Will investing in PSU stocks for dividends pay off?

Will investing in PSU stocks for dividends pay off?

Coimbatore, Feb. 15 While dividend chasing may not be for the faint hearted, the fact that stock prices have come down sharply in 6-7 months gives an opportunity to investors to log on to stocks that are reasonably valued and benefit from dividend payouts.

There is fear that stock prices may head further south once results start trickling in if there is any decline in market sentiment. But the performance of companies in the past nine months would give a fair indication as to how they are likely to close the current fiscal and if they would stick to their dividend track record. A few PSUs have announced interim dividends, giving an idea of the payouts possible.

Generally, investment pundits advice not to take investment decisions solely on the basis of dividend yield because there is no guarantee that companies would persist with a sustained high dividend paying policy, particularly in an uncertain market environment. Moreover, stock investments are done with a view to benefit from share price appreciation rather than from dividend payout, which, even though generous and tax free, cannot equal value appreciation. But any high dividend yield would, to some extent, soothe the psyche of the investors battered and bleeding after steep value erosion in stock prices.

Hinges on Govt policy

It is in this context that investment in PSU stocks could be seriously considered. Generally, the successful PSU companies have been good dividend payers. The fact that the Central Government has been a major shareholder in them and that these companies are in core sectors such as oil, defence, engineering, banking, transport, metal and therefore relatively immune to financial turmoil were reasons for their dividend record. The economic stimulus package announced by the Government also would have a long-term impact on these companies. Of course, the oil marketing companies – IOC, BPCL and HPCL – which generally pay high dividend, were victims of Government policies and the high crude oil prices last year, making them prune dividend payouts. This time, it could be the turn of oil refiners like CPCL to cut down on dividend with oil prices on the decline.

Dividend yield

A look at the dividend payouts by some PSU last year gives an idea as to how much valuable the dividend yield could be because of the sharp decline in their share prices now. Some of them have seen dilution in equity due to bonus/rights issue and hence reduction in dividend percentage is possible. But the advantage to the investors is that they are investing when share prices are low and have the double benefit of value appreciation, when market rebounds, and dividend income.

Some of the high dividend (all data on per share basis) paying PSUs last year were Balmer Lawrie (Rs 17), BHEL (Rs 15.25), BEML (Rs 12), Chennai Petroleum Corporation Ltd (Rs 17), Container Corporation (CONCOR) (Rs 18.50), Dredging Corporation ( Rs 15), GAIL (Rs 10), LIC Housing Finance (Rs 10), ONGC (Rs 32), SCI (Rs 8.50) and SBI (Rs 21.50). The oil marketing PSUs – IOCL, HPCL and BPCL – which paid lower dividend last year, may be more generous this time as crude oil prices have nosedived sharply from a high of $145 plus a barrel to $40 a barrel. A few PSUs have set the tone for dividend outgo by announcing interim dividends – BHEL (Rs 9 for a share), GAIL (Rs 4), ONGC (Rs 18) and CONCOR (Rs 6).

Mr Hitesh Agrawal, Head-Research, Angel Broking, Mumbai, said it the correction in stock prices has made the dividend yield in many PSU stocks attractive. However, it was important to note that considering the weak domestic economic outlook and the liquidity constraints being faced by India Inc, the cash flows of most PSU companies would also be under pressure. Therefore, what was more important to remember was that the dividend yield, particularly over the next couple of years, may not be a repeat of the past.

Growth vs Dividend

On the growth versus dividend argument, Mr Agrawal said it “is important to note that in the absence of growth, dividends cannot be sustained for long. Thus, both these factors go hand in hand, though their distribution pattern may deviate for short periods of time.”

Oil marketing cos

On how he expected the oil marketing companies and oil refiners to decide on the dividend payout, he said the absence of secular growth trend in earnings has resulted in varying dividends for the oil marketing companies.

However, these companies have been able to manage the dividend payout in the range of 30 per cent to 40 per cent and the trend is likely to continue.

For FY-09, dividends are likely to be much in line with dividends for FY-08 (low dividend for a share) on account of higher subsidy burden and inventory losses during the year. For FY-10, the dividends may increase.

But Mr Agrawal said ONGC could pay a healthy dividend over the next couple of years on account of its strong balance sheet and huge cash flow from operations.

Also, higher Government holding and falling direct and indirect taxes’ collections are likely to result in Government asking higher payout from companies such as ONGC.