Ramesh Damani is an unabashed proponent of buying shares with high dividend yield. If one looks at Ramesh Damani‘s stock picks carefully, one can see that Ramesh Damani has his eye firmly on the dividend yield. Ramesh Damani made this quite plain when he recommended GIC Housing and Precision Wire. Both of Ramesh Damani‘s were giving high dividend yields of between 4 to 5% at the time Ramesh Damani spotted them. This high dividend yield, coupled with the fact that the shares had excellent growth prospects, made them compelling purchases according to Ramesh Damani. Since then, Ramesh Damani‘s stock picks have also appreciated considerably in value giving the investors a win-win situation! (See Ramesh Damani’s Stock Picks & Ramesh Damani’s investment mantra for your portfolio)
Rakesh Jhunjhunwala, India’s greatest investor, shares the same fascination for high dividend yield stocks. Rakesh Jhunjhunwala recalls the heady days of 2000 when every investor was purchasing shares of so-called growth companies like Himachal Futuristic, Global Tele and Pentasoft while Rakesh Jhunjhunwala was quitely buying shares of Shipping Corporation, Bharat Electronics & BEML. Why, because these shares returned a very high dividend yield for Rakesh Jhunjhunwala. (See Rakesh Jhunjhunwala’s investment techniques & Rakesh Jhunjhunwala’s tips on how to find multibagger stocks)
Ramdeo Agarwal, millionaire founder-partner of Motilal Oswal Financial Services Ltd, also places heavy reliance on the dividend yield. Ramdeo Agarwal says that in early 2000 he was fascinated with shares like State Bank of India and Hero Honda because they offered a high dividend yield. Ramdeo Agarwal bought these shares heavily because he could rest in the comfort that even in the worst case scenario he would not lose out thanks to the high dividend yield. (See South Indian Bank:Ramdeo Agarwal’s multi-bagger stock?)
Warren Buffett, the emperor of Wall Street, made his billion-dollar empire on the same common-sense logic. Warren Buffett makes this quite plain when he says that you must only buy those shares which you would be happy to hold on to even if the stock market was shut for 10 years! What is Warren Buffett referring to? It is obvious that Warren Buffett is referring to the dividend yield because if you continued to get a yield on your investments in shares which was higher than what you would get from a bank or a fixed deposit surely you would be happy to keep your money in shares, is Warren Buffett‘s indisputable logic.
So, why are the master stock investors Ramesh Damani, Rakesh Jhunjhunwala, Ramdeo Agarwal and Warren Buffett so enamored by high dividend yielding stocks? Well, there is multiple logic to support the liking of these astute investors for high dividend yield stocks. First, a company can afford to pay out dividend consistently only when it is consistently making profits and hopes to be able to do so in the near future. So, the dividend payout gives you an assurance that the company’s management is confident of the company’s prospects in the forseeable future. Second, a high Dividend Yield is an important safeguard whilst buying shares because they provide you with the much needed downside protection. There is comfort in knowing that the share price cannot dip beyond a certain level. Also, even if the share price does plummet you can rest assured that your investment in shares is yielding a reasonable rate of return comparable to what you would have earned from a bank or a fixed deposit.
So, in the heady days of 2010, are there any high dividend yield stocks ripe for the picking? Well, our investment sleuths have identified five such stellar picks which will give you the much needed capital appreciation whilst protecting the downside.
VST Industries Ltd
At the CMP of Rs. 572 and the dividend payout for FY 2009-10 at Rs. 30 (300%), VST Industries is offering a very attractive dividend yield of 5.24%. VST Industries‘ dividend payout of 300% is not unusual. It has maintained such high levels of payout since the past two years ranging from 200 – 300%.
Warren Buffett always says that one must invest in companies that have a “moat” around them. VST Industries has a huge “moat” around it. VST Industries is involved in the business of manufacturing cigarettes. The cigarettes industry is so highly regulated that the Government has stopped issuing any permissions for setting up new units. The result: No incremental competition for VST Industries!
The best thing about VST Industries is that it has a strong and healthy balance sheet and has been consistently paying dividend. As of 31st March 2010, VST Industries had zero debt and huge cash investments. VST Industries‘ equity capital is Rs. 15.44 crores while the shareholders’ funds are Rs. 250.29 crores. VST Industries‘ market cap is Rs. 872 crores. VST Industries‘ cash investments are Rs. 190.3 crores which is about 21.8% of the market cap.
VST Industries‘ results for Q1 FY11 were a bit subdued. VST Industries reported a marginal rise in net revenues to Rs. 127.85 crores from Rs. 126.12 crores in the same quarter in FY 2008-09. VST Industries‘ net profit declined 25.23% to ` 18.02 crores from Rs. 24.10 crores.
VST Industries is unlikely to show any stellar results in the foreseeable future. Also, the problem with VST Industries is that industry is in a sunset phase. At the same time, consumption of cigarettes is unlikely to plummet soon. The result is that VST Industries will continue to generate large cash flows and continue its policy of making generous distribution of dividends to shareholders.
Chennai Petroleum Corporation Ltd
At the CMP of Rs. 251, Chennai Petroleum is offering a dividend yield of 4.8%. Chennai Petroleum has a long history of dividend payments. Chennai Petroleum skipped dividend only once in FY2009 due to losses owing to the global recession. In FY 2008 Chennai Petroleum paid a dividend of 170% and in FY2010, Chennai Petroleum returned to the dividend list with a payout of 120%.
Chennai Petroleum is a standalone refinery with 9.5 million tonne capacity operating in Tamil Nadu. Indian Oil holds 51.9% of Chennai Petroleum while Iran’s National Oil Company holds 15.4%.
The best thing about Chennai Petroleum is that apart from the recent liberalisation in the petroleum pricing regime announced by the Government which will benefit Chennai Petroleum, Chennai Petroleum has been on making huge investments in several projects. Chennai Petroleum has completed a 17.5 MW of wind power, 20 MW gas-based power plant, seawater desalination project and revamp of catalytic reforming unit for converting naphtha into petrol.
Chennai Petroleum has also implemented a de-bottlenecking project to increase its refining capacity by 10% to 10.5 MTPA. Chennai Petroleum has also undertaken an up-gradation project to introduce Euro III/IV grade auto fuels.
Chennai Petroleum has also set up a single point mooring (SPM) facility integrated with crude oil terminal for its Manali Refinery. This will enable Chennai Petroleum to procure crude imports through very large crude carriers.
The end result is that Chennai Petroleum will optimise its costs, improve operations and become more profitable.
Chennai Petroleum reported poor results for Q1 FY 2011. While Chennai Petroleum‘s sales increased 11.79% to Rs 6327.65 crore in the quarter ended June 2010 as against Rs 5660.39 crore in the previous quarter ended June 2009, its’ net loss was Rs 55.31 crore in the quarter ended June 2010 as against net profit of Rs 304.72 crore during the previous quarter ended June 2009. However, the loss appears to be a bit of an aberration caused by lower throughput as the incremental 1mn ton capacity which was added recently was under stabilization phase and the lower GRMs of US$1.8/bbl as against US$6.9/bbl in Q1 FY10 and US$4.3/bbl in Q4 FY10. Chennai Petroleum‘s management has indicated that in Q2 FY11 the GRMs will be much higher at US$4.5/bbl.
Chennai Petroleum announced in September 2010 that it was planning to set up a 9 million tonnes per annum (mtpa) brownfield refinery in Manali, north of Chennai, at a cost Rs 10,000 crores. This will replace Chennai Petroleum‘s ageing 2.8 mtpa refinery and help achieve better energy/utilities management and optimal product pattern. Chennai Petroleum‘s project is expected to be commissioned by the end of 2015. Further, to increase the distillate yield of its refinery and reduce fuel oil production, Chennai Petroleum plans to install a high conversion resid upgradation unit at a cost of Rs 33.5 billion. This project is expected to be completed by 2013 end.
Chennai Petroleum‘s valuations are not very challenging either. In FY 2010, Chennai Petroleum‘s basic & diluted EPS was Rs. 40.51. At the CMP of Rs. 251 the PE ratio is 6.19 which is not unreasonable given the dividend history and the expansion plans on anvil.
Samkrg Pistons and Rings
At the CMP of Rs. 85, Samkrg Pistons and Rings is offering a dividend yield of 4.7% on the basis of the 40% dividend it declared in FY 2009-10. Samkrg Pistons and Rings has a consistent track record of dividends ranging from 30 to 40%.
Samkrg Pistons and Rings is engaged in manufacture of pistons, piston pins, piston rings & circlips for the automotive industry. Samkrg Pistons and Rings has three manufacturing facilities having ISO 9002 and QS-9000 certification located at Hyderabad.
Samkrg Pistons and Rings has benefited from the recent boom in the automotive sector. Samkrg Pistons and Rings returned good results for Q1 FY 2011. Samkrg Pistons and Rings reported a sales turnover of Rs 41.14 crores and a net profit of Rs 2.18 crores for the quarter ended Jun 2010. This marks a huge increase because for the quarter ended Jun 2009 the sales turnover was Rs 27.48 crores and net profit was Rs 1.14 crores.
Samkrg Pistons and Rings‘ steady growth coupled with the boom in the automotive sector and the high dividend yield make it a good investment prospect.
Pondy Oxides & Chemicals Ltd
At the CMP of Rs. 35, Pondy Oxides offers a dividend yield of 3.40% on the basis of its FY 2009-10 dividend payout of 12%. Pondy Oxides has a consistent track record of dividends ranging from 12% to 15% though in FY 2008-09, this was reduced to 5% owing to the global recession.
Pondy Oxides is engaged in production of Zinc Oxide, Litharge, Grey Oxide & Red Lead. Pondy Oxides sells these products to battery manufactures. Thanks to the growth in the automobile sector, Pondy Oxides has seen increasing demand for its products.
Pondy Oxides reported good results in Q1 FY 2011. While Pondy Oxides‘ sales increased 126.48% to Rs 60.04 crores in the quarter ended June 2010 as against Rs 26.51 crores during the previous quarter ended June 2009, the Net profit increased 40.00% to Rs 1.40 crores in the quarter ended June 2010 as against Rs 1.00 crores during the previous quarter ended June 2009.
At the CMP of Rs. 35 and the FY 2009-10 EPS of Rs. 5.71 Pondy Oxides & Chemicals is available at a PE of 6.17 which is not very challenging.
Cosmo Films Ltd
At the CMP of Rs. 148, Cosmo Films Ltd offers a dividend yield of 3.36% on the basis of its FY 2009-10 dividend yield of 50%. Cosmo Films Ltd has made a dividend payout of 50% in the last three years.
Cosmo Films is engaged in manufacture of Biaxially Oriented Polypropylene (BOPP) film for packaging and electronic applications.
ACQUISITION OF GBCS PRINT FINISHING BUSINESS
On 11th June 2009, Cosmo Films completed the acquisition of GBC’s Commercial Print Finishing Business, from ACCO Brands Corporation of USA, for a purchase consideration of USD 17.1 million. This business, with global sales revenue of approx USD 100 million in 2008, has manufacturing facilities in US, Netherlands and South Korea. The purchase consideration was funded by combination of internal accruals, debt and seller deferred payment note of USD 4 million.
This acquisition will help Cosmo Films to further strengthen its presence in the global market including key markets of Europe and United States.
In FY 2009-10, Cosmo Films‘ Net Sales grew 15% year on year (standalone) though EBIDTA remained flat due to difficult market conditions in India, sluggishness in European markets and stiff depreciation of Euro against USD/INR. The acquisition of GBC helped to partly offset the adverse impact of aforementioned factors. With the commissioning of new BOPP capacities in India, competition in domestic markets may further intensify. The decline of Euro vis a vis USD & INR continues unabated and Cosmo Films‘ margins are likely to remain under pressure.
In Q1 FY 2011, Cosmo Films‘ Net profit declined 23.93% to Rs 9.44 crores as against Rs 12.41 crores during the previous quarter ended June 2009. Cosmo Films‘ sales rose 29.78% to Rs 227.53 crores in the quarter ended June 2010 as against Rs 175.32 crores during the previous quarter ended June 2009.
From a medium to long-term perspective, Cosmo Films looks promising owing to its strong presence in the BOPP film market. Cosmo Films‘ attractive dividend yield mitigates the risk of investment to a great extent.