Best DIVIDEND PAYING STOCKS
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The fact that dividend plays an equally important role in terms of the potential return you get from investment in equities is often ignored by investors. Therefore, DSIJ undertook a task to study the dividend yields of companies, paring a comprehensive list down to five recommendations that would suit your portfolio
The rally in the equity market in the last one and half years has led many investors to believe that return from investment in equities comes from price appreciation or an increase in share prices. And the dividend earned on investment on these equities plays a second fiddle role to price appreciation, and therefore usually gets ignored. The assumption might be true to some extent, particularly in the shorter period and that too during a bull run. However, in the longer run, dividend plays an equally important role in terms of the potential return you get from investment in equities.
For example if you would have invested Rs 15,480 in the shares of Colgate-Palmolive (India) at the start of FY02, you would have earned Rs 22,075 by the way of dividends alone till the end of FY15, which gives an internal rate of return of 4 per cent. Although this is lower than the prevailing inflation rate at that time, the twist in the story comes when these dividends are re-invested in the same shares. The re-investment of dividends doubles the return to 8 per cent, assuming the investor had invested the dividend at the share price prevailing when he received dividends. This shows the power of dividends and their re-investment, which is capable of beating long-term inflation. The share price of Colgate-Palmolive (India) in the same period has appreciated by around 22 per cent. What this means is that returns by way of dividend forms almost 40 per cent of share price appreciation.
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We tried to study the impact of dividends and their re-investments with other stocks, especially those that have a consistent dividend paying policy, and the result was not very different. For example if you would have invested Rs 2,625 in the shares of Balmer Lawrie & Co. at the start of FY02, you would have got Rs 18,750 from dividends and would have recovered your cost of investment in the first seven years only through dividends. However, in case of re-investment of dividends, the payback time reduces by one year. Moreover, in this case also almost a quarter of the total return comes from dividends.
Besides this there are various empirical studies which suggest that stocks that pay higher dividend have historically delivered higher risk-adjusted returns. In a study by New York-based Global X Funds for the period 2003-12, it was found that stocks that paid dividends outperformed those that did not and this outperformance generally increased as the dividend yield increased. It goes further and states that dividend paying stocks have lower risk, according to various risk measures, than non-dividend paying stocks.
What’s more, a commitment to dividend also indicates a strong business and a management priority on returning cash to shareholders. This also prevents the management from unnecessary diversification or aggressive acquisition and keeps them focused on the core business. Nonetheless, all the dividend paying stocks are not equal and it is important to separate chaff from grain. You should focus only on those companies that not only have attractive dividend yields but also have sufficient additional cash to maintain and grow their businesses. This is particularly reflected by cash used to pay dividends as proportion to the earnings or dividend payout ratio. Therefore, it’s not only the dividend yield that matters for investing in dividend paying stocks; sustainability and consistency of these dividends are also equally important factors.
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Methodology
To identify such stocks we have used the following filters:
• Comprehensive List: We started with the entire universe of stocks listed with the BSE.
• Dividend History: We took into consideration only those companies that have consistently been paying dividends since 2008 i.e. the last seven years.
• Maintained or Increased: The next filter we used is that these companies either have maintained or increased their dividend in terms of percentage. We have adjusted these dividend payments for any split and bonus.
• Growth in EPS: The third filter that we applied is growth in earning per share of these companies during our study period. We excluded all those companies whose earnings have declined in our study period. Nonetheless, we adjusted this for any bonus issue.
• Non-Sustainable Dividend Payers: To ensure that companies are not paying dividends that are not sustainable in the long term, we excluded those companies whose dividend payout ratio is more than 70 per cent.
• Nine-Month Results: To further ensure that companies will continue with their dividend policy even in this year (FY15) we analysed the nine-month results of these companies to ensure that they will maintain their payout ratio. For example, a company like Deepak Fertilisers that has dividend yield of more than 4 per cent and passed the entire criteria mentioned above was left out due to fall in net profit of the first nine months of FY15 compared to a similar period in FY14. Similar is the case with National Peroxide.
After applying all the above filters we arranged the companies in a descending order of dividend yield and arrived at the final list. Out of all the 114 companies that passed our litmus test, we are recommending five companies from different sectors and if you are risk-aversive these can make it to the core of your portfolio.
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SWARAJ ENGINES
Div. Yield (%): 4.1 | BSE CODE: 500407 | FACE VALUE: Rs 10 | CMP: Rs 807
Swaraj Engines (SEL) is a Mohali-based company which was originally established to manufacture engines for the erstwhile Punjab Tractors (PTL). The company was a joint venture between PTL and Kirloskar Oil Engines. However, in 2007 PTL was taken over by M&M; hence its share in SEL. Mahindra and Mahindra Tractors (M&M) is the market leader, having a share of 40 per cent and has only one supplier for its ‘Swaraj’ brand of tractors – SEL.
SEL has been paying dividends consistently since 1990 and has also constantly increased its dividend per share since FY09. The reason we believe the company could continue with its generous dividend paying policy is due to its strong financial performance. For the 10 years ending FY14, the company’s topline and bottomline has increased at a CAGR of 19 per cent and 18 per cent respectively. What this means is that the company’s sales and profit have grown almost five-fold in the last one decade. What is also incredible is the company’s ability to generate free cash flow more than its net profit. And what is helping it achieve this feat continuously is its leadership position that makes SEL sign better deals with its vendors and customers, which in turn supports it to maintain healthy working capital.
Going ahead, India presents lot of opportunity for the tractor sector. We have already witnessed in the last one decade that since manual labour is getting more expensive, mechanisation of agricultural activities has become more of a compulsion to keep it competitive. Added to this is the low penetration of tractors in India compared to the global average despite India being the largest tractor market in the world. All this presents a good long-term story for the company. The other factors that will act as a growth catalyst for company are strong replacement demand and increase in exports. The demand in the industry is expected to remain sound on account of the shortening tractor replacement cycle.
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SEL has taken appropriate expansion plans to exploit this opportunity. After increasing its capacity to 75,000 tractor engines from 42,000 engines in FY11, the management has approved a further expansion programme to increase the capacity to 1,05,000 engines per annum over the next one year. Despite the company undertaking such an expansion plan, SEL’s balance-sheet has remained strong with negligible debt in its book.
For the nine months ended December 2014, SEL saw a marginal drop in its financial performance. This was primarily due to cumulative supplies slipping at 52,251 engines as compared to 54,797 engines. The tractor industry has witnessed some correction in the last fiscal (FY15) because farm incomes have been negatively impacted by decline in crop output and softening of crop prices. Nonetheless, we continue to believe that volumes in this sector will continue to grow in lower tens or higher single digits for over the next five years as long-term industry drivers remain intact. Therefore, we advise our readers with long-term investment horizon (more than two years) to take exposure in this counter.
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FLEX FOODS
Div. Yield (%): 4.3 | BSE CODE: 523672 | FACE VALUE: Rs 10 | CMP: Rs 53
Flex Foods (FFL) is a part of the Uflex group of companies, which started its operations in 1992 as an export oriented unit. The company is primarily engaged in the business of food processing, including cultivation and freeze-drying of mushroom, herbs and fruits & vegetables. The company has its own captive state-of-art mushroom growing facility with fully equipped mushroom spawn and compost preparation facilities. FF exports around 70 per cent of its product to the US and European markets.
The company has been paying dividend since FY08 and has neither skipped nor lowered its dividend rate in these years. This increases our confidence in the management, especially when there have been concerns raised about it. To ward off any such concern we also tried to check the ratio of cash flow generated from its operations to EBITDA, which many a times is used to check if something is cooking in the book. We calculated the ratio for the last five years and did not find any alarming sign there. The ratio was close to one except for FY13.
For the ten years through FY14, FFL has posted sales and net profit growth of 11 per cent and 3 per cent respectively, though it has accelerated recently and in FY14 on a yearly basis it has posted growth of 25 per cent and 85 per cent in its topline and bottomline respectively. For the nine months of FY15, FFL posted topline growth of 18.6 per cent on a yearly basis while its bottomline in the same period grew by 24 per cent.
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We believe the company will continue with its good financial performance given the food processing industry as a whole is witnessing robust growth. What is leading such growth is changing demographics, growing population and rapid urbanisation. Besides, growth in organised retail, increasing foreign direct investment in food processing, and introduction of new products will add fuel to the explosive growth of the Indian food processing industry. Keeping in mind the demand for freeze-dried products, particularly for herbs, the company has undertaken an expansion program for freeze-dried products by adding one more processing chamber at an estimated cost of Rs 12 crore.
Despite such an expansion plan, FFL has a very sound balance-sheet with debt to equity ratio of less than 0.2 times. Last year, one of the credit rating agencies, ICRA, upgraded the company’s term loan of Rs 9 crore from BBB- to BBB on back of “the visibility to cash flows on account of expanded capacity already booked by the existing major customers.” The rating continues to factor in the long experience of the promoters and the established presence of the company in the food processing industry; long relationships with overseas customers which ensure repeat orders; and the company’s focus on producing higher value-added products leading to healthy profitability.
Moreover, the latest shareholding pattern (March 2015) of FFL shows that promoters have increased their stake in the company marginally to 59.68 per cent from 58.96 per cent in December 2014. All these factors give us confidence that the company will continue to reward its shareholders. Therefore our advice is to buy this counter.
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MANAPPURAM FINANCE
Div. Yield (%): 5.3 | BSE CODE: 531213 | FACE VALUE: Rs 2 | CMP: Rs 34
Incorporated in 1992, Manappuram Finance (MFL) is a Kerala-based non-deposit taking NBFC. It lends against household gold jewellery largely to individuals. MFL has been in a consolidation mode since the regulatory changes started in 2012. At the end of Q3 FY15, MFL had 3,293 branches with 0.168 crore live customers. MFL has been continuously rewarding its shareholders through dividend payments. Since FY94 MFL has been paying dividends every year and in the last 14 years it has never lowered its rate of dividend, which has increased from 8 per cent of the face value to 90 per cent in FY14. There are few companies in the listed space that have achieved this kind of a feat.
This is despite the company seeing a sharp fall in its financial performance in FY13 over FY12, when MFL’s topline declined by 15 per cent whereas the bottomline saw a steep fall of 65 per cent. Even in FY14 the company registered a fall in its total income on a yearly basis but posted growth in profit due to better control of costs. This speaks a lot about the dividend policy of the company and its continuity. The trend has been repeated for the first nine months of FY15 where the total income has declined but profits are increasing. On a sequential basis there has been some improvement in the topline which has gone up 2.3 per cent.
MFL’s business growth has been reviving since the start of FY15, the supporting factors being stabilisation of gold prices at around USD 1,200 per ounce and branch activation efforts implemented by the company. The quarterly disbursements are on an uptrend and stood at Rs 5,965.8 crore in Q3 FY15. The company’s stock of gold holdings has increased from 47.95 tonnes to 50.23 tonnes during 9M FY15. This led to growth of AUM by 8 per cent to Rs 8,824 crore in the same period. Besides this asset growth, recovery in the longer term would be driven by introduction of new products such as microfinance, affordable housing, and commercial vehicle loans.
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These new lines of business, according to the management, are expected to contribute up to 25 per cent of the total AUM in the next three years. This would also lend a much-needed diversification pathway to the existing business model. The other important performance metrics have also been showing continuous improvement. The company has managed to increase its spread in the last few quarters which stood at 13.38 per cent at the end of 9M FY15, one of the highest in the industry. Now that we are entering into a phase of lower interest rates, we may see this spread increasing further.
The asset quality has also improved in the third quarter of FY15. The gross NPAs, after increasing during Q2 FY14 to Q2 FY15 to 2 per cent, came down sharply to 1 per cent of AUM in Q3 FY15. This was on account of the company getting rid of its affected portfolio through auctioning. The total capital adequacy of MFL is at a healthy level of 26.94 per cent compared to the minimum 15 per cent stipulated by the RBI for gold loan companies. The gearing levels are also comfortable at 2.94x, thus leaving ample scope for increase in leverage. All this ensures that the company is adequately capitalised to power its future growth. Hence, we believe this stock will add glitter to your portfolio.
BALMER LAWRIE & COMPANY
Div. Yield (%): 3.2 | BSE CODE: 523319 | FACE VALUE: Rs 10 | CMP: Rs 560
Balmer Lawrie & Company (BLC) is a truly diversified central public sector undertaking with a ‘Mini Ratna–I’ status and presence in both manufacturing and service sectors. BLC is a multi-location and multi-product medium-sized company manufacturing steel barrels, greases & lubricants, and performance chemicals and carries out various service-based activities such as logistics management, tours & travels, project engineering & consultancy in oil & infrastructure sector, container freight, and tea blending & packaging. These activities are carried out through seven different strategic business units (SBUs).
Such a diversified business model helps the company in mitigating any downswing in any particular sector and this is clearly reflected in the company’s financial performance that has been consistent over the years. Since FY10 BLC’s topline and bottomline has increased at a CAGR of 12 per cent and 7 per cent respectively. The dividend history of the company stands testimony to the company’s performance, which remained firm in every phase of business cycle. BLC is undoubtedly one of the best companies in the listed space when it comes to good dividend yielding companies.
It has a track record of continuous dividend payment since FY89, i.e. for the last 26 years. What is also noteworthy is that it has continuously increased its dividend percentage (adjusting for bonus issue) since FY01, i.e. from the last 14 years. What has made this possible is the strong cash flow from the operations of the company which has always been strong with average cash EPS representing almost 9.5 per cent of the company’s share price.
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BLC’s operations can be segregated mainly into five segments (not SBU) namely industrial packaging (contributing 30 per cent of revenue in FY14), logistics (15 per cent of revenue), tours & travels (37 per cent of revenue), grease & lubricants (14 per cent of revenues) and others (4 per cent of revenue). There are various growth drivers that will propel individual segments of company going ahead. The government’s policy to enhance private investment in ports will help BLC’s logistics business. As part of its expansion, BLC has opened satellite branches at Guntur and Indore and five more associates focusing on third party logistics and project logistics. It has plans to set up three new temperature-controlled warehouses in Hyderabad, NCR and Mumbai.
In its industrial packaging business, BLC manufactures 165 and 200 litre capacity steel drums whose major customers are from lubricants, greases, transformer oil, chemicals, agrochemicals as well as food and fruit industries for safe packaging, transport and storage of the products. Its expansion has been done with new technologies and expertise which could reduce the manufacturing cost and contribute to boost the margins.
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Meanwhile, India’s tourism has gained momentum recently and is an integral part of the Indian economy. Various initiatives taken by the new government like ‘Swachh Bharat Abhiyan’ and visa on arrival will be the key growth drivers for this industry. BLC is one of the well-known travel & tour agents in the country and operates from more than 88 locations across 19 cities in the country. BLC acquired the leisure travel business of Vacations Exotica Destinations, a large tour operator in the country which would help to expand its value proposition services like wide range of holiday services.
BLC under its grease & lubricants segment supplies syntanes to the leather tanneries under the brand ‘Balmol’, and is looking forward to the launch of new products. BLC has also expanded into construction chemicals such as concrete admixtures, additives, etc., targeting the construction & infrastructure industry. Beside this, the main catalyst for this business unit exists in lagoon sludge cleaning business and this is expected to intensify with the applicability of strict pollution norms in the oil industry.
We believe there is ample scope for the company to grow in the individual segments where it operates and will continue to perform. Therefore we advise our risk-aversive readers to make this stock as a core entity of their portfolio.