More bang for the buck? Why big dividend payers are not attractive

NMDC, Hindustan Zinc, CIL, and Indiabulls Housing offer dividend yields more than the 10-year G-Sec

Many stocks have started to appear attractive on dividend yield, following a sharp correction in the past eight weeks. This yield is the dividend per share paid by a company during a financial year as a percentage of share price.

The average dividend yield for the top-50 dividend paying companies in the BSE 500 index has improved to around four per cent, based on the dividend declared for 2015-16. The yield around the same time last year for this set was around three per cent (on their 2014-15 payout).

Narrowing spreads between dividend and bond yields makes the case for high-dividend companies more compelling. The yield on the benchmark 10-year government securities (G-sec) has declined from its 2016 peak of seven per cent to 6.5 per cent. Bond yields and their prices move in opposite directions.

 

Interestingly, five companies now offer dividend yields more than the 10-year G-Sec yield. NMDC, Coal India and Hindustan Zinc offer 11.2 per cent, 10.5 per cent and 9.5 per cent, respectively. In other words, Rs 100 invested in the 10-year G-sec paper will earn Rs 6.5 but an equal amount invested in shares of Hindustan Zinc will earn Rs 10.5 in dividends. This is assuming the current price of the stock, and that the dividend is maintained at FY16 levels.

So, are investors better off investing in these five stocks? The answer, surprisingly, is no.

An analysis of the financials of these five companies for the past few years shows that the higher dividends are on the back of an increase in payouts and not due to any improvement in earnings. We take a closer look at the five companies with exceptionally high dividend yields:  

NMDC

The state-owned miner offers the best dividend yield in the BSE 500 universe. However, its dividend payout increased to nearly 150 per cent in 2015-16 from an average payout of around 60 per cent in the previous years. Dividend payout ratio is calculated as a dividend paid divided by a net profit in an accounting year. The company paid Rs 4,361 crore in dividends in 2015-16 as compared to its consolidated net profit of Rs 2,933 crore for that financial year. In the first half of 2016-17, NMDC’s profits were down 20 per cent. Therefore, a high dividend payout in this financial year looks challenging, unless the company again digs into its reserves.

Hindustan Zinc

The Vedanta group company made it to the top dividend yield list, thanks to the hefty Rs 24 per share (1,200 per cent) it paid in 2015-16. Its dividend payout for 2015-16 was 144 per cent as against its usual payout of around 21-22 per cent in the previous two years. Its profits, too, are down 30 per cent (after adjusting for extraordinary items) in the first half of this financial year.

Coal India

The coal miner has consistently paid out its entire profits as dividends in the past few financial years. However, profits were down 34 per cent in the first half of 2016-17. If Coal India has to match dividends paid in the last few years, the payout will have to be more than 100 per cent.

Indiabulls Housing Finance

The stock appears most attractive in this pack of five. The private sector mortgage lender has increased its payout to 90 per cent from an average 55 per cent in the past three financial years. It has shown an impressive 20 per cent growth in profits in the first half of 2016-17.

REC

Rural Electrification Corporation (REC), the power project finance is a relatively attractive bet. Its payout in 2015-16 was 32 per cent compared to around 20 per cent in the past. However, profits stayed flat in the first half of 2016-17. On valuation, too, the stock is reasonably priced, at the adjusted book value for 2017-18.