Saturday, May 22, 2010

Investors in line for dividend bonanza

Shareholders can look forward to attractive returns from their investments in India Inc, going by huge dividend payouts that some of the leading companies have doled out for FY10.

These companies rewarded their shareholders handsomely through higher dividends, after reporting a strong growth in earnings. The trend, according to analysts, is likely to extend to more companies, particularly those which generate a large amount of cash every year and don’t have major capex plans in the near future.

More than a dozen companies have announced a payout of up to 70-98%, calculated on the basis of their earnings and dividend for the year ended March 31, ’10, or December 31, ’09. The list is dominated by the two-wheeler major Hero Honda and a few other major companies like Castrol India, Nestle India and GSK Pharma. A few small and medium-sized companies also figure among high dividend-paying companies.

“It makes sense to announce large payouts if a company doesn’t have a huge debt to service and no capex plans to fund with cash generated from its operations,” said Devesh Kumar, joint MD and Group CEO, Fortune Financial Services, a Mumbai-based broking and financial services firm.

Companies like Hero Honda and other major companies in pharmaceutical and consumer goods industries don’t need to conserve resources, because they are established in their respective fields and have been generating a lot of cash every year. They have already built up a strong distribution and marketing network and don’t have any major capex plans, thus leaving good scope for them to dole out large dividend payouts, added Mr Kumar.

Hero Honda surprised its shareholders by paying a record 5500%, or Rs 110, dividend per share, including 4000% silver jubilee special dividend. At this rate, the payout ratio works out to as high as 98%. The company’s net profit jumped 74% to Rs 2,232 crore while net sales grew 28% to Rs 15,861 crore in FY10. Lubricant major Castrol India and confectionery MNC Nestle India also declared handsome dividends, with the payout ratio working out to 81% and 71%, respectively. The two companies reported a rise of 45% and 23%, respectively in their net profits.

According to analysts, many companies have been rewarding their shareholders for the past few years and could be good investment opportunity for prospective investors, provided they offer attractive dividend yield at current prices.

“The BSE Sensex has given a 3% negative return year-to-date. In such a scenario, high dividend-yield stocks would be good investment options,” said Vishal Jajoo, equity research analyst, FCH Centrum Wealth Managers. High dividend-yield stocks will ensure regular tax-free income for investors even if there is no significant appreciation in the price, he added.

According to the head of institutional dealing at a domestic broking firm, many companies offer attractive dividend yield which is more because of their beaten-down prices. He, however, cautions that investors should analyse various factors before taking an investment decision on the basis of dividend yield.

A company is considered fundamentally healthy if its debt-to-equity ratio is less than one. It should be growing with a 20% operating margin on a consistent basis. High operating margin acts as a cushion against substantial rise in input costs in the short term. The company should have high interest coverage to ensure that it will be able to protect its margins even if the cost of borrowing is on the rise, he added.

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