Investing in high dividend yield stocks with a consistent track record is a good strategy

Investing in high dividend yield stocks with a consistent track record is a good strategy

With tough economic conditions and falling interest rates, investing in high dividend yield stocks with a consistent track record is a good strategy.

The current challenging times and the sharp correction in the equity markets have led to a dramatic fall in stock valuations. However, picking a stock for investment has also become an equally difficult task, given the increasing risk as corporate performance becomes unpredictable. Little wonder then that stock markets have turned volatile and sentiment is weak. Investors have turned wary and their appetite for risk has almost vanished.
Simultaneously, interest rates have started falling and bank fixed deposits now provide a return of between 3.5 and 8 per cent annually, which suggests that returns on the so-called safer assets are diminishing.
In this scenario, the strategy to invest in high dividend yield stocks would make good sense. The Smart Investor crunched numbers of all companies listed on the BSE with a market capitalisation of over Rs 100 crore and a dividend yield of about five per cent or more. In addition, factors like growth prospects, leverage (in terms of debt-to-equity), revenue track record and cash flows were also considered to arrive at the shortlist of nine investment-worthy companies (See: Dividend Stars) .
These attributes should not only ensure dividends in future, but also indicate that there is potential for capital appreciation in the longer run. Apart from these nine companies, there are 15 more that offer high dividend yield and deserve attention. (See: Consistent Performers) Read on to know more.

Deepak Fertilisers
Deepak Fertilisers, a major player in nitrogen-based bulk chemicals (accounts for 71 per cent of total revenues), has been a key beneficiary of consistent demand from user industries like pharmaceuticals, pesticides, textiles, fertilisers, rubber and petrochemicals. It reported a 34 per cent growth in sales and a decline of 9 per cent in net profit for Q3 FY09.
The fall in profits was on account of lower operating margins (due to higher trading volumes), a 182 per cent spurt in interest costs and a shutdown of its ammonium nitrate plant for 59 days.
Going ahead, although realisations will be lower, given the 20-40 per cent correction in chemical prices, the company should benefit from higher volumes and a simultaneous fall in raw material (phosphoric acid, etc) prices. The company is increasing its capacities of diluted nitric acid (DNA) by 50 per cent and ammonium nitrate by 45 per cent this quarter.
Besides, the enhanced availability of gas from Reliance Industries' KG Basin would prove to be a positive trigger helping in producing more volumes of methanol (FY08 capacity utilisation of 31 per cent) and fertilisers. Increased capacities, restart of plant, higher utilisation levels and, the start of revenues from real estate and power generation businesses, augur well for the company, and should ensure healthy growth in financials. At Rs 53.4, the stock is trading at 3.4 times FY09 and 3.6 times FY10 estimated earnings.

Gateway Distriparks
The decline in India's exports (down 9.9 per cent) and slowdown in imports (up just 6 per cent) during November 2008 was bound to have an impact on companies like Gateway Distriparks, which generates about 70 per cent of revenue from the container freight business.
During Q3 FY09, Gateway reported a 10 per cent decline in volumes, but its standalone revenue was higher by 30 per cent on account of higher realisations earned on ground rentals. However, these concerns of slowing foreign trade may continue for some time, but, given that the company is the largest port-based container freight player with presence in all the major ports like Mumbai, Chennai, Vizag and Cochin (20 per cent market share at Mumbai port), it should benefit whenever trade revives (likely in 12 months).
Additionally, there is cushion in the form of its recent entry into the railway container business. The income from railway business increased a robust 226 per cent in Q3 FY09 at Rs 43.8 crore on account of addition of seven new rakes taking the total capacity to 14 rakes.
The company is expanding its rakes capacity and is also investing in the cold chain business as long-term growth drivers. It has plans to acquire 22 new rakes and increase the cold chain capacity from 10,000 pallets to 25,000 pallets. The cold chain business, which is growing fast and accounts for 9 per cent of total income, holds huge potential in terms of transportation and warehousing services for the agriculture and processed foods sectors.
Gateway (is virtually debt-free) provides good long-term investment opportunity in light of the prospects of businesses it operates in, consistent growth in revenues and valuable asset base in key logistic areas. Overall, while there are some near to medium term macro economic issues, which are yet to be fully priced in, the stock is a good long term investment and can be considered at dips. The stock is trading at 7.5 times FY09 and 8.5 times FY10 estimated earnings.

LIC Housing Finance
Among the leading housing finance players in the country, LIC Housing provides loans for homes as well as construction activities. In FY07 and FY08, LIC Housing has grown at robust rates; consolidated net income and profit have risen by an average 30 per cent and 37.5 per cent, respectively. Even for the nine months ended December 2008, net income and net profit was up 36 per cent and 39 per cent, respectively. Notably, the company’s net interest margins (NIMs) have been healthy and ranged between 2.6 per cent and 3.3 per cent in the last six quarters. Likewise, while asset quality has also been improving (net non-performing loans declined to just 0.7 per cent in Q3 FY09 from 0.9 per cent in Q2 FY09 and 1.6 per cent in Q3FY08), provision coverage is reasonable at over 50 per cent.
The improvement in performance (since FY07) is largely due to the internal restructuring the company undertook, including strengthening its risk management and loan recovery systems.

Among the few worries that have lately cropped up, say analysts, is the high growth in loan advances to project developers in Q2 and Q3 of FY09. Although this segment provides higher yield as compared to loan advances to the retail (individual) segment, the tough environment being experienced by the former is the reason for their concerns.
Positively, the project developer segment accounts for less than 10 per cent of total advances, with the rest coming from the retail segment. Thus, as NIMs are expected to hover close to 3 per cent levels, analysts suggest that asset quality may deteriorate (though not significantly) due to the difficult macro environment.
With net profit estimated to grow by at least 15 per cent annually in FY10 and FY11, the dividend payout (as a percentage of net profit) should also improve (last five years average payout is 25 per cent). At Rs 206, the yield (based on FY08 dividend) works out to 4.9 per cent, and can be considered for dividends as well as capital appreciation. Opto Circuits
A stable growth outlook (10-15 per cent) for the global medical electronics devices segment, a successful inorganic acquisitions strategy (seven so far) and a strong distribution network are expected to help Opto Circuits record 30 per cent top line growth over the next four years. The company's products in the invasive (devices such as stents, which aid blood flow) and non-invasive (monitors and sensors) segments have a global market size of about $12 billion.
The company is awaiting US FDA approvals, which will enable it to sell its stents in the US, which along with Japan accounts for half of global sales. This will expand its addressable market size from about $5 billion currently. In addition to these two key markets, Opto has the CE (European conformity) certification, which allows it to sell its stents in 34 countries and is now expanding its presence in new, low cost markets which will help it generate volumes and control fixed costs.
Its acquisitions have been aimed at plugging its gaps, for examplein the ICU range, and will help it to expand its product portfolio and achieve scale faster.With negligible debt, a resilient, recession proof sector that helps the company generate about Rs 70 crore of free cash from the business, and estimated annual earnings growth of 30 per cent (FY08-FY11), expect the company to maintain its consistent dividend record going ahead. The stock trades at 6 times FY10 estimated earnings. Pfizer India
Despite the sale of key brands such as Listerine and Benadryl to Johnson & Johnson, Pfizer still has well known brands such as Corex, Becosules, Gelusil and Waterbury's Compound, which coupled with launches of Champix (to reduce smoking) and Cyklokapron (prevent bleeding) last year, are expected to help grow net profit by about 20 per cent in FY08 (November year end).
Both its key businesses–animal healthcare and pharmaceuticals (accounts for 85 per cent) have seen healthy growth of about 18 per cent and 11 per cent, respectively to Rs 62 crore and Rs 435 crore, for the nine months ended August 2008. On the back of strong volume growth, outsourcing and cost reductions in logistics/supply chain, EBIDTA margin is expected to improve to 28 per cent over the next two years from 23 per cent currently.
With minimal capex and zero debt, expect the current cash hoard to grow to about Rs 700 crore (Rs 235 per share) for the year ended November 2008.
The two key risks for the company are on the regulatory front (currently 22 per cent of its products are under price control) and the presence of a 100 per cent subsidiary though the company has not launched its products through this route for CY08. The stock is available at 9.2 times its adjusted CY08 EPS of Rs 52, and can deliver 30 per cent over the next one year.
Savita Chemicals
Despite the drop in base oil prices, petroleum specialty product (including transformer oil) manufacturer, Savita Chemicals is likely to see an improvement in operating profit margins (OPM) only from Q1 FY10. Base oil prices (key raw material for transformer oils) have dropped 63 per cent from their August 2008 peak to about $530 per tonne, but due to the inventory carryover, OPM will range 7-7.5 per cent for the last two quarters of FY09.
While the near-term will be challenging due to delays in projects in the power sector, it is estimated that the Rs 1,500 crore transformer oil segment is likely to grow at 15-20 per cent in FY10. The company expects exports of transformer oils and liquid paraffin to touch 18 per cent of the estimated Rs 1,200 crore turnover in FY09. Growth would have been higher, but for the slowdown in demand in its key West Asian markets.
While the company has invested Rs 65 crore in debottlenecking capacity and wind power business, capex funding for FY10 is unlikely to be an issue with ebt-equity ratio at just 0.2.
The company has been generous in its dividend policy doling out nearly 100 per cent dividend every year for the last four years, and good growth prospects for the sector means this is likely to continue. The stock is trading at just 3 times its FY10 earnings and can give returns of about 25 per cent over the next one year.

Thermax
The industrial production (IIP) figures, which reflected a decline of 0.41 per cent in October are clearly signaling an industrial (steel, refinery, cement, etc) slowdown and thus, its impact on companies in the engineering sector (like Thermax). The stock of Thermax has corrected almost 80 per cent from its peak of Rs 925 in January 2008, and well reflects the current economic conditions.
This can be attributed to higher industrial exposure, given that Thermax generates about 70 per cent of its revenues from products and solution including heating, cooling, waste heat recovery and captive power for various industries. The remaining 30 per cent comes from environment, which includes water treatment and recycling, waste management and chemicals.
As the concerns over economic growth may remain for some time, there is some improvement seen. The industrial growth, albeit marginally, has recovered to 2.38 per cent in November 2008.
The lower commodity prices, improving credit availability, falling interest rates and increasing government intervention to arrest the economic slowdown are some more positive developments. Even in the short-term, the company’s existing order book of Rs 4,500 crore (1.3 times its FY08 revenue), should ensure healthy revenue growth. Above all, Thermax is well-managed and a debt-free company, having a track record of consistent growth in revenues and regular dividend payouts. Valuations, too, look appealing (current P/E of 7 times TTM earnings) in light of the historical PE range of about 6-35 times.

Paper Products
A part of Finland-based Huhtamaki Oyj (a leading global consumer packaging company with operations in 36 countries), Paper Products is a dominant flexible packaging player in India and provides total packaging solutions (flexible packaging, labelling, specialised cartons, holograms, and packaging machinery).
A majority of its revenues (over 70 per cent) come from the FMCG industry, besides other categories like seeds, specialised chemicals, pharmaceuticals and electronics. Its client list includes nearly all the top names—Unilever, Nestle, Britannia, Coca Cola, Pepsi, Perfetti, Colgate, Tata Tea, Mico, Castrol, Cadbury, Dabur and P&G and many others. Its fortunes are thus, largely linked to those of the FMCG players, which have done reasonably well in the last few quarters.
Paper Products, too, has reported a growth of about 22 per cent in net sales at Rs 508 crore for the nine months ended September 2008 (year ending is December). However, forex losses to the tune of Rs 10.5 crore (including book loss of Rs 5.75 crore) resulted in profit after tax declining 19.7 per cent to Rs 16.6 crore.
That apart, pressure on margins, on account of higher raw material prices (films, polymers which are derived from crude oil and metals) also existed during most part of 2008. The margin pressure however, should ease going forwrd as crude oil and metal prices have fallen sharply (part of this could get offset due to the rupee’s depreciation).
Since product packaging involves protecting the product from damage, weather, pilferage and leakage, technology plays an important role. And, Paper Products’ emphasis on technology driven solutions and ability to innovate has helped it sustain leadership in the business.
Going forward, its investment in expanding capacities (in 2007 and 2008) will help sustain volume growth, which together with easing pressure on margins, should help the company report 15 per cent growth in profits over the next two years.

Varun Shipping
Energy transportation company Varun Shipping is increasing its focus on the offshore segment (LPG and crude tankers are its other segments) with the acquisition of its sixth anchor handling towing and supply vessel (AHTS) recently. The increasing demand for AHTS vessels for deep sea exploration activity in KG Basin, North Sea and coasts of Nigeria, Brazil and Mexico is expected to increase the share of the company's revenues in the high margin offshore segment from two per cent earlier to about 25 per cent (about Rs 200 crore) in the current fiscal.
Despite the fall in crude oil prices, the company believes that the offshore segment will continue to see good demand on the back of increased oil exploration activity and a likely uptrend in crude prices going ahead. In its LPG business, which contributes to half of its revenues, the company expects coastal business to compensate for the drop in imports due to increased production at Reliance Industries.
While the energy transportation sector has been less impaced than the dry bulk segment, the drop in overall demand will mean a hit of about 10 per cent to the company's top line in the current fiscal. The worry for the company will be the Rs 2,200 crore debt on its books, which could aggravate if global recessionary conditions continue to depress freight rates.
The stock is available at 4.2 times its estimated FY10 earnings. With a consistent dividend track record of nearly two decades, Varun could generate about 20 per cent returns in the next one year.