If dividends and capital gains are the two components of return to an investor, how much do Indian investors value dividends? Not much, it seems.
Indian investors tend to put their money on stocks more for their ability to deliver capital gains than for their yearly dividend payouts. This is also justified by the fact the Indian market as a whole doesn't deliver much of a return by way of dividend.
The current dividend yield for the constituents of the Nifty index (dividends/market price) is less than 1 per cent. Nevertheless, investing for dividends does make sense for investors due to a few reasons. If last year's evidence is anything to go by, dividend payouts tend to be less volatile than company profits, which decide valuations. While the market as a whole may not sport a high dividend yield, investors can still bet on the few stocks that do. Here's an analysis of the trends in dividend payouts of Indian companies and dividend yield stocks, based on a study of the CNX 500 stocks.
Despite 2008-09 being one of the worst years in recent times for the Indian economy and its companies, the latter did not materially cut back on dividend payouts. Even as the overall net profit of the CNX 500 companies dipped by 6 per cent between 2007-08 and 2008-09, their total dividend payout saw only a 2 per cent dip, falling to Rs 52,500 crore from the Rs 53,360 crore in FY08.
The overall dividend payout ratio actually edged up a little from 24 to 24.8 per cent, as companies dug deeper into their pockets to pay dividends. The number of companies that declared dividends in 2008-09 was 364, just 17 short of the previous year.
Quite a few of the companies that paid dividends last year maintained their dividend rates despite a fall in net profits — Amtek India, Godrej Industries, Jindal Saw, Nirma and Tata Chemicals being some instances. Tata Steel maintained its dividend rate at 160 per cent despite a small 10 per cent growth in its standalone profits. The message to investors is that dividend payouts may be less volatile than per-share earnings. During a downturn, this makes it preferable for investors to bet on dividend paying companies rather than non dividend payers.
Investors looking for consistent dividend payers over the long term however may not have too many stocks to choose from. Scanning through the CNX 500 companies throws up a few names — Neyveli Lignite, Chambal Fertilisers, Hero Honda Motors, Geometric, Havells India and Elder Pharma.
The trick in identifying consistent dividend-paying companies seems to be low payout ratio. Most companies with a regular payout appear to have set a record of consistency by paying a limited share of profits as dividends; payout ratio has been less than 30 per cent in eleven of these companies.
Elder Pharma has been declaring 25 per cent dividend every year in the last five years. But this is just 9-12 per cent of its profits. Geometric has been declaring 40 per cent dividends which are again just 10-20 per cent of its profits. A low payout ratio probably allows dividend-paying companies to maintain the payments even through ups and downs in earnings over the years.
Higher stock valuation?
If dividends and capital gains are the two components of return to an investor, how much do Indian investors value dividends? Not much, it seems. The market doesn't actually give higher valuation to companies that pay out consistent or high dividends. Hero Honda Motors with an annual dividend Rs 20 per share, for example, has never traded at valuations higher than TVS Motor (whose dividends have fallen from Rs 1.30 per share to 70 paise per share) in the last five years.
Tata Chemicals (dividend per share risen to Rs 9/share from Rs 6.5 five years back) has been trading at lower valuations compared to RCF (dividend per share Rs 1.70-1.20); State Bank of India too (dividend per share up from Rs 12.5 to Rs 29) has been trading at a lower PE than HDFC Bank (dividend per share Rs 10, up from Rs 4.5).
The markets also don't seem to mark down a stock's valuations when dividends are cut or don't materialise for a particular year. For example, JSW Steel's dividends dropped sharper than that of SAIL in FY09 but the market continued to give it a higher PE than the latter.
Given that valuations are a function of a company's perceived "growth" potential, markets appear to value companies that plough back profits into the business better than those that pay out dividends. This means that if you are a dividend seeking investor, you may actually find your stocks trading at a valuation discount to peers.
Dividend yield stocks
Turning from dividend payouts to dividend yield (dividends as a proportion of stock price), though the index's average yield is low, there are a handful of stocks in the CNX 500 that have consistently delivered high yields to investors; with dividends rising in proportion to the market price of the share.
Some stocks that have consistently delivered a 3-7 per cent yield every year over the last five years are Supreme Industries, Karur Vysya Bank, Wyeth, Nava Bharat Ventures, Supreme Petrochemicals, LIC Housing Finance and Andhra Bank. In some of these cases, the high dividend yield made up for the capital loss in the stock during the 2008 meltdown.
In the case of Wyeth for example, dividends added 8.17 per cent (Rs 37/share) in FY09 to the returns of investors who had bought the share a year ago. This almost made up for the loss in the value of the share (Rs 38/share) in that period on crash in the stock market. However, investors basing their decision mainly on a stock's historic dividend to get at the yield may at times be misled by companies cutting back on dividends or reducing payouts after exceptional years. Someone who invested in Indo Rama Synthetics in March 2008 looking at its attractive 13.5 per cent dividend yield was likely to have been disappointed the following year. With the company reporting a loss of over Rs 90 crore on a fall in sales and spike in interest cost the next, it didn't declare dividends at all.
In the case of Monsanto India, the company's one-off dividends of Rs 297/share in 2007-08 lifted the dividend 'yield' to very high levels; but dividends normalised the very next year to Rs 25/share. Another instance of a company making a large payout due to one-time income was EID Parry which declared a 1000 per cent dividend in FY09 out of windfall profits on sale of investments. This however may not be the case in the current year.
An unusually high dividend yield may also be a direct reflection of the low valuations that the market is willing to grant a particular stock due to uncertainties surrounding the business.
Findings so far suggest three key takeaways for dividend seeking investors:
Dividends for the more consistent companies may be less volatile than their profits;
Look for a low payout ratio if you seek consistent dividends; and
Beware of one-off payments while determining yield.
Finally, are there any specific sectors that investors can look to, to unearth high dividend yield stocks? Investors though don't have too many choices. But fertiliser makers and banks seem to figure more often on the list of dividend yielding stocks.
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