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Bet on high-dividend stocks could pay

If such companies also grow at a steady pace, it will mean higher returns

Vishal Chhabria & Ujjval Jauhari  |  Mumbai/ New Delhi 

In a growth market like India, an investment strategy based purely on dividend yield might not seem attractive. But if companies also offer healthy growth, it could prove rewarding for investors. And, if one is able to enter the markets at an opportune time, returns would see a boost.

On timing, dividend yields tend to be lower when stock prices are high and vice versa. The stock market, which scaled to an all-time high in early March, has corrected about eight per cent since then. But, many stocks are down by a bigger margin, so that provides comfort.

If one looks at a little longer time frame, the Sensex is trading at levels seen in September 2014 or only 11.5 per cent higher than May 26, 2014, levels - the day Narendra Modi took oath as Prime Minister. Since August last year, the index has been range-bound, between 26,000 and 30,000. Experts say a market on the rise might not be a good time to look at high-dividend-yield stocks, as most investors tend to focus on growth companies, giving such stocks higher valuations.

Among the best times to consider the dividend yield investment strategy, says Ajay Bodke, head-investment strategy & advisory, Prabhudas Lilladher Private Limited, is when the market is non-trending or range-bound.

Mayuresh Joshi, vice-president, Angel Broking, says dividend yield stocks with earnings stability and growth should be a core part of one's portfolio in any market condition.

Ravi Shenoy, vice-president of mid-caps at Motilal Oswal Securities, says, "Currently, investors are looking for growth-oriented stocks in the bull market, along with dividend yield, a right strategy in a bull market. So, if growth is there, the yields will keep coming."

Interestingly, it is that time of the year when companies start taking shareholder approvals to distribute dividends for the financial year gone by.

Among prominent companies that offer a mix of both dividend and growth, beside a healthy dividend-paying record are Coal India, Deepak Fertilisers, GE Shipping, Neyveli Lignite and Oil India.

Coal India has a large cash balance and is a monopoly, growing at a steady pace. Although it has big capex plans, the company generates huge cash, leaving surplus for dividend distribution. Notably, the government has set a target to double the company's output to one billion tonnes by FY20, and is also in the process of resolving hurdles to enhance production. In recent months, Coal India has seen production grow at a faster pace. Additionally, a large chunk of output is sold below international prices. As the company gradually raises prices, it should add to profitability and faster earnings growth.

Deepak Fertilisers, which saw some impact of lower gas availability for the business in FY15, saw the chemical segment post higher revenues, cushioning the revenue in the March quarter. Analysts say the government will take measures for improved gas availability, looking at the impetus required for the fertiliser sector. Emkay Global has revised the FY16 revenue and Ebitda (earnings before interest, taxes, depreciation and amortisation) estimates higher by 14 per cent and 7 per cent, respectively, on the back of upward revisions in trading revenues for chemical and fertiliser segments. Increase in gas supplies can be another trigger. Emkay's analysts estimate the company's earnings-per-share (EPS) growth at 58 per cent and 45 per cent during FY16 and FY17, respectively.

GE Shipping gets an equal amount of revenue from shipping and offshore segments. Management vision, coupled with a favourable fleet mix and age of equipment, has helped it weather business cyclicality. In a recent report, ICICI Securities analysts said, "GE Shipping would continue its consistent performance on the back of a diversified fleet profile, while its presence in the high-margin offshore segment would mean better revenue visibility and reduce the volatility in revenues and cushion its earnings." They have a target price of Rs 405 (upside potential of 19 per cent). Though GE Shipping's FY16 earnings growth is expected to be soft, it is seen picking up in the following year.

Neyveli Lignite, the power generator, has huge lignite reserves, giving it the benefit of backward integration. With the fuel shortage in the sector, along with benefit of its forward integration and expansion of generation, the growth rates (somewhat soft in the past few years) should improve. In the March quarter, net profit grew 37 per cent. The start of commercial operations of 250-Mw of thermal power station-II, attained in April and strong lignite demand should support earnings growth and dividend payouts. Bloomberg consensus estimates peg the annual earnings growth at 16-18 per cent in FY16 and FY17.

Oil India, along with other upstream oil companies, has seen a respite in subsidy burden after reforms like diesel deregulation. Its subsidies fell 37 per cent in FY15. While the ad hoc subsidy mechanism and lack of clarity on gas prices remain a concern, analysts such as Nitin Tiwari at Religare Institutional equities say the new formula after diesel deregulation for determining the share of upstream subsidy, which the government is evaluating, can make a good difference. He estimates Oil India's EPS to rise by Rs 17 for every $10 a barrel increase in net realisation, and has a target price of Rs 685.

To sum up, if the Reserve Bank of India indeed cuts key policy rates, it would make these high dividend yield stocks even more attractive.

First Published: Sun, May 31 2015. 22:59 IST