InFocus

Dividend-paying stocks

Low-hanging fruits
Downside protection could be at the cost of capital appreciation and need to remain locked in a for a full year
Paper Products (PPL) declared the results for the financial year ended 31 December 2012 (CY 2012) early February 2013. It reported 14.3% decline in profit after tax (PAT) in CY 2012 over CY 2011. The company announced dividend of 130% on face value of Rs 2, which translates into dividend per share of Rs 2.6 per share. The dividend payout ratio works out to around 36.2% considering its earning per share (EPS) of Rs 7.18 for CY 2012. The leading manufacturer of flexible packaging material is known for paying dividends on a consistent basis. Over the last 10 years, it has paid dividend in the range of 50% to 150%. The dividend declared for CY 2012 would be paid sometime in May 2013 after receiving approval from shareholders in its annual general meeting to be held in due course. At the current market price of Rs 63, the dividend yield works out to little over 4%. This may sound unexciting considering the present high interest regime. However, this is certainly not on the lower side if interest rates are viewed over a longer period. Besides, dividend on equity shares is tax-free in the hands of investors. The dividend distribution tax applicable is paid by the company. The present dividend yield of PPL could be certainly alluring for investors who like to gun for dividend as a source of income. Out here investors can monitor the stock movement and try to invest at a lower price to maximize yield. In this exercise, limit orders can be used to invest at a lower price. Invariably, this strategy could offer higher yield. Another crucial advantage is the time available to invest in high yield stocks. Investors have ample time to invest in PPL. For companies whose financial year begins in April, March to mid May is the opportune time to explorer high dividend yield companies or those that can pay handsome dividends. If investors take exposure to companies post financial results are out, stocks offering reasonably higher dividend could witness a rally based on the quantum of dividend announced. For investors valuing dividend as a steady source of income, a well laid out

strategy is critical. Around 90% of listed companies close their books on 31 March every year. Further, investors can anticipate profit for the full year based on the results for the nine months and take appropriate call. This apart, generally stocks tend to witness correction once they go ex-dividend. Therefore, investing in stocks with high dividend yield ahead of annual results make sense. In fact, the market is smart and takes little time to react and tap opportunities. A rally in a stock post dividend announcement wipes out gains for investors. For investors, it is better to invest early in anticipation of dividend, between March and mid May, to earn handsome yield. It goes without saying that it is difficult to predict dividend payouts. Investors can look at the stated dividend policy of a company, which is generally part of the annual report. Also, investors should check past track record to examine if it is in sync with the dividend policy. Apart from the quantum, the payout ratio, which is basically EPS paid as dividend, can be checked. Further, investors can check the latest nine months results to get an idea about profit for the full year. This method is still not full-proof as a company could have capital investment plans that could compel it to lower the dividend payout. Besides, companies can change the dividend policy.

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High dividend yield stocks could provide downside protection. Thus, it is recommended to risk-averse investors such as senior citizens or those who are new to the equity markets. The downside protection works as follows. If a stock plunges, the dividend yield goes up. This is seen as an investment opportunity to buy the battered stock. The renewed buying helps the stock to recover on the trading floor. Interest rates offered by banks on fixed deposits can be considered as a benchmark to determine if the dividend yield is high or low. The dividend yield ratio is calculated as dividend per share (DPS) upon market price. It is expressed in percentage. A higher dividend yield means alluring investment opportunity for investors. Besides, high dividend yield stocks could have a lower beta. This means lesser quantum of volatility in comparison with the market. It is better to take into consideration dividend paid per share (adjusted for stocksplit) while determining dividend yield instead of dividend percentage. This is because investors could assume face value to be Rs 10, which would not be the case. It is better to take into consideration the total dividend outgo upon market capitalisation ratio for determining dividend yield. Capital Market has made an attempt to narrow down companies that could reward shareholders with high dividends. The exercise was started with 2,700 companies listed on the Bombay Stock Exchange that are fairly liquid. Companies whose latest results for the financial year ended 31 March 2012 (FY 2012) were available were only considered. Firms with market capitalisation below Rs 50 crore were removed from the database. Next, companies that had reported profit and paid dividend in all the last five financial years were selected. Companies to have reported loss in the nine months ended 31 December 2012 were removed. Further, companies reporting 75% and above profit in the nine months ended 31 December 2012 compared with the profit reported in FY 2012 were selected. The idea was to identify potential candidates that could offer high dividend yield. Moreover, this is necessary to predict the possibility of dividend payment as there is no guarantee that companies would continue with high dividend unless they achieve the level of profitability reported in the immediate previous year.

REC is among the companies offering dividend yield in excess of 3% per annum
Next, dividend yield based on dividend paid in FY 2012 was determined. Firms with dividend yield greater than 3% were selected. At the end, there were 70 companies (see table: Time to sow). Investors could monitor the stocks on the list regularly, taking exposure on correction or at target price. This could improve chances of getting higher yield. Importantly, monitoring price levels is critical to spot the right opportunities as these could be short-lived. Consider Jagran Prakashan to understand the methodology. The company reported PAT of Rs 178.3 crore in FY 2012 and Rs 191 crore in the nine months ended 31 December 2012. Thus, the probability of the company maintaining the dividend paid in FY 2012 is on the higher side. This is provided the company does not have any other pressing needs or capital expenditure that could compel it to reduce the quantum of dividend. Jagran paid dividend at the rate of 175% on face value of Rs 2 (dividend per share of Rs 3.5). At the current market price of Rs 97.7, its dividend yield works out to 3.6%. Bank of Maharashtra has exceeded PAT reported in FY 2012 in the nine months itself and also offers decent dividend yield. At the current market price of Rs 53.4, its yield works out to 4.1%.The possibility of companies that have already achieved the profit level of FY 2012 in the first nine months of FY 2013 of paying improved dividend is reasonably on the higher side. Large-cap companies offering dividend yield in excess of 3% include Coal India (3.1%), Oil India (3.4%), Rural Electrification Corporation (3.1%) and Union Bank (3.5%). Among mid-cap stocks, SJVN, Indiabulls Financials, Bank of Maharashtra, Tata Investment Corporation, and Dewan Housing are offering dividend yield in excess of 4%. The large-cap category is defined as companies with market capitalisation over Rs 10000 crore and midcaps with market capitalisation between Rs 1000 crore and Rs 10000 crore. There are certain risks attached with this strategy. First, the shortlist is based on anticipation that as the companies have already achieved 75% or more PAT recorded in FY 2012 in the nine months of the current financial year their chances of declaring the same or higher quantum of dividend as in the previous year are good. This could prove wrong. The last quarter could be challenging for these companies and some of them could report poor results. Further, a firm may not reward its shareholders simply because it has earned handsome profit as it could have other priorities and concerns as well. Likewise, companies that are in midst of capacity expansion could skip dividend to conserve cash. The challenging business environment could compel firms to lower dividend payouts. Investors should scan the dividend policy of companies over three to five years to form a view. Another problem is that several companies paying decent quantum of dividend do it in an intelligent way: they pay interim dividends on periodic basis. The first advantage is dividend is not a one-time drain

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InFocus
on the cash flows of such firms. Second, it also helps to have a loyal shareholder base that dislikes portfolio churning. If investors are looking for quick bucks in the form of dividend or capital gain based on the rally witnessed post announcement of dividend, companies paying interim dividends are of no use. In such cases, dividend yield could be illusionary. Investors have to remain invested for one complete year to receive the full quantum of expected dividend. In FY 2012, Indiabulls Financial Services paid a dividend of 650% on face value of Rs 2, that is, dividend per share of Rs 13. Its dividend yield at 4.9% is certainly on the higher side. However, out of Rs 13, it paid Rs 6 as interim dividend. Thus, investors need to stay invested in the company throughout the financial year to earn higher dividend. Dividend paid between two general body meetings of shareholders is termed as interim dividend. Ideally, investors should remove exceptional and extraordinary profit while determining profit. Companies may or may not pay dividend based on extraordinary profit. Besides, investors should focus on regular dividends or normalised dividend payouts while calculating divided yields. This is because special dividends paid on occasions such as anniversaries or higher dividend paid on windfall gains could inflate the dividend yield of the intermediate years. Considering the fact that many smalland mid-size companies have emerged as offering high dividend yield, investors need to exercise caution. They have to put emphasis on the financial track record of these companies. Companies with high dividend yields could have limited opportunities to grow their business. Thus, such companies may prefer to dole out cash. Such stocks could be slow movers as well. Whats the point in investing in a stagnant business for sake of high dividends? In such cases, scope for capital appreciation could be very limited. Equities is about taking risk and benefiting out of the same. Growth potential and high dividend yield could be a winning combination for risk-averse investors. S Khedekar

Time to sow
Stocks with dividend yield greater than 3% COMPANY NETWORTH DEBT EQUITY (Rs cr) RATIO
0.0 5.8 0.0 0.2 3.7 0.0 0.0 0.0 0.6 0.0 0.0 0.0 1.9 0.7 0.0 0.3 1.4 0.1 1.7 0.2 0.0 6.9 0.0 0.1 0.4

PAT (Rs cr)

DIVIDEND (%) (Rs cr)

100.0 400.0 75.0 80.0 9.4 650.0 38.0 30.0 22.0 175.0 145.0 180.0 210.0 19.0 91.0 25.0 200.0 280.0 140.0 150.0 50.0 150.0 81.0 45.0 130.0 75.0 75.0 6316.4 1142.2 740.6 440.4 388.8 405.0 228.7 105.1 129.7 110.7 101.5 90.0 115.7 79.1 106.1 37.8 34.5 45.6 29.9 30.8 49.5 21.9 28.8 24.2 16.1 17.1 31.2

RONW (%)
40.1 20.8 20.6 14.3 14.2 20.8 17.9 20.7 11.3 24.4 18.6 13.9 9.1 7.6 17.7 8.4 13.2 20.9 16.7 14.1 15.5 16.3 10.2 12.3 31.2 5.2 35.2

CURRENT MKT PRICE (Rs)

317.0 547.4 236.0 228.4 20.0 263.1 121.7 93.8 53.4 97.7 429.6 546.6 435.9 56.1 174.6 72.1 582.6 598.3 45.3 458.8 9.6 494.0 36.9 119.1 431.0 22.2 21.7

MARKET CAP (Rs cr)

200197.0 32905.9 23299.1 12571.8 8273.2 8220.3 7325.7 3283.6 3148.4 3089.8 3007.2 2732.8 2401.5 2332.9 2048.4 1090.5 1005.6 974.6 951.8 942.7 919.7 721.2 653.9 641.1 535.3 507.1 453.0

52-WEEK LOW (Rs)

301.2 431.0 142.0 150.1 18.4 178.6 84.1 80.0 42.9 78.0 326.7 470.1 416.5 51.9 142.3 56.4 575.6 511.6 42.0 341.0 7.6 423.0 35.0 83.4 382.5 14.6 20.9

52-WEEK HIGH (Rs)

386.0 617.4 267.5 288.0 23.0 345.5 145.2 128.0 66.2 117.5 502.0 648.0 535.0 85.8 279.0 84.1 755.0 710.0 60.2 595.0 15.6 551.0 82.7 156.6 528.5 28.8 31.5

DY (%)
3.2 3.5 3.2 3.5 4.7 4.9 3.1 3.2 4.1 3.6 3.4 3.3 4.8 3.4 5.2 3.5 3.4 4.7 3.1 3.3 5.4 3.0 4.4 3.8 3.0 3.4 6.9

P/E

P/BV

Coal India Oil India Rural Elec.Corp. Union Bank (I) SJVN Indiabulls Fin. Syndicate Bank Dena Bank Bank of Maha Jagran Prakashan St Bk of Bikaner SBT Tata Inv.Corpn. Chambal Fert. Dewan Housing Guj Inds. Power Monsanto India Balmer Lawrie Sundram Fasten. Hinduja Ventures REI Agro Savita Oil Tech Praj Inds. GIC Housing Fin Swaraj Engines Geojit BNP IL&FS Inv Manage

40453.0 17739.5 14805.9 13133.9 7822.3 4905.5 8039.6 4291.5 3779.0 751.9 4164.9 3866.2 1920.9 1701.2 1439.5 384.4 758.5 642.4 733.8 2697.3 437.7 553.4 497.2 186.3 411.7 233.4

0.0 14788.2 3469.2 2838.7 1771.9 1068.7 998.1 1314.4 803.1 436.8 178.3 652.0 510.5 161.6 158.3 323.7 118.4 50.2 148.1 99.6 100.5 397.9 68.0 67.9 59.0 52.8 19.5 73.5

12.5 10.1 6.4 5.9 8.2 6.9 4.3 3.5 5.5 13.2 3.8 4.5 14.1 6.2 5.9 5.8 17.3 6.6 8.4 9.8 1.8 6.9 10.6 7.3 9.8 7.1 6.1

4.9 1.9 1.6 1.0 1.1 1.7 0.9 0.8 0.8 4.1 0.7 0.7 1.3 1.4 1.0 0.8 2.6 1.3 1.5 1.3 0.3 1.6 1.2 1.3 2.9 1.2 1.9

2021.5 11.3

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COMPANY NETWORTH DEBT EQUITY (Rs cr) RATIO
1.2 0.0 0.7 0.1 0.1 2.7 0.9 0.5 0.4 0.6 0.3 0.0 0.6 0.5 1.2 0.6 0.6 0.3 3.0 0.1 3.8 0.6 1.0 0.6 1.7 0.4 0.6 0.3 0.7 0.4 0.0 0.0 2.4 0.0 0.0 1.4 1.0 0.0 0.0 0.5 3.4 0.0 2.1 60.6 81.9 427.3 380.2 577.7 700.3 159.3 249.5 342.0 338.0 314.1 636.8 201.4 164.6 286.5 376.6 80.3 87.0 223.5 334.0 69.8 197.6 84.1 114.1 191.5 97.5 127.5 158.4 77.8 27.4 75.5 90.6 56.3 100.2 59.6 88.0 82.3 63.9 109.4 171.0 65.9 47.7

PAT (Rs cr)

32.8 28.4 37.0 56.0 37.1 21.1 31.1 27.0 52.8 85.6 60.6 35.3 8.8 28.5 35.0 34.3 67.7 57.1 15.5 28.9 31.6 11.5 24.2 18.9 18.6 14.2 3.8 12.5 3.6 24.3 5.2 11.4 23.9 3.9 7.1 14.1 10.6 3.6 11.1 9.5 4.5 10.0 5.1

DIVIDEND (%) Rs cr
50.0 100.0 240.0 60.0 20.0 10.0 45.0 16.0 70.0 105.0 185.0 25.0 50.0 70.0 100.0 50.0 20.0 120.0 35.0 130.0 18.0 80.0 22.0 200.0 32.0 30.0 15.0 50.0 20.0 75.0 550.0 50.0 20.0 70.0 25.0 60.0 16.0 20.0 45.0 8.0 15.0 40.0 15.0 18.8 22.2 14.4 16.0 20.2 13.5 15.8 14.7 10.6 12.6 13.8 8.1 10.9 7.9 10.8 7.9 4.7 9.4 4.4 5.9 4.1 4.2 4.1 5.2 3.2 3.5 3.6 4.4 2.6 4.0 3.2 5.0 5.5 3.4 2.4 2.5 2.1 2.1 1.8 2.1 2.6 1.7 1.7

RONW (%)
5.3 49.5 51.6 13.7 10.0 3.7 3.3 17.5 19.5 28.5 19.2 11.7 1.6 13.0 21.3 12.5 22.1 99.7 26.8 13.6 9.9 17.1 12.9 22.5 17.5 7.6 3.6 10.1 2.3 35.7 19.6 15.6 26.0 7.8 6.0 26.9 9.3 4.3 18.6 9.0 2.7 16.2 11.0

CURRENT MKT PRICE (Rs)

119.1 192.0 652.4 143.1 25.6 25.3 94.0 35.0 209.1 24.6 382.5 82.7 109.7 19.8 175.7 109.3 63.0 189.6 113.8 294.9 50.8 201.3 54.6 390.0 94.0 73.2 27.6 90.0 61.4 14.3 1290.3 72.3 52.8 148.4 75.1 40.5 50.9 59.0 141.0 20.9 27.4 120.4 22.9

MARKET CAP (Rs cr)

448.6 426.2 391.4 381.9 350.8 340.9 329.2 320.4 316.9 301.1 285.3 267.6 239.6 224.0 191.3 173.5 153.5 148.5 141.9 133.0 115.7 105.1 102.6 102.2 94.0 84.6 82.8 79.9 79.9 77.0 74.8 73.2 71.5 71.2 70.6 67.4 67.0 61.3 56.8 54.7 51.5 51.3 50.4

52-WEEK LOW (Rs)

75.2 145.0 641.0 120.1 20.5 23.6 92.0 32.4 119.0 21.0 318.0 60.6 100.0 14.0 166.1 66.1 53.2 137.8 58.2 289.0 46.0 134.7 44.5 307.0 87.1 69.1 25.1 85.0 52.0 13.1 1200.0 40.0 48.0 115.0 30.6 38.0 46.0 55.1 90.5 13.9 26.7 80.1 21.5

52-WEEK HIGH (Rs)

148.0 238.0 787.0 192.7 33.6 31.8 131.1 43.5 282.7 41.8 547.0 97.0 144.0 26.0 258.2 142.7 113.0 347.5 138.9 371.7 76.8 294.0 85.0 479.0 132.1 94.0 38.5 134.0 76.0 21.4 1619.9 123.4 76.9 188.0 107.9 63.8 74.0 79.0 164.5 35.5 64.6 148.0 35.0

DY (%)
4.2 5.2 3.7 4.2 5.8 4.0 4.8 4.6 3.3 4.2 4.8 3.0 4.6 3.5 5.7 4.6 3.1 6.3 3.1 4.4 3.5 3.9 4.0 5.1 3.4 4.1 4.4 5.6 3.3 5.2 4.3 6.9 7.7 4.7 3.3 3.7 3.1 3.4 3.2 3.8 5.0 3.3 3.3

P/E

P/BV

K P R Mill Ltd Balmer Law. Inv. Empire Inds. Mangalam Cement Kirl. Ferrous PNB Gilts Dhunseri Petro. Indrapr.Medical Everest Inds. Take Solutions Hil Ltd Nucleus Soft. Century Enka KCP Sugar &Inds. Repro India Visaka Inds. Surana Corp. Cochin Minerals Muthoot Cap.Serv Cheviot Company First Leasing Apcotex Industri Kalpena Inds. Gloster Shivam Autotech Prec. Wires (I) Accel Frontline Jocil LKP Finance Haldyn Glass Indl.& Prud.Inv. Thinksoft Global Alchemist Panasonic Carbon India Gelatine Steelcast Hitech Plast Blue Star Info. Narmada Gelatine Vijay Shan. Bui. Tantia Constr. Mazda Ram Ratna Wires

615.9

5.3 13.8 9.9 4.4 7.8 5.5 5.2 10.8 5.1 3.5 4.1 6.1 9.7 4.9 4.9 3.0 2.2 2.1 6.6 4.2 3.8 8.1 4.1 4.5 4.5 5.0 15.1 4.6 7.8 2.9 16.1 3.6 2.3 10.7 4.7 3.5 7.1 10.3 4.0 7.8 4.7 3.8 5.4

0.7 7.0 4.8 0.9 0.9 0.6 0.5 2.0 1.3 0.9 0.8 0.9 0.4 1.1 1.2 0.6 0.4 1.8 1.6 0.6 0.3 1.5 0.5 1.2 0.8 0.4 0.8 0.6 0.5 1.0 2.7 1.0 0.8 1.3 0.7 1.1 0.8 0.7 0.9 0.5 0.3 0.8 1.1

CMP (current market price) is BSE closing as on 6 March 2013. DY (%): Dividend yield is based on dividend paid in FY 2012.Consolidated financials considered wherever available. P/E (price to earning ratio) is based on trailing 12- month (TTM) profit for the period ended 31 December 2012. Net worth, debt-equity ratio, PAT, equity dividend and RONW (return on net worth) is for FY 2012. Source: Capitaline Database s

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