Valuations, dividend yields draw investors to PSU counters

Dividend payouts from PSUs increased 80% in the last four years

With the government likely to announce special dividends from cash-rich public sector undertakings (PSUs), investors are again focusing on these entities. In the past three months, the BSE PSU index surged 16.8 per cent, compared with the Sensex’s 12.5 per cent rise.

A combination of steady dividend increases and attractive valuations is the primary reason behind investors’ newfound appetite for PSUs. Through the past five years, PSUs have been seeing steady increase in dividend payouts, despite the slacking economy. Last financial year, PSUs paid Rs 49,585 crore as dividend to shareholders, 80 per cent more than the Rs 27,469 crore in 2008-09.

Vikas Gupta, executive vice-president, Arthveda Fund Management, says, “We have been bullish on PSU stocks for some time, as many of these are heavily undervalued and sitting on piles of cash. The government is likely to give additional dividend. Not all of it will be distributed but it will certainly drive the dividend yields of a few companies even higher.”

Rajat Rajgharia, head of research, Motilal Oswal, says, “We have been positive on PSUs but investors have not made money in the last many years. There are many good PSUs, with good businesses and attractive valuations, but lack of clarity on policies is affecting those.”

Therefore, experts feel investors will have to wait longer for sizable returns. “There’s room for re-rating but it’s a patient game,” Rajgharia says.

Says Gupta: “Investing in PSU stocks is a no-brainer, at least for many zero-debt companies. Investors can get a steady cash flow from dividends which, net of taxes, can be better than fixed deposits.”

On Power Grid Corporation’s recent follow-on offering, Gupta says, “It’s good the issue was oversubscribed, but it was also an arbitrage opportunity. It’s not only a good sign for PSUs but equities in general.”