Company offering dividend payout? Here's how your investment portfolio can gain
While some investors seek capital growth and prefer companies that pay
low dividends and invest more for growth, some want high current income
in the form of dividends and are willing to settle for lower capital
appreciation. Thus, the dividend payout ratio is a closely-watched measure.
Corporate results for 2011-12 are out. The verdict is clear. Profit growth has fallen, margins are under pressure and companies have more or less exhausted their pricing power.
Out of 100 companies in the BSE 100 index, more than half have seen a fall in their dividend payout ratio, the part of profit paid as dividend to shareholders. The average dividend payout ratio has fallen from 39 per cent in 2010-11 to 25 per cent.
Let's assume that company X makes four quarterly payments of Re 1 each, totalling Rs 4 per share, and its net annual earnings are Rs 20 per share. The dividend payout ratio is Rs 4/Rs 20x100 = 20 per cent. This means X has distributed 20 per cent earnings as dividends and retained 80 per cent for further growth.
DIVIDEND MATTERS
While some investors seek capital growth and prefer companies that pay low dividends and invest more for growth, some want high current income in the form of dividends and are willing to settle for lower capital appreciation.
Thus, the dividend payout ratio is a closely-watched measure. It fell last year due to various factors.
Things, however, differ from sector to sector. Infrastructure and engineering companies, for instance, had a difficult last year due to slowing order inflows, margin pressure and high cost of debt, which hit bottom lines.
"As companies still need to invest for long-term expansion and provide for working capital, a fall in the payout ratio is normal in such a scenario," says Khattar.
In the FMCG and pharmaceutical pack, Asian Paints maintained its dividend payout ratio at 40 per cent, while its dividend per share was Rs 40 in 2011-12 compared to Rs 32 in 2010-11 as PAT rose 23 per cent.
Colgate Palmolive India's dividend payout ratio rose 2 per cent and dividend per share Rs 3 in spite of a modest 10 per cent profit growth. Nestle and ITC's payout ratios fell in spite of double-digit profit growth. But both maintained their dividend per share. Khattar welcomes the trend.
"This is a healthy sign as there are a number of investment opportunities in the consumption space. These companies' return on equity, often upwards of 50 per cent, makes a strong case for large deployments," he says.
HIGH DIVIDEND YIELDS
In spite of stagnant dividend payouts, a number of companies have seen an increase in dividend yields.
"This can be attributed to the fall in stock prices, which came off by 15-20 per cent in 2011-12," says Ramanathan K, chief investment officer, ING Investment Management. He says absolute dividends are more important than the payout ratios, especially when expressed in comparison with the stock price.
Dividend yield is expressed as a percentage, that is, dividend per share divided by the price per share. The ratio ascertains earning on an investment over and above the capital appreciation. However, the stock price of a company reflects the dividend per share and is adjusted accordingly.
Further, since 2008, stock markets have fallen 25 per cent whereas broad market earnings have risen more than 50 per cent. Even in case of stagnant payouts, the absolute increase in dividends is more than 50 per cent. And with stock prices at a low, yields have improved substantially.
"Even from a longer term point of view, as confidence about growth has been shaken and return on equity has withered off, stock prices have fallen, pushing up dividend yields," says Khattar.
SHOULD YOU CARE?
Unlike investments such as bank deposits or bonds, dividends are not guaranteed. If a company faces a cash crunch, reducing dividend is one way it will try to save money. It is important for investors to watch out for consistency in profitability. If a company can't make steady profits, it may not pay dividend regularly.
Further, dividends are paid from cash flow. So, free cash flow is an important factor in financial results.
Agarwal of Angel Broking says good dividend-paying stocks have performed better than others in the recent past and are trading at high valuations, which makes future outperformance difficult.
Going ahead, an improved economic environment which boosts corporate profitability and confidence will lead to higher dividend payouts.
However, experts say one must also look at other parameters-such as earnings outlook and growth-along with dividend payouts and yields.
AN ALTERNATIVE
Those who want to invest in good dividend yielding stocks with professional help may consider dividend yield funds. These invest in companies that pay more dividends compared to the broader market. This makes the portfolio less volatile and able to withstand market falls better.
These funds have outperformed the market over various periods. In the last three and five years, they have delivered in excess of 10 per cent compared to little or no growth in the Sensex.
In fact, the CNX Dividend Opportunities Index has performed better than the broader market since the 2008 financial crisis. Dividend yield stocks or funds should be a part of any portfolio; however, the weights may differ depending on one's risk profile and investment objective.
Out of 100 companies in the BSE 100 index, more than half have seen a fall in their dividend payout ratio, the part of profit paid as dividend to shareholders. The average dividend payout ratio has fallen from 39 per cent in 2010-11 to 25 per cent.
Let's assume that company X makes four quarterly payments of Re 1 each, totalling Rs 4 per share, and its net annual earnings are Rs 20 per share. The dividend payout ratio is Rs 4/Rs 20x100 = 20 per cent. This means X has distributed 20 per cent earnings as dividends and retained 80 per cent for further growth.
DIVIDEND MATTERS
While some investors seek capital growth and prefer companies that pay low dividends and invest more for growth, some want high current income in the form of dividends and are willing to settle for lower capital appreciation.
Thus, the dividend payout ratio is a closely-watched measure. It fell last year due to various factors.
ARCHIVE: Why dividends can't be taken for granted
Vinay Khattar, head of research, capital markets (individual client), Edelweiss Financial Services, says some companies have been hit by slowing order inflows and falling margins. Also, some big companies in the fast moving consumer goods, or FMCG, sector are spending heavily on expansion and so paying less.
COMPANY SPECIFICS
Companies that depend on the infrastructure sector such as in construction, engineering and cement spaces paid less dividend in 2011-12 compared to 2010-11. BHEL's profit growth, for instance, fell from 39 per cent in 2010-11 to 16 per cent in 2011-12.
SPECIAL - Investment tip: Best stocks that hit one-year lows
The dividend per share, which rose from Rs 23 in 2009-10 to Rs 31 in 2010-11, was stagnant in 2011-12. ABB's dividend payout ratio fell from 67 per cent in 2011 to 35 per cent in 2012, though the dividend per share rose from Rs 2 to Rs 3 on the back of a two-and-a-half-time increase in profit after tax or PAT.
ACC's dividend payout ratio fell from 51 per cent in 2011 to 39 per cent in 2012. The dividend per share fell from Rs 30 to Rs 28. The company saw flat profit growth during the period.
Similarly, Cummins India's dividend per share fell from Rs 15 in 2010-11 to Rs 11 in 2011-12 due to flat profit growth.
Ashok Leyland's dividend payout ratio halved and the dividend per share fell from Rs 2 to Re 1. The company's net profit fell 10 per cent owing to the fall in demand for medium and heavy commercial vehicles.
"In the last few quarters, access to capital has been a problem. Thus, companies are conserving capital," says Vaibhav Agarwal, vice president, research, Angel Broking.
25 per cent
Vinay Khattar, head of research, capital markets (individual client), Edelweiss Financial Services, says some companies have been hit by slowing order inflows and falling margins. Also, some big companies in the fast moving consumer goods, or FMCG, sector are spending heavily on expansion and so paying less.
COMPANY SPECIFICS
Companies that depend on the infrastructure sector such as in construction, engineering and cement spaces paid less dividend in 2011-12 compared to 2010-11. BHEL's profit growth, for instance, fell from 39 per cent in 2010-11 to 16 per cent in 2011-12.
SPECIAL - Investment tip: Best stocks that hit one-year lows
The dividend per share, which rose from Rs 23 in 2009-10 to Rs 31 in 2010-11, was stagnant in 2011-12. ABB's dividend payout ratio fell from 67 per cent in 2011 to 35 per cent in 2012, though the dividend per share rose from Rs 2 to Rs 3 on the back of a two-and-a-half-time increase in profit after tax or PAT.
ACC's dividend payout ratio fell from 51 per cent in 2011 to 39 per cent in 2012. The dividend per share fell from Rs 30 to Rs 28. The company saw flat profit growth during the period.
Similarly, Cummins India's dividend per share fell from Rs 15 in 2010-11 to Rs 11 in 2011-12 due to flat profit growth.
Ashok Leyland's dividend payout ratio halved and the dividend per share fell from Rs 2 to Re 1. The company's net profit fell 10 per cent owing to the fall in demand for medium and heavy commercial vehicles.
"In the last few quarters, access to capital has been a problem. Thus, companies are conserving capital," says Vaibhav Agarwal, vice president, research, Angel Broking.
25 per cent
is the average dividend payout ratio of companies comprising the Bombay Stock Exchange 100 index
Things, however, differ from sector to sector. Infrastructure and engineering companies, for instance, had a difficult last year due to slowing order inflows, margin pressure and high cost of debt, which hit bottom lines.
"As companies still need to invest for long-term expansion and provide for working capital, a fall in the payout ratio is normal in such a scenario," says Khattar.
In the FMCG and pharmaceutical pack, Asian Paints maintained its dividend payout ratio at 40 per cent, while its dividend per share was Rs 40 in 2011-12 compared to Rs 32 in 2010-11 as PAT rose 23 per cent.
Colgate Palmolive India's dividend payout ratio rose 2 per cent and dividend per share Rs 3 in spite of a modest 10 per cent profit growth. Nestle and ITC's payout ratios fell in spite of double-digit profit growth. But both maintained their dividend per share. Khattar welcomes the trend.
"This is a healthy sign as there are a number of investment opportunities in the consumption space. These companies' return on equity, often upwards of 50 per cent, makes a strong case for large deployments," he says.
HIGH DIVIDEND YIELDS
In spite of stagnant dividend payouts, a number of companies have seen an increase in dividend yields.
"This can be attributed to the fall in stock prices, which came off by 15-20 per cent in 2011-12," says Ramanathan K, chief investment officer, ING Investment Management. He says absolute dividends are more important than the payout ratios, especially when expressed in comparison with the stock price.
Dividend yield is expressed as a percentage, that is, dividend per share divided by the price per share. The ratio ascertains earning on an investment over and above the capital appreciation. However, the stock price of a company reflects the dividend per share and is adjusted accordingly.
Further, since 2008, stock markets have fallen 25 per cent whereas broad market earnings have risen more than 50 per cent. Even in case of stagnant payouts, the absolute increase in dividends is more than 50 per cent. And with stock prices at a low, yields have improved substantially.
"Even from a longer term point of view, as confidence about growth has been shaken and return on equity has withered off, stock prices have fallen, pushing up dividend yields," says Khattar.
SHOULD YOU CARE?
Unlike investments such as bank deposits or bonds, dividends are not guaranteed. If a company faces a cash crunch, reducing dividend is one way it will try to save money. It is important for investors to watch out for consistency in profitability. If a company can't make steady profits, it may not pay dividend regularly.
Further, dividends are paid from cash flow. So, free cash flow is an important factor in financial results.
Agarwal of Angel Broking says good dividend-paying stocks have performed better than others in the recent past and are trading at high valuations, which makes future outperformance difficult.
Going ahead, an improved economic environment which boosts corporate profitability and confidence will lead to higher dividend payouts.
However, experts say one must also look at other parameters-such as earnings outlook and growth-along with dividend payouts and yields.
AN ALTERNATIVE
Those who want to invest in good dividend yielding stocks with professional help may consider dividend yield funds. These invest in companies that pay more dividends compared to the broader market. This makes the portfolio less volatile and able to withstand market falls better.
These funds have outperformed the market over various periods. In the last three and five years, they have delivered in excess of 10 per cent compared to little or no growth in the Sensex.
In fact, the CNX Dividend Opportunities Index has performed better than the broader market since the 2008 financial crisis. Dividend yield stocks or funds should be a part of any portfolio; however, the weights may differ depending on one's risk profile and investment objective.
