Record Dividends Lure ICICI Fund to State Firms: Corporate India
India’s state-owned companies are paying the biggest dividends in at least three years, a buy signal for the country’s third-largest money manager as the government extracts higher payouts to pare its budget deficit.
The S&P BSE India PSU Index’s dividend yield has doubled in the past year to 5.1 percent, the highest reading since Bloomberg began compiling the data in August 2009. That’s also the biggest gap on record versus the benchmark S&P BSE Sensex index, which has a 1.6 percent payout.
ICICI Prudential Asset Management Co. says dividends at government-owned companies are irresistible even after bad debt at state-run lenders and intervention into the energy industry spurred a 28 percent decline in the PSU Index in the past year. Coal India Ltd. (COAL), the world’s top producer of the fuel, will pay out a record 183 billion rupees ($3 billion) this month to help Prime Minister Manmohan Singh narrow the fiscal deficit to a six-year low of 4.8 percent and prevent a credit-rating downgrade to junk.
“PSU stocks are dirt cheap and the dividend yield is very attractive,” S. Naren, who oversees $13.5 billion as chief investment officer at ICICI, said in an interview yesterday, declining to name companies. His ICICI Prudential Dynamic Plan has returned 23 percent annually the past five years, beating 98 percent of peers, according to data compiled by Bloomberg.
Naren’s funds purchased shares of Oil & Natural Gas Corp. (ONGC), the largest energy explorer, and Power Grid Corp., the biggest electricity distributor, last month. ONGC has a 12-month dividend yield of 3.43 percent and Power Grid has a payout of 2.9 percent, data compiled by Bloomberg show. Coal India’s 13.4 percent yield is the most among the 30 companies on the Sensex, the data show. That compares with a payout of 8.77 percent for the nation’s benchmark 10-year government bonds.
Stocks in the PSU gauge are valued at an average 7.3 times projected 12-month earnings, compared with 12.9 times for the Sensex, which has risen 3 percent in the past year.
Sampath Reddy, who manages $6 billion as chief investment officer at Bajaj Allianz Life Insurance Co. in Pune, near Mumbai, favors state companies that are “natural monopolies” or operating in industries with little competition. Reddy said he bought shares of NTPC Ltd. (NTPC), which generates 42,454 megawatts or about a quarter of India’s total capacity, and GAIL India Ltd., which sells half of the natural gas used in the nation.
NTPC has a dividend yield of 4.4 percent, the second-highest among Sensex companies, and GAIL has a payout of 2.7 percent, the data show.
Government intervention has curbed earnings at some-state owned businesses. Indian Oil Corp.’s profit slumped 82 percent to 16.8 billion rupees in the three months ended Sept. 30. The company sells diesel, kerosene and cooking gas at below market prices to curb inflation. It is partly compensated for the losses with cash from the government and discounts on the sale of crude by ONGC and Oil India. The subsidy payments are often delayed, resulting in lower profits.
At least seven state-run lenders have announced mid-year payouts this month with three more considering disbursements even as the banks struggle with narrowing risk buffers and bad loans amid decade-low economic growth. The banks, in which the government owns at least 55 percent, are forking out the money three months after Singh announced a 140 billion-rupee infusion to boost capital as soured debt as a percentage of total loans surged to a six-year high in September.
Policy makers should seek to plug the budget deficit by improving tax collections instead of relying on dividends, Jonathan Bell, the London-based head of emerging markets equities at Nomura Asset Management, which oversees $287 billion globally, said by e-mail. State companies may only get a boost if a new government gains enough power to push through economic reforms, he said.
India’s fiscal deficit through November reached 94 percent of the targeted 5.4 trillion rupees in the year ending on March 31. The country may lose its investment grade rating unless elections due by May lead to a government capable of reviving economic growth, Standard & Poor’s said in November.
Cash hoards at government-owned companies make the stocks attractive, ICICI’s Naren said. ONGC had 195.6 billion rupees of cash and equivalents as of Sept. 30, the third-highest among the 30 Sensex companies, data compiled by Bloomberg show. Oil India had 124.9 billion rupees and Coal India had 116.8 billion rupees, the data show.
ONGC trades at 7.7 times projected 12-month earnings, a discount of 18 percent to its five-year average. Coal India is valued at 8.9 times, about half the multiple reached in the first month after its trading debut in October 2010.
“You have large companies that are cash-rich, operate in non-competitive environments and have very good fundamentals,” Naren said. “That set of stocks is very attractive.”
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