Reap rich dividends from 5 stocks

Worried about investing at the current elevated levels? You can look at stocks that have been delivering a steady stream of dividends, irrespective of market cycles. Here are our top picks

MOIL: Shining bright

In the mineral and metals space, MOIL is one of the stocks with consistent dividend yield, ranging between 2 and 4 per cent over the past few years. Healthy operating profit margin and debt-free position are other positives.

With the company’s various mine development and expansion projects in place, it is well-placed to increase the supply of manganese ore in domestic market.

This metal is being largely imported, as domestic supply is insufficient to meet the growing demand from steel makers (for which manganese is a raw material).

At the current market price of ₹184, the stock is reasonably valued at about 11 times its trailing 12-month earnings, lower than the 19 times it had traded at, on an average, over the past three years. Long-term investors with a medium-risk appetite can buy this stock.

Since MOIL is a PSU, investors can expect a steady dividend payouts in the future too.

Expansion to meet demand

The company derives about 90 per cent of its revenue from the sale of manganese ore. In FY18, it produced about 1.2 million tonnes (mt) of manganese ore, which is the highest in the last 10 years.

The performance of the manganese ore industry is directly linked to that of the steel industry. World Steel Association projects a growth of 5.5 and 6 per cent for 2018 and 2019 respectively for finished steel.

To meet the increasing demand for steel, the company envisages production of 2 mt by FY21 and 2.5 mt by FY25.

MOIL has accordingly taken up various mine development and expansion projects, which are expected to increase production substantially.

Healthy financials

In FY18, MOIL registered the highest ever revenue of over ₹1,300 crore, a 32 per cent increase over FY17, on account of improved realisations and increased volumes.

Net profit for the year had also grown by good 38 per cent Y-o-Y to about ₹422 crore. In the quarter ended June 2018, revenue declined 5 per cent over the same period the previous year to ₹360 crore, but the net profit grew by 16 per cent to ₹113 crore.

MOIL has strong operating margins, close to 40 per cent.

Hero MotoCorp: Revving up

The Hero MotoCorp stock has been on a losing streak for most part of last year, touching its one-year low of ₹3,037.10 in end-July 2018. But for investors who lost out on capital gains, the stock has been a good bet from a dividend perspective. The company has paid out an interim dividend of ₹55 per share and a final dividend of ₹40 per share for 2017-18, with the dividend yield for the year working out to 2.68 per cent. The company has always been a benevolent dividend payer; it has declared dividends consistently at least for the last 15 years. Dividend yields in the previous two fiscals have also been over 2 per cent.

Competition woes

After the twin blows of demonetisation and GST, two-wheeler sales picked up since mid-2017-18. This trend has continued into this fiscal as well, with industry sales volumes growing by about 14 per cent so far in 2018-19.

However, stiff competition from Bajaj Auto in the entry segment bikes in which Hero is the market leader, and a weaker product mix in scooters, have been hampering prospects for the Hero MotoCorp stock.

Another reason for the subdued stock performance has been the pressure on operating margins from the rise in input costs as well as higher tax outgo due to the expiry of excise (CGST) benefits for the Haridwar plant from this fiscal. In the quarter ended June 2018, while revenues grew by 10.4 per cent over the June 2017 quarter to ₹8,810 crore, the company’s profits came in at ₹909 crore, marginally dropping over the June 2017 quarter. Operating margins fell to 15.6 per cent compared with 16.2 per cent a year ago.

Making amends

The company is expected to put up a better show this year. Increasing affordability in the urban areas has seen the sale of premium bikes heat up in recent times. While Hero has not traditionally been strong in this segment, it has recently introduced the Xtreme 200R to cash in on the demand for premium bikes. The Xpulse 200 cc will also be launched this fiscal. It has also upgraded the Karizma, which is offered in the 200-250 cc segment.

Besides, to regain lost market share in scooters, the company will launch the 125 cc version of the Duet and Maestro Edge scooters. This is the sub-segment where all the action lies, and competitors such as Honda already have 125 cc versions of their products such as the Activa. Better product mix from these launches, cost-control efforts and price increases to pass on rise in raw material costs will help cushion margins.

Mahanagar Gas: Well-fuelled

Mumbai-based city gas distributor Mahanagar Gas ticks all the check-boxes to qualify as a good dividend yield stock pick. It has a track record of paying healthy dividends; the dividends being paid are sustainable; the company has the muscle to weather tough times; has good profit growth prospects; and the recent decline in the stock price is not due to company-specific factors.

Mahanagar Gas has been a consistent dividend payer, returning to shareholders ₹17.5-19 per share as dividend every year between FY13 and FY18. For FY18, the company’s dividend declared was ₹19 per share. Of this, the record date for the final dividend payout (₹11 per share) is September 7, 2018.

Scope for appreciation

At ₹19 per share (FY18 dividend) and the current stock price of ₹865, the dividend yield works out to 2.2 per cent. Then, there is also the potential of good appreciation in the stock price.

Since early November 2017, the stock has lost about 32 per cent. It now trades at an attractive 18 times the trailing 12-month earnings compared with the average of 22 times over the past three years.

A few factors seem to have caused this reversal in the stock that had more than doubled since its initial public offer (IPO) in June 2016. Among these were tepid volume growth numbers in some quarters and volatility in many mid-cap stocks after Budget 2018. In the more recent past — from April 2018 onwards and again over the past few days — the stock’s fall seems to be driven by significant stake sales by a promoter entity, BG Asia Pacific Holdings Pte, a subsidiary of Shell.

The concerns though seem overdone. One, volume growth for Mahanagar Gas has picked up from 4 per cent Y-o-Y in the September 2017 quarter to about 7 per cent in the March 2018 quarter and to about 12 per cent in the June 2018 quarter. The company’s profit for FY 18 grew a strong 22 per cent Y-o-Y. Profit growth in the March 2018 and June 2018 quarters was in single-digits, with the company not passing on completely the cost hikes in gas sourcing costs.

But Mahanagar Gas has good pricing power and can increase the prices of its products, as it has done in the past. It is the near-monopoly supplier of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai and surrounding regions, and its products have significant cost advantages over competing fuels such as petrol, diesel, LPG and some industrial fuels.

Healthy prospects

Volume growth should remain healthy with an under-penetrated market, steady conversion of vehicles to CNG and more households opting for PNG, and the company bidding for supply to new high-potential geographical areas such as Chennai.

A strong balance-sheet with negligible debt positions the company comfortably to fund expansion plans.

City gas distributors such as Mahanagar Gas also enjoy significant cost benefits. Companies supplying CNG to vehicles and PNG to households have been given top priority in the allocation of domestic gas that is much cheaper than imported gas. Mahanagar Gas gets nearly 85 per cent of its revenue from these businesses.

The paring of stake by BG Asia Pacific Pte is unlikely to impact the company’s prospects, with the company having the backing of the other strong promoter GAIL (India) and the Government of Maharashtra, that is also a shareholder.

PSU Oil Marketing Companies: Down but not out

Being a shareholder in companies controlled by the government comes with its plusses and minuses. On the positive side, a steady stream of healthy dividends is almost a given. The major shareholder — the government — is always in need of funds, and PSU companies have little choice but to ‘do the needful’. On the other hand, there is the real risk of government interference in the operations of these companies. Decisions are sometimes taken, not out of commercial considerations, but to make the government look nice in the public eyes. That takes a toll on the stocks. The upshot: the combination of high dividends and decline in stock prices translate into high dividend yields.

The curious case of the three public sector oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL — bears this out. Come rain or shine, these companies pay out dividends in double-digits every year. Over the past three fiscal years, the dividend per share has been in the ₹14-35 range. The three stocks, meanwhile, have been hammered on the market over the last year — Indian Oil and BPCL are down more than 30 per cent, while HPCL is down nearly 50 per cent. Hence, the dividend yield is now a rosy 6-7 per cent.

Margins take a knock

The market is worried because a pattern is emerging of the PSU OMCs capitulating to the diktats of the government, and losing their pricing freedom on petrol and diesel in the poll season — the companies go slow or freeze price hikes altogether, temporarily. This happened during the run-up to the Gujarat State elections last December and repeated itself prior to the Karnataka State elections this May. Hence, the marketing margins of the OMCs took a sharp knock. But when the poll season was behind them, the oil firms made up lost ground by hiking prices; marketing margins went up again.

There are worries whether this recoup-after-elections phenomenon will be possible in the coming months, with an intense election cycle on the cards. Elections in Rajasthan, Madhya Pradesh and Chhattisgarh are lined up towards the end of the year;the Lok Sabha election is likely to be held around April 2019. Also, it doesn’t help that crude oil prices are hardening again and the rupee is losing ground.

Good buys

But from a long-term perspective, these stocks seem good buys. One, despite the pulls and pressures, earnings growth has remained healthy, aided by expansions and inventory gains. Earnings should continue growing at a good pace over the long run with the companies expanding and upgrading their capacities.

Next, valuations have moderated considerably. On a trailing 12-month basis, Indian Oil now trades at about six times (three-year average is about 10 times), HPCL trades at about 5.5 times (three-year average is about 8.5 times) and BPCL trades at about 7.5 times (three-year average is about 12 times). Finally, it is unlikely that the government will roll back completely the pricing reforms that have ushered in huge positive change over the past few years. It is likely that, in less than a year from now, when the election dust settles, true pricing freedom will be restored to the OMCs.

Oracle Finacial Services Software: High-margin player

As an IT solutions company, driven by its products portfolio, Oracle Financial Services Software (OFSS) is a suitable option for investors with a moderate risk appetite and a two-year horizon. The mid-tier player’s stock has rallied just over 20 per cent in the last one year, when several companies in the IT sector doubled or even tripled in value.

A high-margin, stable products business, a healthy geographic-mix of emerging and developed markets, and entrenched presence with global financial services clientele, are positives.

The company consistently offers healthy dividends and rewards shareholders. On an average, the dividend yield has been well over 3 per cent over the past several years.

Enjoying a premium

At ₹4,170, the OFSS stock trades at 21 times its likely per share earnings for FY20, much lower than its three-year average of about 26 times. The valuation multiple of mid-tier IT players, Mindtree and Hexaware, though not strictly comparable, are at similar levels. OFSS usually enjoys an operating margin of nearly 40 per cent, much higher than the 23-27 per cent that the top-tier IT players such as TCS and Infosys usually deliver, and is among the best in the industry. This higher margin means that the company has enjoyed a valuation premium over Infosys, Wipro and HCL and most mid-tier players.

In FY18, OFSS’ revenues grew by 2 per cent to ₹4,527 crore, while net profits increased by 4.4 per cent to ₹1,237 crore. The current fiscal has started on a much stronger note, with revenues in the June quarter increasing by 11.7 per cent Y-o-Y to ₹1,345 crore and net profits rising by 9 per cent to ₹402 crore.

Product-driven

OFSS derives over 87 per cent of its revenues from delivering products and related services (implementation, maintenance, upgrades). The balance comes from providing IT and BPO services. Being a subsidiary of global products major, Oracle helps in client references. Its FLEXCUBE, a banking product, is among the highest revenue earners in the industry.

The products business carries multiple revenue streams in the form of licence, maintenance and consulting fee, thus creating a resilient model. Though the model is subject to demand fluctuations, OFSS’ deep presence across banks and financial institutions ensures adequate client traction across market cycles. The company does not sacrifice margins for the sake of growth.

OFSS has an excellent geographic mix with near equal distribution of revenues across the Americas (34 per cent), Europe, West Asia and Africa (33 per cent) and Asia Pacific (33 per cent). Thus, the company benefits from sustained demand from a blend of fast-growing emerging markets and stable developed geographies.

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