Unlike debt investments, in equity investments dividend does play a pivotal role in decision-making. Though not appreciated enough, but dividends are a simple yet trustworthy indicator of any company’s health.
For starters a company with a history of regular dividend payout will most likely keep paying dividend, since any break will be interpreted by the market as a sign of the company being in dire straits.
Moreover, unless a company is fundamentally strong and making decent profits, year after year, it cannot be a regular dividend paying company. Hence by declaring dividend every year the company is sending a strong message about its financial health.
And if a company is able to maintain consistency even during turbulent times, like we faced last year, a period when most of the companies were facing liquidity crisis and struggling to meet their cash requirements, then it is surely a standout corporate. One should think highly of the stocks that distributed surplus cash to their shareholders that too at par with previous years or at an increased level.
Another less appreciated character of dividends is that they tend to be sticky, unless under severe duress, the company will do its utmost to sustain the current level of dividend payout.
Applying theory to practice, we looked for companies on the BSE 500 index, that have got a record of giving consistent dividends. The data threw up 56 companies that have consistently increased their dividend over the last 3 years, prior to 2008 — there is hardly any company that ended 2008 unscathed.
Out of the dream dividend paying companies only 24 were able to maintain the rising trend of payouts, while 13 provided solace to the investors by sustaining their payouts at previous levels.
A company that can come out of one of the worst years on stock markets with its head held high is certainly worth a second look. We made our yardstick a little more tougher and took a deeper look at companies, which, other than being consistent dividend payers, have also a yield that is more than 2 per cent. This shrunk our list to just seven companies, out of which six were financial companies.
Our list at the top is populated by as many as five public sector banks (PSBs). 2008 undoubtedly was the year of resurgence of the (PSBs).
Though it is debatable whether the PSBs’ performance in 2008 was engineered or was an accident, but no one can deny the fact that they had a good year.
The profit of these five banks on an average soared by 37 per cent. Punjab National Bank and Bank of India were able to increase their profits for the year by over 50 per cent. While Andhra Bank, Indian Overseas Bank and Punjab National Bank combined were able to increase their deposit base by 22 per cent on the average. The net interest income (NII) also went up from Rs 14,990 crore to Rs 18,717 crore i.e. a jump of 23 per cent on an average in each bank.
Bank of India operates in three business segments — treasury operations, wholesale banking and retail banking as others, but it particularly saw its NII increase by over 30 per cent year-on-year (YoY).
Punjab National Bank (PNB), unlike its peers saw growth in advances retain strength at 38 per cent YoY. In spite of being at the forefront of PLR cuts, the bank posted a healthy growth in Net Interest Income (NII) of 29 per cent YoY.
In the recent bull rally these five stocks went up on an average by 112 per cent, still their dividend yield was close to 4 per cent. Other than PNB and Bank of India all others had dividend yield above 4 per cent.
LIC Housing Finance is the other financial company that we latched onto through the exercise. The company is a subsidiary of Life Insurance Corporation (LIC), where the promoter controls 40 per cent of the shareholding. Currently, it has got an yield of 2.09 per cent. With profits rising by 37 per cent in FY09 compared FY08, the company declared 130 per cent (Rs 13) dividend for FY09 compared to 100 per cent (Rs 10) in FY08. NII for the Q1FY10 saw an increase of 17 per cent YoY.
Nestle was among the fast moving consumer goods companies (FMCG) that was able to resist the onslaught of 2008 market crash. In 2008 the company fell just 3.14 per cent compared to 52.35 per cent fall logged by Sensex. On the back of 29 per cent rise in net profit, the company increased its dividend payout in CY08 to 425 per cent (including interim and final) from 330 per cent in CY07.