FY14 estimated book value indicates limited downside. With the government in the process of restructuring SEBs (NTPC’s key customers), receivables should reduce and improve cash flows further.
Paper Products (PPL) is of one of the oldest and leading packaging material provider catering largely to the FMCG companies like Nestle, Lever, Cadbury, Coca Cola, P&G, etc. It is owned by Huhtamaki Oyj of Finland. Importantly, the business is technology intensive and requires less capital. Since 1991, PPL is paying dividends regularly. From FY2001 to FY2012, it generated about Rs624 crore cash from operations, of which it paid Rs153 crore as dividends.
Recently, its share price has corrected as demand growth is down to about 4-5% as against double-digit growth in the past. But given that demand growth will improve in the medium-term, PPL’s business prospects should also look up.
Swaraj Engines, jointly promoted by M&M and Kirloskar Industries, has maintained 130% dividend payout (as in FY12) despite profit growth falling 5% in FY13. Though growth remained muted in FY13, profits have rebounded during the June’13 quarter with demand being largely driven by its largest client M&M. The company’s net profit grew 22.8 year-on-year and 20.7% sequentially in the quarter. The company has recently also expanded its installed capacity to 75,000 engines from 60,000 engines per annum to meet the strong demand, an indication of higher sales going ahead.
Other factors like its presence in all engine capacities, softening of commodity prices and dependence on agriculture industry also bodes well. These factors are expected to help drive sales growth, with margins also improving as higher capacities get increasingly utilised.
“It is a good time to buy dividend stocks but it should be an approach of basket buying. One should select companies with say, 4-5% dividend yield,” says Raamdeo Agrawal, joint managing director, Motilal Oswal.
Agrawal adds that even if there are issues about earnings growth in the near-term, one should not worry till business fundamentals are good and debt is low.
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UR Bhat, managing director, Dalton Capital Advisors, too, believes that many high dividend yielding companies are ignored by the market. However, investors should be careful in terms of choice.
Of the listed companies on BSE, we looked at companies with dividend yield (taking into account dividend as per latest audited annual results) of over 3% and further filtered the list by considering the past track record, those with low debt and healthy return ratios.
Here are five companies with good growth visibility.
Cairn India’s prospects are improving on the back of rising crude oil prices, weak rupee and its efforts to enhance output. Its prolific oil and gas producing Rajasthan-based fields are expected to reach daily oil production of 210,000-215,000 barrels compared to 173,000 in the June 2013 quarter. To expand production and its reserve base, Cairn is investing Rs 16,000 crore over three years, of which nearly Rs 13,000 crore will be in the Rajasthan Block.
For now, analysts estimate Cairn’s production to rise by 16.5% to 54.4 million in FY14 and further to 59.1 million barrels of oil equivalent in FY15. Though FY13 is the first year in which Cairn has paid dividend, since its initial investment phase is over and it has paid its debt in full, expect cash flows to be used to drive growth and pay dividends. In April 2012, its Board approved a dividend (pay-out) policy of around 20% of annual consolidated profits. With return on equity of 19-20% and valuations at a discount to peers, there is upside for the stock given analysts’ price target range of Rs 370-443.
The stock of Coal India had corrected sharply from its 52-week high of Rs 396 to an all-time low of Rs 238.35 last week in the backdrop of government mulling options on divestment. But, expectations of a special dividend and share buyback have led a recovery to Rs 288. Operationally, the company which saw a profits growth of 17.4% in FY13 is on a sound wicket.
It has been able to raise prices for its fuel supply agreements in May end is a positive. This would take care of higher wage costs as well as improve profitability. Analysts at Morgan Stanley had estimated Coal India’s average realisations to rise by 5.3% in FY14 and by 6.4% in FY15. On the volumes front, the company plans to dispatch 492 million tonnes (MT) in FY14 compared to 465 MT in FY13. Analysts see production rising to 467 MT in FY14 (452 MT in FY13). However, volumes are seen rising at faster pace moving forward.
Analysts at HSBC believe post a moderate 3% increase in volumes in FY14, growth in volumes will pick up to 5.2% in FY15-16. The company has committed to increase production to 615 MT in FY17 (8% CAGR). Analysts at HSBC conservatively forecast production of 554 MT in FY17 (5.2% CAGR). Thus, profits are expected to grow 11% CAGR over FY15 & 16.
Despite the power sector facing several problems, NTPC is in a better position considering that its 41,184mw of projects is generating over Rs 15,000 crore of operating cash annually. A large part of this growing cash is redeployed in upcoming projects, and thus, is aiding growth. “We expect that over FY12-14, commercial capacity would grow at 8% annually, which would drive regulatory equity block growth of 14% annually,” says V Balasubramaniam, who tracks NTPC at Citi Research.
The growing equity base and a regulated return on equity of 14-16% will ensure that cash generation remains strong and NTPC pays more dividends. As against the per share dividend of Rs 3.5 in 2008, NTPC paid Rs 5.75 for FY13. And, the yield will only improve on the back of higher cash flows led by new capacities and improvement in existing operations on higher coal availability. Also, current low valuations of 1.1 times FY14 estimated book value indicates limited downside. With the government in the process of restructuring SEBs (NTPC’s key customers), receivables should reduce and improve cash flows further.
Paper Products (PPL) is of one of the oldest and leading packaging material provider catering largely to the FMCG companies like Nestle, Lever, Cadbury, Coca Cola, P&G, etc. It is owned by Huhtamaki Oyj of Finland. Importantly, the business is technology intensive and requires less capital. Since 1991, PPL is paying dividends regularly. From FY2001 to FY2012, it generated about Rs624 crore cash from operations, of which it paid Rs153 crore as dividends.
Recently, its share price has corrected as demand growth is down to about 4-5% as against double-digit growth in the past. But given that demand growth will improve in the medium-term, PPL’s business prospects should also look up.
Swaraj Engines, jointly promoted by M&M and Kirloskar Industries, has maintained 130% dividend payout (as in FY12) despite profit growth falling 5% in FY13. Though growth remained muted in FY13, profits have rebounded during the June’13 quarter with demand being largely driven by its largest client M&M. The company’s net profit grew 22.8 year-on-year and 20.7% sequentially in the quarter. The company has recently also expanded its installed capacity to 75,000 engines from 60,000 engines per annum to meet the strong demand, an indication of higher sales going ahead.
Other factors like its presence in all engine capacities, softening of commodity prices and dependence on agriculture industry also bodes well. These factors are expected to help drive sales growth, with margins also improving as higher capacities get increasingly utilised.