Value creators for turbulent times

The only thing that gives me pleasure is to see my dividend coming in”, said John D Rockefeller, American oil magnate and philanthropist. This view seems more apt than anything else in the current volatile market. In normal market conditions, average investors would prefer to invest in those stocks that give them good capital appreciation over a period of time. The current conditions, though, can be described as anything but normal. Once again, fears of a global recession are looming large, and this is reflected in the equity market’s performance. The Indian equity market is down by 20 per cent Year-to-Date (YTD), and this is also true for most of the world – most equity markets around the world have shown negative returns during this period as well.

So, what are the options that one could look at in such times? Well, fixed income securities would logically figure high on the list of most investors when interest rates are rising and equity markets are falling. However, traditional wisdom has it that equity is the best asset class, and offers a good capital appreciation opportunity over a longer period of time.

Consider this. What if you were helped to build a portfolio consisting of stocks that offer you the best of both worlds – capital appreciation as well as steady periodic income in the form of dividends – in such volatile times? After all, isn’t successful equity investing about creating long-term wealth, rather than just benefiting from the good times? 

We, at DSIJ, have tried our best to put together a quick list of ‘best of both worlds’ for the benefit of our readers. Certain companies not only provide fixed returns in the form of dividends, but also have a scope of good capital appreciation. This recommendation, of course, comes with the universal caveat that ‘past performance is no guarantee of future results’. Nevertheless, we have tried to weed out those companies which we feel are not likely to perform well in future.

While we started out with a list of 222 companies (please see  Methodology for details of how we have arrived at the list), we have shortlisted 11 companies after applying other financial parameters like dividend coverage ratio, debt equity ratio and so on. The list is largely dominated by finance companies, which include banks, both from the private and the public sectors. At a distant second comes the pharmaceutical sector, followed by FMCG and IT-ITES companies.

Conclusion:

Certain well-known companies are conspicuous by their absence in this list, despite the fact that they pay high dividends per share. This is either due to higher share prices and hence low yield, or on account of inconsistency in their dividend payments. However, we are also providing a list of the top 50 companies that dole out highest dividend (in rupees) for our readers’ information.

With respect to our original list of companies, we suggest that our readers invest in the stocks in a staggered manner, and expect stable returns in the coming years.

The total shareholder returns for Aegis Logistics (Aegis) stands at a 95 per cent. This means that if an individual had invested Rs 100 in this company in the year 2006 and was still holding on to the scrip, then the value would have been Rs 195 as of today. Aegis provides total supply chain management services to the Indian petroleum industry. It also has presence in the Auto LPG (ALPG) retailing business. The company has a presence across eight states in the western and southern regions of India. It has played a pioneering role in the development of an extensive retail network of Auto LPG stations in India under the brand name Aegis Autogas. The company operates in two segments, logistics and gas. 97 per cent of its revenues are derived from the gas segment, while the rest comes from logistics. Aegis owns and operates a fully-refrigerated 20000 MT LPG import terminal. [PAGE BREAK]

It also offers gas logistics services to major customers on a contractual or spot basis. Such services include storage of gas and delivery to the customer’s site, either by pipeline or road tankers. The logistics segment is involved in the sourcing, marketing and distribution of various chemicals, oil and petroleum products. The company provides logistics services, primarily to the importers of petroleum and chemical products. It has a terminal at Trombay in Mumbai, which is connected to three jetties at the Mumbai port. Aegis has created value over a period, and has a dividend yield of two per cent and a coverage ratio of more than 2x. We believe that the company is likely to create more value for its shareholders ahead, and is also likely to maintain its dividend policy going forward. One can look at the stock from a longer-term perspective.

Colgate Palmolive (I)

If an investor had invested Rs 100 in Colgate in FY06, at this point of time the individual would have been sitting on Rs 246. This implies a total shareholder return of 146 per cent. Colgate has been amongst the top companies in creating value for its shareholders. The company has been a consistent dividend payer since FY2000, and moreover, has man-aged to either increase or maintain its dividend at a constant for the last six years. It has a presence in oral care, with multiple products at various price points. The range includes tooth pastes, toothpowder, toothbrushes and mouthwash under the ‘Colgate’ brand, as well as a specialised range of dental therapies under the banner of Colgate Oral Pharmaceuticals.[PAGE BREAK]

Colgate offers investors a dividend yield of two per cent. In view of the edge it has over its competitors, the company is likely to maintain its dividend policy going forward. The dividend has been consistently paid out through its net profit, which gives out positive vibes on its cash generating capacity. The company is likely to be a value creator going forward too, and one can look at the stock from a longer-term perspective.

CIL has also signed an agreement with the Qatar Fertiliser Company (QAFCO) for the supply of urea. We believe that the price hike taken by the company from the start of April 2011, the company will be well placed in rewarding its investors going ahead.

Cummins India

Cummins India is a 51 per cent subsidiary of Cummins Inc. USA, the world’s largest independent diesel engine designer and manufacturer of above 200 horsepower. It also caters to the growing market for gas and dual-fuel engines. The company has the distinction of paying consistent dividends since FY90, and has never lowered its dividend rate.

As regards capital appreciation, the stock price of the company has increased 1.74x since the beginning of FY06. The company is virtually debt-free, with a debt-to-equity ratio of just 0.01x, and has a high return on net worth at 32 per cent.

Going forward, for FY12, the management expects its revenue to grow at around 12-15 per cent, with the domestic market growing at 25 per cent and exports expected to increase by around 15 per cent.

All this makes the stock look to be a good bet in a volatile market, offering you the best of both worlds in terms of capital appreciation as well as dividend payouts.

Deepak Fertilisers

Deepak Fertilisers and Petro-chemicals Corporation (DFPCL) is a multi-product company with three broad-based business segments: Chemicals, Fertilisers and Value-Added Real Estate. Chemicals contribute a maximum share of around 65-70 per cent to the revenue, followed by fertilisers, which contribute to around 30 per cent, while the rest comes in from realty and others. The company is a leader in the supply of Technical Ammonium Nitrate (TAN) in India, which is a critical requirement for the mining and construction industry. DFPCL intends to feature among the world’s top three TAN producers over the next five years.

On the financial front, for the five years ending FY11, the company has reported a topline CAGR of 22 per cent and a bottom-line CAGR of 20 per cent. We opine that the company will maintain this performance going forward, which will be primarily fuelled by the expansion and modification it is undertaking in its business verticals.

DFPCL has recently commissioned a new TAN complex at Mumbai, the production capacity of which will be ramped up throughout the year, and is expected to reach 160000 tonnes by the end of FY12. It is also setting up a new Concentrated Nitric Acid plant at the same location, which will manufacture 46200 tonnes per annum. On the realty front, work on the modification of Ishanya (India’s first International Design Centre and Speciality Mall) from a specialty mall to a lifestyle centre will be completed in Q3 of this year.

We believe that this will help the company to carry on with its strong dividend policy. According to the management, DFPCL would continue to reward its shareholders consistently.

Emami

If an investor had invested Rs 100 in the stock of this company in FY06, it would have yielded a total return of 363 per cent at present, which means that the value of investment would have been Rs 463. This kind of return speaks volumes about the value creation of Emami. The company’s brands enjoy wide acceptance, and it has a very strong distributor network that helps the company to have a good penetration level. Emami enjoys a leadership position with two of its brands, namely Navratna oil and Boroplus antiseptic cream. The market share of the two products stands at 49 per cent and 75 per cent as of 2010, as against 47 per cent and 65 per cent in 2005. It also enjoys a market share of 60 per cent in the men’s fairness cream segment. This position of being a market leader in several segments amply demonstrates the niche created by the company among its users. This is what sends extremely positive vibes among investors, and the company too has not disappointed its shareholders.[PAGE BREAK]

GIC Housing

GIC Housing, which started its operations way back in 1989 under the name of ‘GIC Grih Vitta’, has not only delighted its home loan customers, but also its shareholders. Not only has the stock appreciated well over a period of years, but the company has also been distributing a good portion of its profits as dividends to shareholders. It has a track record of consistently distributing dividends since it went public in FY95, and in no year after FY03 has this reduced. Promoted by some of the leading public sector insurance companies and financial institutions like GIC, New India Insurance, United India Insurance, IFCI and UTI, it has been continuously paying dividend since 1995, and almost a fifth of the total shareholder returns has been generated by way of dividends.

According to us, the company will continue to reward its shareholders going forward, by distributing generous dividends backed by a good financial performance. The topline and bottomline of the company have increased at a compounded annual rate of 14 per cent and 56 per cent respectively over the past ten years ending 2011. What is important to note is that, in the last few years the financial performance of the company has improved consider ably. It registered a robust growth of 70 per cent in PAT for the year ended 31st March, 2011. This growth has certainly not come at the cost of quality of assets. The Net Non-Performing Assets (NNPA) as on 31st March, 2011, stood at 0.41 per cent, as against 1.47 per cent for the previous year. The company is adequately capitalised to fund its future growth, and its Capital Adequacy Ratio (CAR) as on 31st March, 2011, stood at 15.42 per cent, as against the minimum requirement of 12 per cent. We feel that GIC Housing can add considerable strength to one’s portfolio over a period of time, without wilting too much under the current macro-economic pressures.

GRUH Finance

Dividend has been consistently paid out through its net profit, which gives out positive vibes on the cash generating capacity of the company. The company is likely to be a value creator going forward too, and one can look at the stock for a longer horizon.

TVS Srichakra

Had you invested Rs 100 in TVS Srichakra (TVSSL) in the year 2006, you would have been sitting on a pile of Rs 522 as of today. TVSSL is engaged in the manufacture of tyres and tubes for two- and three-wheelers.

It is a part of TVS, the USD 2.2 billion largest auto ancillary group. The company supplies tyres to major auto manufacturing companies, viz. TVS Motors, Hero Honda, Bajaj Auto and Yamaha Motors. It has a network of over 2050 dealers and 23 depots spread across India. It also exports tyres to the USA, Europe, Africa, South America and South East Asia. During FY11, the company has increased its capacity with respect to tyres and tubes from 321.53 lakh and 300.50 lakh to 329.53 lakh and 308.50 lakh per annum respectively. The company has been innovating on a constant basis, and has launched several new tyre variants for both domestic and export markets. The only concern that remains with the stock is the higher levels of debt. However, this is expected to get mitigated, as this debt is due to the capacity expansion it has made in the last fiscal. The company has a dividend yield of four per cent, and the dividend coverage ratio stands at 4.09x. The dividend has been consistently paid out through its net profit, which gives out positive vibes on the company’s cash generating capacity. It can be said that the company is likely to be a value creator going forward too, and investors can look at the stock from a longer-term perspective.