Monday, February 21, 2011

Are good days going to come back again?

Here is a snippet of the article in economic times dated 30 March 2001 with my own emphasis highlighted in bold letters:

While the market may have belied the hopes of investors looking for capital appreciation, the sharp downturn in prices has raised the dividend yield for many companies. With the annual results fast approaching, dividend income from companies may prove to be a source of steady income for investors.
Consider the case of Blue Star, for instance. The company has been paying dividend consistently for the last three years. With the dividend declared last year at Rs 5 per share and the current market price at Rs 30, the dividend yield works out to as high as 16.5 per cent. Even if the company pays Rs 3.5 as dividend this year, the dividend yield still stands at 11.5 per cent, which is tax-free.
This is not all. There are many others like Kirloskar Oil, VIP Industries, GNFC, Tat Finance, Wellwin Industries and Bank of Punjab, which have a consistent dividend-paying record over the years and an attractive dividend yield of 10 to 13 per cent based on their current prices. In some cases like Pentamedia, Paper products and Avanti Feeds, there has also been a gradual increase in their dividend pay-out over the years.
Of all the 4,000 plus companies listed on the BSE, there are around 775 profit-making firms, which have a consistent dividend paying track record for the last three years. While some companies have a very low dividend yield, others run the risk of not being able to repeat their past performance. In a detailed study, ET tried to identify companies which may provide attractive dividend yields, assuming they maintain their past dividend paying record. Taking a cut-off for the dividend yield at 10 per cent or more, based on the dividend paid last year, and by including only those companies with a positive net profit growth in the trailing 12-month period, compared to the previous year, the list was pruned to just 80.
Since liquidity is of paramount importance, only those companies were selected which had an average daily volume of atleast 500 shares and market cap above Rs 10 crores. In many cases, the volumes have dried up in the current market scenario.
The final list had around 20 companies. Ashok Leyland Finance is at the top with a dividend yield of 16.7 per cent, followed by Blue Star with 16.5 per cent and Garware Wall Ropes with 16.1 per cent. It is the tax-free nature of dividends which make share attractive, compared with the falling interest rates on other fixed income instruments. Also, with the finance minister reducing the tax on the dividend paid out by companies from 20 to 10 per cent in the current Budget, it is possible that some corporates may even increase their dividend pay-out.
The only risk involved in dividend pay-out on shares is that of a capital loss. This is because there is a time lag between the dividend declaration date and the actual payment date, which could be as much as three months. Capital could thus erode in the intervening period. Also, in some cases, the volumes are quite low, due to which there remains a risk of not being able to exit.
Returns Flight

Company FY '00 Div (%) FY '99 Div (%) FY '98 Div (%) TTM NP Chg (%) Latest Price (Rs) Div Yield (%)
Ashok Leyland Fin 40 40 50 39 24.0 16.7
Blue Star 50 35 35 10 30.4 16.5
Garware-Wall Ropes 20 20 18 17 12.4 16.1
Goetze (India) 25 20 40 9 18.3 13.7
Wellwin 25 25 22.5 55 19.5 12.8
VIP 25 25 25 35 19.8 12.6
Pentamedia 120 70 55 1 95.7 12.5
Avanti Feeds 35 25 18 37 29.1 12.0
Lakshmi Auto 25 30 30 23 21.0 11.9
Advani Oerlikon 15 25 25 130 13.2 11.4
City Union Bank 25 20 25 7 22.2 11.3
Varun Shipping 14 14 21 1 12.5 11.2
GNFC 25 22 22 4 22.4 11.2
Tata Sponge Iron 20 10 18 100 18.0 11.1
Bajaj Auto Fin 30 25 2 4 27.8 10.8
Kirloskar Oil 35 35 35 49 32.6 10.8
Tata Finance 45 40 40 12 42.0 10.7
Bank of Punjab 15 14 14 46 14.6 10.3
Tata Yokogawa 32.5 32.5 30 23 31.9 10.2
TTM - Trailing 12 months, NP-Net Profits

Not every company in this list turn out to be a good investment. Blue star share price multiplied from INR 30 to INR 1700 today (5:1 split with price of INR 340 today) and Advani Oerlikon (Ador Welding) going up from INR 13 to INR 170 today but Varun Shipping is still languishing at INR 30.  I would like to remind investors that at the bottom in March 2009, many small cap companies were available at similar valuations, IMPAL @ 120 giving dividend of INR 12 yielding 10%, Garware Wall Ropes @ 25 giving dividend of 2.5 yielding 10% and many more such companies.

Is Mr Market going to give this kind of opportunity again in 2011?

Smart doesn't always equal rational.

Image: renjith krishnan /

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Mahesh said...

Hi Chinmay,

Small correction, Blue Start CMP is 330 not 30..hope u missed typing 3 :-).

I am silent reader since from 2 years :-).

I gain immense knowledge from you.

Keep up your spirit.

Chinmay said...

Hi Mahesh,

There is no typo. The current market price I have mentioned is 340 after a 5:1 split so actual price is 1700 while the same was 30 at the time of article, i.e. in March 2001. So in almost 10 years, the price has gone up by 57 times (not percent). If you look at the dividend, the company gives INR 8 as dividend last year which for split adjusted is INR 40. So if you buy blue star at INR 30 in 2001, you will be getting INR 40 as dividend today after 10 years. So investment of INR 30000 would be earning INR 40000 a year in dividends, capital gains are just by-product here.

Chinmay Asarawala

Sachin Dixit said...

As you told :-
IMPAL @ 120 giving dividend of INR 12 yielding 10%

But IMPAL is trading @ 680 with dividend yield of 0.23%
Is their something I am missing ?

Chinmay said...

Hi Sachin,

I am not talking about IMPAL's price today. I am talking about IMPAL's price in March 2009, when the Sensex was at 8K+. IMPAL bottomed at around 120 and declared dividend of 12 in FY09. My apologies for a lot of confusion in this post.

I am comparing data from three different time frames, one in March 2001 which a bear market bottom, another in March 2009 which also was a bear market bottom and the other one is of today's where there are hardly any good company available providing reasonable dividend yield.


Mahesh said...

Chinmay sir sorry for delay relpy and thanku for clarification. May i know your email id have some stocks to discuss.

Chinmay said...


I don't give individual portfolio advice. I am not a full time financial adviser. You should get one for yourself.


Mahesh said...

i am of my own, making significant lucre from odd stocks. Just curious to know whether you came across stocks intended to discuss. Any way keep providing analysis. Thanks.

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