Indian Market Review from Keynote Capitals: Low Dividend Yield Stocks
Both in bull and bear markets, a large number of investors seek out high dividend yield stocks, as the latter apparently provide returns similar to that on say fixed deposits with banks. Most investors view high dividend yield stocks as safe bets. However, investors tend to overlook the fact that the primary objective of equity investments is capital gains, rather than fixed returns.
We conducted a study in order to understand the market’s perception of high dividend yield and low dividend yield stocks and arrived at the following conclusions.
Summary of findings
- Aggregate earnings growth: Remarkably, low yield stocks reported a higher average earnings growth y-o-y (65% in FY07 and 37.5% in FY08) vis-?-vis high yield stocks (30.5% in FY07 and 14.9% in FY08).
- Aggregate market cap changes: High yield stocks (down 32.5%) however outperformed low yield stocks (down 32.9%) during the period under consideration.
- Dividend payout: High yield stocks reported higher payout of 35.4%, while the payout of low yield stocks was far lower at 11.8%.
- Sector prospects: Stocks from emerging and high growth sectors offered low yield, while stocks from sectors with low to moderate growth offered high yield.
- Average yield: High yield stocks had an average yield of 4.3% and low yield stocks, 0.5%
- Safe bets? If profit growth in high yield stocks is indeed lagging that in low yield stocks, can the former really be considered “safe bets”? We believe slower profit growth may indicate a lower probability of dividend percentage and payout being maintained going forward, failing which the yield could decline, making these stocks “less attractive” than they appear currently.
Conclusion
We therefore conclude that high yield stocks may not necessarily be safe bets after all, especially as they most probably belong to low-to-moderate growth companies, while it is the low yield stocks that could actually have a higher likelihood of giving better returns, by virtue of belonging to moderate-to-high growth sectors.
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| Latest Indian Stock Market Reports |
Indian stock market daily morning report (March 18, 2010, Thursday)
The Sensex closed positive yesterday in line with the strong markets as sentiments turned bullish after the US Fed Reserve maintained its pledge to keep interest rates near zero, and pointed to increased momentum in the recovery of the US economy. Metal stocks rose on gains in metal prices on the London Metal Exchange. Infosys Tech and TCS touched all-time highs on improving demand outlook on the back of a recovery in world markets.
Indian stock market and companies daily report (March 18, 2010, Thursday)
The benchmark indices surged in early trade, tracking firm global stocks. Global stocks rose after the US Fed held benchmark rates near zero and maintained its pledge to keep them low for an extended period. However, after hitting its highest level in nearly two months in morning trade, the market trimmed gains in early afternoon trade. The Sensex and the Nifty gained 0.6% and 0.7%, respectively, while the BSE Mid-cap and Small-cap indices gained 0.2% and lost 0.1%, respectively. Among the front-liners, Hindalco, ICICI Bank, TCS, L&T and Sun Pharma were up by 2-3%, while Maruti, HUL, Tata Power and Mahindra & Mahindra were down by 1-2%. In the mid-cap segment, STC, Andrew Yule, HMT, Amtek Auto and Engineers India were up by 5-18%, while Shriram City, MVL, Bannari Amman Sugar, Coromandel Intl, and Shree Renuka were down by 4-6%.
Indian stock market daily morning report (March 17, 2010, Wednesday)
The Sensex closed positive yesterday on the back of the rally in index heavyweights like Reliance Industries and L&T. Buying was seen across all sectors except FMCG and PSU stocks in the last couple of hours of trade. Market breadth was strong at around 1.77x as investors bought large cap stocks. FIIs bought equities worth Rs3.77bn, while domestic institutions sold equities worth Rs1.58bn. The Asian markets are trading positive this morning. The Nikkei is up as the US Fed pledged to keep borrowing costs near zero for an “extended period” and the yen weakened. The Hang Seng is also trading positive.
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| Indian Stocks Recommendations |
Godrej Properties IPO review and analysis by Angel Broking, 9 December 2009
Godrej Properties Limited (GPL) intends to develop its projects through joint development agreements with land owners. Under this asset-light model, GPL will enter into revenue, profit or area-sharing agreements with land owners, instead of an outright purchase of the land. This model avoids direct land dealings for GPL and the locking-up of extensive capital in land. Around 80% of GPL's existing land bank will be executed through joint developments with partners. The Godrej brand name has been associated with quality and strong corporate governance. Both of its existing listed entities, Godrej Consumer Products and Godrej Industries have given CAGR Returns of 48% and 77%, respectively, to investors since 2001. We believe that GPL could leverage its parentage brand (with respect to access to the land at Vikhroli and a strong customer preference towards it), assuring a timely delivery of execution. More than 50% of GPL's existing land bank is exposed towards township projects and in one location (Ahmedabad), which will be executed over the next ten years. Any delay in this execution or a fall in property prices in Ahmedabad will impact our NAV estimates, as 50% of our NAV is derived from this project.
JSW Energy Ltd IPO review and analysis by Nirmal Bang, 8 December 2009
JSW Energy Ltd. (JSWEL) is a power project development company, which is developing, and will operate and maintain, power projects in India. The company has two thermal power projects under operation, with a combined installed capacity of 860 MW. JSWEL is a part of the JSW Group, a leading business group in India. JSW Group has a presence in high growth sector like Steel, Energy, Aluminium, Cement, Infrastructure and Logistics. Post IPO holding of Promoter and Promoter Group would be 78.12%
JSW Energy IPO review and analysis by Angel Broking, 7 December 2009
JSW Energy (JSWEL) currently has operational capacity of 995MW and is in the process of executing projects with capacity of 2,655MW. In addition, the company has 7,740MW power generation projects at an early stage of development. A major portion (2,145MW) of JSWEL’s upcoming capacities is expected to be operational by FY2011E thereby providing near-term visibility. Out of the plants under construction, the company expects to commission 570MW by end FY2010E, while another 1,575MW is expected to get operational in FY2011E. Thus, a robust portfolio and near-term Revenue visibility is a major positive for the company.
| | Indian News |
Indian Banking fortnightly report (February 2010), 15 March 2010
Indian Union Budget review 2010-2011, 6 March 2010
Indian Auto Sector Update, 6 March 2010
Indian Economic Survey 2010, 25 February 2010
Indian railway budget 2010 analysis, 24 February 2010
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