Dividends Now Investors’ Envy, Owners’ Pride Promoters bankroll projects via fat payouts in weak market

Metals tycoon Anil Agarwal earned ten times the national average through dividends last fiscal, when promoter-dominated companies turned generous to fund other businesses of their owners in a weak market. 

More than 200 promoter groups from the public and private sectors grossed . 99,462 crore (approximately $17.8 billion) in dividends in 2011-12, more than sufficient to fund the government's entire food security programme allocation of . 75,000 crore, or to build over 7,000 kilometres of six-lane highways across the country, a study by ETIG shows. Shiv Nadar of HCL and the Tata Group trailed Agarwal, whose Vedanta Group notched up 84% higher dividend income during the financial year, at . 2,045 crore, boosted by 2-2.5 times higher payout by the flagship companies Sterlite Industries (India) and Hindustan Zinc. Tata Group companies paid . 8,657.3 crore in dividends to the promoter group. Special Dividends Higher Than Regular Payouts 
The payout by Tata Group was three times more than the amount received by Reliance Industries Chairman Mukesh Ambani, who earned Rs 2,786 crore. A whopping jump of nearly 80% in dividends paid by the flagship IT exporter Tata Consultancy Services, along with a marginal increase in dividends from Tata Global Beverages and Titan Industries, helped the Tata Group collect its highest dividends in at least the past six years. 
"Conceptually, when the return on equity is down, companies tend to distribute excess funds to investors," said Sandeep Singal, who co-heads institutional equities at Emkay Global Financial Services. "Moreover, in FY12, a lot of companies gave special dividends, which were significantly higher than the regular dividends." 
According to Singal, in a challenging environment, promoters may have to pay themselves higher dividends either to mark-up their existing investments or to make fresh investments in seemingly more profitable businesses or to meet personal cash requirements. Wipro's Azim Premji, who had seen the highest increase in his dividend income in the previous year, saw a flat growth, at Rs 1,475 crore, as his flagship IT company failed to take advantage of a spurt in outsourcing 
Aggregate dividend paid to promoter groups in the sample rose by 9%. The contribution of state-owned undertakings rose at a faster pace of 14.2%, compared with the 5% jump in dividends reported by private companies. Theproportion of state-run companies in total dividends also rose by 200 basis points to 42%. "PSUs have been directed to declare higher dividends. This has bolstered the overall dividend payout," said investment advisor SP Tulsian, while drawing attention to mid-cap staterun banks such as Allahabad Bank, Dena Bank and Andhra Bank, which paid higher dividends. Other large state-owned undertakings, such as Coal India, Rural Electrification Corp and Power Finance Corp, also doled out special dividends. 
Apart from a higher absolute dividend, India Inc also paid a higher proportion of net profit as dividends. The share of dividends in net profit, known as dividend payout ratio, rose to 27.3% in 2011-12, from 25% a year earlier, when the ratio had dropped marginally by 30 basis points. "While I am not particularly excited by an increase in the absolute amount of dividends, the rise in payout ratio looks encouraging," said Tulsian. However, a few analysts attributed the rising payout ratio to the changing structure of listed companies.
"Companies that have not been profitable enough to pay dividends get wiped out gradually. Thus, we are left with a sample largely comprising companies that pay dividends. This will result in better dividend related ratios over time," said Saurabh Mukherjea, equities head at Ambit Capital. Market analysts said the tough economic environment would not impact the trend of higher dividends, even as it threatens to impact growth.

iNDIA EQUITY STOOCKS:High-dividend stocks are better wealth creators too

An ET Wealthanalysis of nearly 1,200 firms reveals that the companies which provide regular dividends also offer higher capital appreciation for investors.

SAMEER BHARDWAJ 

    Investors love high-dividend stocks because they fulfil two basic needs. These stocks provide a regular income and are relatively less volatile than other scrips. The dividend yield acts as a safety cushion that prevents the scrip from going into a free-fall. However, these are not the only reasons you should consider the dividend yield stocks. ET Wealthanalysed nearly 1,200 listed companies and found that in the past three years, the companies that have paid regular dividends have also offered high capital appreciation to investors. 
    The dividend discount model says that the price of a stock is the present value of the future dividends discounted at an appropriate rate. If the discount rate is constant, an increased stream of dividends will lead to a higher value, and vice versa. In other words, the companies that boost their dividend payment are likely to outperform the stocks that have contracting dividends. This implies that the stocks that pay dividends are not only a good source of regular income, but are also better wealth creators than other stocks and investment avenues. 
    To test this theory, we analysed 1,183 companies and studied their dividend payment patterns for the past three financial years. The stocks that had not paid any dividend in the past three years were excluded from the analysis. This left us with 586 stocks. Next, we categorised these stocks into two groups. The first included companies that had consistently increased their dividends in the past three years. The second group comprised firms which had either reduced their dividends or where the payout had remained stagnant in the past three years. 
    The importance of dividend payout was clear when we analysed the price performance of these two groups between 31 March 2009 and 29 July 2011. In the first group, the stock prices of the companies that had increased the dividend payment had appreciated by 286% on an average. The share prices in the second group, which included companies with falling or stagnant dividends, had risen by 129% on average. During the same period, the Sensex, which also included companies that had not paid any dividend, rose by 87.44%. All these returns are in absolute terms. 
    This underlines the market's perception of dividend payout. Both groups contained dividend paying stocks, but the first group generated more than twice the returns delivered by the second group. Also, both managed to outperform the broader market. Whether they increase or decrease the dividend payout, the stocks that give a regular income will be able to outperform the general market substantially. 
    Does this mean that dividend stocks always outperform other stocks? Says Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Old Mutual Life Insurance: "When the dividend yield is higher than the risk-free interest yield, these stocks will outperform. Also, in a volatile or bearish market, the company's fundamentals will hold these stocks in good stead." The yield of the benchmark government bond is considered a proxy for the risk-free rate. In India, the 10-year government bond yield has averaged 8.1% in the past year. 
    However, people should not invest in such stocks blindly because some companies tend to pay dividends just to soothe their shareholders. So, investment in such firms may not be fruitful in the long run. Says Shanbhag: "The best way to look for such anomalies is by checking whether the dividends are from the current cash profits." 
    This helps separate the chaff from the grain. The dividend should have been paid from the company's operating profit. It makes little sense to distribute cash to shareholders when the company isn't making any. 
    We also analysed the dividend payments according to sectors (see graphic). So, which were the most generous dividend payers and which were the most niggardly? The IT industry was the most generous, with its dividend payments increasing by over 2,318 crore in 2010-11 compared with 2009-10. Banks came next with an increase of 2,158 crore, followed by the pharma industry. The tobacco industry made the unkindest cut, reducing its dividend by 351 crore. 
    We have identified five fundamentally sound dividend paying companies that can make for good, stable investments. All five are established players in their respective sectors and are included in the S&P CNX Nifty. The share prices of these stocks have been hammered down due to the global crisis. This only makes them more attractive for the long-term investor. Among these five stocks, Bajaj Auto tops with its 100% dividend growth in 2010-11 over the previous year. 
Tata Motors 
India's largest automobile manufacturer designs, manufactures, assembles and finances automobiles of all shapes and sizes. In the April-June quarter of 2011-12, Tata Motors' consolidated revenue grew 24.1% y-o-y to 33,570 crore. JLR's volume grew by 4.9% y-o-y to 62,090 vehicles. The prices in the commercial vehicles as well as passenger vehicles segments rose by approximately 2% in the beginning of the quarter. The company's JLR segment is likely to perform well due to large investments in research and development (R&D), and savvy product segmentation. The demand from China and other emerging markets will remain firm even if the demand from developed markets slips (due to concerns over recession). The stock presents a good buying opportunity. 
ICICI Bank 
The financial powerhouse and its subsidiaries offer a wide range of services, including commercial banking, retail banking, project and corporate finance, life and general insurance, venture capital and private equity, investment banking and broking services. The bank reported robust results for the first quarter of 2011-12, with net profit growing by 29.8% y-o-y to 1,332 crore. The asset quality is continuously improving at both the delinquency and recovery level. Its net interest income grew 21% y-o-y, supported by a steady loan growth. Looking at the consolidated results that include the performance of subsidiaries, its consolidated net profit grew 52.8% y-o-y and 6.3% q-o-q led by a strong core performance in banking, life insurance and general insurance. The stock is an attractive buy. 
Bajaj Auto 
This two- and three-wheeler manufacturer is wellknown for its R&D, product development, engineering and low-cost manufacturing skills. In the first quarter of 2011-12, its net revenue grew 23% y-o-y to 4,780 crore. The volume grew 17.7% y-o-y to 1.09 million units, driven by a 16% y-o-y growth in motorcycles and a 30% y-o-y growth in threewheelers. The company has increased its stake in Austria's KTM Power Sports AG to 39.26% and might consider taking it up to 49%. Moreover, the increasing penetration in rural markets and replacement demand from urban markets makes the industry dynamics favourable. At the current price, the stock is available at a good valuation. 
    Dr Reddy's Laboratories 
    This global pharma company has proven research capabilities and presence across the value chain. It conducts research in diabetes, obesity, cardiovascular diseases, anti-infective products and inflammation. The company reported higher-than-expected results in the April-June quarter of 2011-12, with its overall net profit growing by 25.1% y-o-y to 262 crore. The company has entered into strategic alliances with GSK and Valent Pharma that will assist in its longterm growth. At its current price, the stock presents an attractive investment opportunity. 
Larsen & Toubro 
India's largest engineering and construction company posted an impressive first quarter results, with its revenue up by 21% y-o-y to 9,480 crore. Its net profit increased by 12% y-o-y to 740 crore. Its order book includes large orders like the 1,200 crore Hyderabad Metro, 1,700 crore for the four-laning of National Highway 14 between Beawar and Pindwara, in Rajasthan, and a 1,400 crore power plant for PPN. L&T is fundamentally the strongest company in the industry and makes for a good buy at current levels.

12 Stocks You Can Count On and INVEST

INVESTING IN A DOWNT URN Rising rates, a slowing economy and global economic gloom — surely not the best of times to bet on stocks. But it's the stocks that you pick in these difficult times that can become your long-term winners. The ET Intelligence Group lists out a few companies that pack a punch... and promise Axis Bank  Axis Bank's loan book grew a robust 45% compared with an industry average of 21% between 2006 and 2011 due to its strong branch network. A strong loan book along with healthy fee income have boosted profit at a CAGR of almost 50% in 2007-11. Non-performing assets have been more or less stable for Axis. At the current P/E multiple of 12, the stock is reasonably valued. Bharti Airtel  Recent tariff hikes have put the telecom sector back on the investor's radar. And, of all players, Bharti Airtel looks to be the safest bet, considering its global presence. Apart from India, it is present in Sri Lanka, Bangladesh and 16 African nations. This insulates it from onemarket dependence. It is among the few players with more than 90% active user base, which should help new service launches. BHEL  The company's stock trades at a P/E of less than 14 – the lowest since March 2005. The current price makes the stock an attractive buy, given its strong balance sheet and sound financials. It has been logging a double-digit revenue growth, consistently since the past five years. However, order inflows and growing competition from Chinese manufacturers are some near-term concerns. HDFC Bank  It is the country's most premium bank in terms of valuations. Its strong financial and robust business model justifies the valuation. It is the most consistent performer in the sector in terms of profit growth and credit offtake. Its margin has stayed above 4%, which is one of the highest in the industry along with the lowest ratio of bad loans. So, despite a P/E multiple of 25, it is a safe bet for long-term investors. ITC  An established cigarette major, 60% of ITC's revenues are contributed by other businesses such as FMCG, hotels, paper, stationery and agriculture. Nevertheless, ITC relies heavily on the cigarette business as it generates 80% of net profit. Consistent growth, strong cash flows and high dividend payout of more than 45% make the company a safe haven for investors in these uncertain times. ONGC  The state-owned oil and gas major remains a safe bet in the current turbulent times, thanks to its robust balance sheet, inexpensive valuations and attractive dividend yield despite the compulsory subsidy sharing that's eroding profits. In the past one month, it has hardly fallen although the Sensex has lost 13.7%. If global oil prices fall due to another recession, ONGC stands to benefit as realisations will go up. Oil India  Oil India is the smaller peer of ONGC, which endows it with twin benefits — it enjoys the same traits as its larger peer when it comes to being defensive, but its smaller size means it can grow faster. It has steadily improved output in the past few quarters and is looking for overseas acquisitions. Being restricted to Northeast India was a major drawback, but it is expanding in other parts of India and overseas. Powergrid  The company is insulated from fuel availability and power off-take risks unlike other power companies. It also earns a fixed return on its investments. Its performance in the past one year has been impressive and earnings grew 23%. It will benefit from the huge demand for transmission capacity. Despite a 30% correction in the Power Index, the stock remains stable and makes for a less risky investment. Sun Pharma  Though the stock hit its record high a month ago, Sun Pharma remains the safest bet in the pharma sector. A strong balance sheet, robust cash flows and consistent performance make the company highly investment-worthy. It commands leadership in six therapeutic areas and boasts of one of the highest operating margins in the industry. Its prospects in the US market have improved after the Taro takeover. Sterlite Industries  UK-based Vedanta's Indian arm has outperformed its peers in terms of sales and earnings growth and is still available at a lower P/E multiple. Profits rose 63% on higher aluminium prices and better copper treatment and refining margins. While softening of base metal prices due to sluggish demand is a concern, earnings growth from its silver business remains strong. Thermax  It has shown a marked improvement in FY11 performance compared with the past two years. Revenue growth has outpaced peers in Q1 FY12. The current order book gives it a revenue visibility for more than a year but fresh order inflows are needed for revenue to grow at the same pace. It has corrected by 18% in the past one month and trades at P/E of 14, less than half its average P/E of past 5 years. United Phosphorous  At a price-to-earnings multiple (P/E) of 10.2, UPL's valuation has fallen to its lowest in at least five years. Nevertheless, it continues to grow through acquisitions and is already the fifth largest agrochemical company in the world. Although the world is facing threats of economic recession, UPL's customer industry — agriculture — is fairly immune to it, which makes the stock a safe long-term bet.