Balance Your Portfolio With High Dividend Paying FMCG Stocks

FMCG stocks in general are high dividend yielding stocks. Tanay Loya and Nikita Singh look deeper into the prospects of identifying investment opportunities in high dividend paying FMCG stocks and share some interesting aspects on dividend investing.

Dividend Investing has long been practised by those investo looking for regular income. With interest rates softening in India in line with the global trend, investo who have hitherto not looked at equities for regular income, may find it interesting to own stocks that pay high dividends consistently. 

But is it enough to simply identify high dividend paying stocks and start buying them or is there more to it that meets the eye? 

Dividend investing is actually an art just like equity investing. The trickiest aspect of dividend investing is identifying the best dividend paying stocks and then holding on to them for the long term. Indeed, long-term orientation is the single greatest edge an investor has when it comes to stock market investing. The same applies to dividend investing.

Those companies that have shown consistent increase in dividend pay-out year-on-year are the ones that have outperformed the companies that have maintained steady dividend pay-out or have reported decline in dividend pay-outs.

We can see that it is not always correct to simply look at high dividend Those companies that have shown consistent increase in dividend pay-out year-on-year are the ones that have outperformed the companies that have maintained steady dividend pay-out or have reported decline in dividend pay-outspaying companies for outperformance. NMDC, Coal India are some of the examples of underperformance, despite distributing high dividends year-on year. However, we can see that those stocks where the dividend growth was negative, the underperformance is more widespread. We can safely say that investo can avoid those stocks which have shown negative dividend growth.

Most of the investing public chase growth and follow growth-investing strategy. Says Rakesh Tarway, Head - Research, Reliance Securities, "Equity investing is primarily meant for investing in growth. Any company’s primary mandate is to create and increase shareholder value. So, deploying generated capital through profits to accumulate growth should be primary target for any company to create shareholder value. Companies that have high dividend payout policy generally have sub-optimal avenues to deploy generated capital in a profitable manner for future growth.”

However, there are few seasoned investo who focus on regular income and prefer equity over the fixed income financial instruments. If we consider the price appreciation in the high dividend paying stocks and the regular income generated via dividends, the investment in high dividend paying stocks becomes extremely attractive. 

The above table shows the dividend distribution trend across various secto and the average returns generated on a sectoral basis. We can see that FMCG is one sector that has been able to generate returns in access of 13 per cent which compares favourably with Sensex returns over a similar period. The BSE Sensex has been able to generate 11.81 per cent returns over five-year period on an annualised basis. Oil & gas is one sector other than FMCG which has a better dividend yield and has outperformed the FMCG index returns over the five-year period.

FMCG SECTOR OUTLOOK : 

Trudging through the fit half of calender year 2016, the USD 49 billion FMCG sector in India bolstered up on increasing overall consumption as well as rural consumption of consumer durables, backed by good monsoon and dampening commodity and crude prices, coupled with the introduction of government initiatives such as Seventh Pay Commission for Central government employees, implementation of OROP recommendations, higher minimum selling prices, loan waive and NREGA disbuements that has widely multiplied the purchasing power in the economy.

Demonetisation and GST have had a negative impact on the FMCG sector. However, the short-term duel with demonetisation and GST is going to bear sweet fruits for the FMCG sector in the long term, with the sector benefiting from the abolishment of taxation on inter-state transaction, convenient compliance norms and more efficient supply chain and logistics arrangement.

The following will not only increase the cost efficiency of the companies, thereby increasing the profit margins, but also strengthen the companies’ distribution network and market penetration.

Dividend Taxation In India 

''According to the Income Tax Act and the amendments made in its clause through the Finance Bill 2017, dividend income sourced from equity shares of Indian companies are exempted from taxation. However, all the resident Indians are liable to pay a 10 per cent tax on the dividend amount received from domestic companies in excess of 10 lakh, as stated in the Bill. The following tax is charged over and above the dividend distribution tax paid by the company which declares such dividends.''

CONCLUSION: - 

While healthy dividends talk about profitability of the company and dividends do matter, they have to be considered alongside many other matrices and data points. Dividends don’t lie and surely high dividend paying stocks should be looked at favourably from investment point of view. The FMCG companies have a track record of consistent dividend distribution. 

Investo looking for constructing a balanced portfolio should look at investing opportunities in FMCG sector with a focus on those stocks that have been able to reflect dividend growth over the yea. Clearly, dividends constitute a remarkable percentage of total returns if one reinvests the dividends in the same stock that has a long-term track record of distributing dividends. Not only are the companies which are able to grow their dividend payout year after year are fundamentally strong and much sought-after by investo, but these stocks also make for great buys in times of steep price correction as the dividend yield improves in such testing times. It is high time investo start considering dividend income as one of the best forms of passive income, especially when the interest rates in savings and fixed deposits are spiralling down. 

While doing so, the most important aspect to be remembered by the investo is that not all stocks that pay high dividends are worthy of investment.

❝Evaluate company's overall prospects before investing in high dividend paying stocks❞
Aasif Hirani, Director, Tradebulls Securities.

If you were to advise anyone on picking high dividend paying stocks, what would it be? 

Who doesn’t like a stock that pays them to own it? That is why there is certain attraction to high yield dividend paying stocks. But before investing in these high dividend paying stocks, there are some pitfalls that need to be undetood. Fit of all, one needs to ask three questions. Why is the company paying high dividend? Is the dividend sustainable? What is the stock's overall prospect? If the company is good and paying high dividend, then investo can consider buying, but if the stock is having high dividend yield because of plunging share price, then investo should be wary. Are high dividend stocks a good investment? Not necessarily! One should pay attention to how the dividends are paid. Does the company pay every quarter? Every year? Remember, the company is paying dividend when it wants to reward its shareholder, but if it is a growing company, it wants to reinvest the profit in the business, rather than rewarding the shareholde. Shareholde ultimately gets rewarded through appreciation in share prices. A quick way to spot if a company can keep paying dividends at the current levels is to see dividend payout ratio. If the ratio is above 100%, it means the company is paying all or more of its income to shareholde rather than retaining the amount for growth. That could not be sustained by the company for long. Third, and most important, is looking at the stock's prospect, because if the stock price plunges, the losses could make dividend received irrelevant. So that is why investo need to evaluate overall prospects of the company. In short, high dividend stocks are great, but that should not be the only reason for buying the stock. 

How to construct a high portfolio of high dividend paying stocks? 

High yield dividend investments are getting the limelight as dividend investment is a proven method to generate good returns in this era of low interest rates. So dividend stocks are not only popular with individual investo, but also with pension funds and institutional investo. We can identify some quality and sustainable high dividend paying stocks by applying few paramete. We can start off with choosing stocks having dividend yield of more than 4% but should ignore stocks with payout ratio of more than 80% as it indicates the company is not retaining earnings for expansion or business development. Moreover, high payout ratio is not sustainable in the long run. Investo can try to exclude companies that provide special ex-dividend on recurring basis (Special dividend is where company pays dividend to shareholde from typical recurring dividend cycle and dividends should be more than 25% to be considered as special). Investo should also ignore stocks of companies having market cap under 10,000 crore and ignore stocks of companies having debt-to-market cap ratio of more than 1. These are some of the paramete which will help investo in creating sound portfolio of high dividend paying stocks.

 

" Dividend reinvestment is one of the most underrated aspect of equity investing. The above table highlights how, by reinvesting dividends consistently for 10 yea in the same stock which distributed dividends, one can significantly enhance the total return component.

❝FMCG stocks are strong defensive bet for investo looking at regular returns❞ 

Himanshu Nayyar, Consumer & Agri Analyst - Institutional Research, Systematix shares

What is your outlook on FMCG sector? 

Outlook on the sector remains positive as always as India is expected to remain a consumption-driven economy and demand should start recovering from 2HFY18 onwards, post the GST disruption seen in the last quarter which should gradually normalise over the next couple of quarte. A strong monsoon this year coupled with other government measures should drive a strong recovery in the ailing rural markets. Despite RM prices rising, most companies should be able to protect their margins today, given decent pricing power to pass on any significant increases in addition to other margin leve in the form of reducing A&P spends and generating further cost efficiencies. 

What is your view on investing in high dividend yielding FMCG stocks? 

Generally, high dividend payouts is a strong reason for investo to look at FMCG stocks, but given the valuation multiples have gone up significantly for the sector without a proportionate rise in earnings, the dividend yield today looks quite low compared to historical levels. But definitely, FMCG stocks are a strong defensive bet for investo looking at regular returns via dividends in a consistent manner without a lot of volatility. 

Do high dividend paying stocks outperform the broader markets in general? 

I don’t think that statement can be generalised. In bullish or strong market conditions, they generally tend to underperform as investo chase growth, while they outperform in a bear or weak market when safety of capital is the prime investor concern. They also tend to outperform in periods of any geopolitical or other uncertainties. 

When is the right time to invest in high dividend paying stocks? 

The best times to invest in such stocks are either when they have corrected significantly due to any macro events or general market weakness or when the markets look close to peaking out and investo see this as a good opportunity to book profits in high growth stocks and park their gains in relatively low beta defensive stocks. 

Over the yea, in your view, has corporate India been generous in distributing dividends? 

Although I would not call it generous, but things do seem to be getting better on that front as companies realise that there is no need to keep excess cash on balance sheets which depresses both return ratios and valuation multiples. 

So, we see an increasing trend of special dividends and buybacks in India which justifiably rewards all shareholde. 

Although low dividend payouts are also due to the nature of the Indian economy, where there are always multiple growth opportunities which the companies want to exploit by deploying their capital, they are gradually undetanding the need for maintaining a balance between allocation of capital for growth and dividend distribution. 

Is it correct to say FMCG stocks have better dividend paying track record? 

FMCG stocks in general have consistent and stable dividend paying track records owing to the asset light business models, low capex requirements, consistency in earnings and strong cash flows. Even the IT sector has seen strong dividend payouts over the past few yea to utilize the excess cash they have accumulated on the books.

VST Industries 

CMP: 2690
BSE Code: 509966
FV: 10
Market Cap (F.F.): 2,825.11 Crore

VST Industries Limited is one of the major Indian conglomerates engaged in manufacturing of cigarettes containing tobacco and unmanufactured tobacco. The company’s manufacturing facility in Hyderabad in Telangana mainly operates in the tobacco segment and has a strong geographical presence across India along with growing presence abroad.

The company is on a growth momentum, despite the trend of year-on-year tax hikes on tobacco. The company’s strategic portfolio expansion through marked differentiation in products has successfully earned it high priced trademarks like Editions King size & Total 69mm over the past two yea. Also, the company’s existing trademarks such as Special & Red Charms are also delivering strong performance in the major markets. 

VST Industries’ efforts to cut through the competition by offering innovative products have been well-received by the markets, while the company’s strategic expansion plans and growing investments to strengthen its distribution infrastructure and widen its geographical presence is likely to ensure company’s continued strong performance. 

On the financial front, VST Industries Ltd posted 4.12 per cent drop in its revenue from 586.02 crore in Q1FY17 to 561.86 crore in Q1FY18. The company’s profit before interest, depreciation and tax (PBIDT) stood at 65.31 crore in Q1FY18, down by 2.38 per cent on a year-on-year basis. 

The profit after tax of the company also decreased by 8.99 per cent to 39.79 crore in the fit quarter of FY18, as against PAT of 43.72 crore in Q1FY17.;

On an annual basis, the company’s revenue increased by 10.86 per cent to 2,282.39 crore in FY17 from 2,058.77 crore in FY16. The company’s PBIDT stood at Rs246.16 crore in FY17, up by 3.69 per cent from Rs237.40 crore in FY16. The company’s profit after tax stood at Rs167.21 crore, up by 9.21 per cent in FY17 from Rs153.11 crore in FY16.

On the valuation front, the share price of VST Industries Limited is trading at a PE of 25.54x as against its pee such as Godfrey Phillips (49x). The company’s PE also seems to be slightly undervalued in comparison with the industry PE of 33.17x.

Tata Global Beverages 

CMP: Rs193
BSE Code: 500800
FV: 1
Market Cap (F.F.): Rs8,039.33 Crore 

Tata Global Beverages Limited, a Tata Group subsidiary, is a beverage company engaged in the business of trading, manufacturing and distribution of tea, coffee and water. The company's main operations involve processing and blending of tea, including manufacturing of instant tea. The company's business interests include tea, including the cultivation, manufacture, blending and sale of tea in packets, bulk or value-added forms; coffee, including the cultivation of coffee and related plantation crops, and sale of coffee in several value- added forms, and sales of water products and other businesses. 

The company has a strong presence in India, Europe, United States, Canada and Australia, with plantation business in both India and Sri Lanka, and extraction business in India, US and China as well. The company’s Tata Tea brands include Tata Tea Premium, Tata Tea Gold, Tata Tea Life, Tata Tea Agni, Tata Tea Chakra Gold, Tata Tea Kannan Devan and Tata Tea Gemini. 

The company’s increasing focus on volume growth across markets and its attempt to tailor its services and products according to the local tastes and consumer trends is expected to continue its growth momentum through brand led expansion, innovation and sharp cost efficiency. 

On the financial front, Tata Global Beverages Limited posted a 4.80 per cent rise in its revenue from Rs820.08 crore in Q1FY17 to Rs859.44 crore in Q1FY18. The company’s profit before interest, depreciation and tax (PBIDT) stood at Rs160.21 crore in Q1FY18, up by 38 per cent as against PBIDT of Rs116.09 crore in Q1FY17. The profit after tax of the company also increased by 108.14 per cent to Rs152.48 crore in the first quarter of FY18, as against Rs73.26 crore in Q1FY17. 

On an annual basis, the company’s revenue increased 2.58 per cent to Rs3,063.89 crore in FY17 from Rs2,986.79 crore in FY16. The company’s PBIDT stood at Rs362.65 crore in FY17, up by 0.98 per cent from Rs359.12 crore in FY16. The company’s profit after tax stood at Rs276 crore, up by 21.85 per cent in FY17 from Rs226.49 crore in FY16. 

On the valuation front, the share price of Tata Global Beverages Limited is trading at a PE of 33.94x as against its peers such as Mcleod Russel (42.14x) and CCL Products India (38.73x). The company’s PE is in sync with the industry PE of 33.37x.