Your only escape from falling share prices.. - The 5 Minute WrapUp by Equitymaster
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Your only escape from falling share prices..

Apr 18, 2011

In this issue:
» Curtain raiser for 12th 5-yr plan
» Ports see good volumes. But then will it continue?
» And the currency battle continues
» Banks to raise interest rates
» ...and more!

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 Chart of the day
In the business of investing, there are very few who would not recognize the name of legendary Benjamin Graham. For those who have not heard of him, he is the mentor of Warren Buffett. Graham's principles on value investing have helped many an investor in earning returns. An important criterion that he has stressed upon is the company's ability to pay dividends. He has stated that "dividends are a sign that a company is profitable. It offers an investor returns even if the company's stock does not perform well."

The dividends have certainly helped out many an investor. In a recent story carried by a leading daily, company promoters and large investors have made a killing through the dividends paid out by their companies. In fact, in the financial year ended 2010, promoters have made huge sums thanks to the dividends. And with the profits of India Inc seeing an upward swing in the current year, these dividends are all set to increase.

Even companies that have not seen their share prices perform that well, have seen huge growth in their dividend payouts. A case in point being Hero Honda which paid out a whopping Rs 12 bn as dividends to the promoter group in 2010. But the gains made by individual promoter groups were nothing when compared to that received by the government. The government has taken home Rs 110 bn from its holdings in just the PSU behemoths. In fact, government owned ONGC was the largest dividend grosser for its promoter group.

Data source: Hindu Business Line

While small investors may not earn such huge amounts through dividends as they are received in proportion to one's holdings, they can nevertheless act as a cushion for investments. Especially during times when stock prices are volatile.

Do you give importance to dividends when selecting a stock for investment? Share your comments with us or post your views on our facebook page.

The biggest impediment to India's economic growth currently is of course infrastructure. However, if one were to find out the next two problem areas, education and health care would certainly top the list. Hence, it was heartening to know that these two areas along with infrastructure will be the priority areas for India's 12th five year plan that will start next year. And what about economic growth? Well, people expecting double digit growth rates will have to wait a bit we suppose. Montek Singh Ahluwalia, the planning commission deputy chairman, feels that this growth would be too ambitious. He has instead settled for a growth in the region of 9% p.a. for the five year period. Another salient feature could be an introduction of the PPP model in the field of education and health for the first time. Power and manufacturing are other issues that will be given some serious thought in the upcoming plan. While performance based incentives are being mooted for the power sector, the Government is targeting a double digit growth rate in manufacturing. To sum up, the Government's heart does indeed seem to be in the right place. How much of this translates into reality remains to be seen.

Cargo volumes have grown well in the last 6 months on a year-on-year (YoY) basis. But will the trend continue? It is important to note that a lower base in the previous corresponding period has been responsible for this high YoY growth. Going forward, the numbers may not seem very impressive. This time the reason would be a relatively higher base.

There are other reasons too that will inhibit growth of cargo volumes. One, there is limited incremental capacity available at the Mumbai-based Jawaharlal Nehru port. As a result, export-import (exim) cargoes have already started shifting to other ports and SEZs (special economic zones). This, in turn, has led to lower lead distances and, thus, lower realisations. To add further, the Indian Railways have sharply hiked freight rates. This too, has affected domestic cargo volumes.

All in all, the logistics sector is going to face some volume pressures as a result of capacity constraints and higher rail freight charges.

You can now expect your home loans and car loans to become even dearer. With SBI (State Bank of India), the nation's largest bank mulling an increase in interest rates, other banks will soon follow suit. Currently, SBI has the lowest benchmark rate among major banks, at 8.25%. The bank however plans to increase this rate by 0.25% on account of margin pressure, with increasing cost of funds. Along with most banks, it offered high deposit rates in the last quarter of the 2011 fiscal. This was due to scarce market liquidity, and pressure to meet year-end targets. SBI's home loan scheme, at attractively low interest rates, led to additional margin pressure. Unfortunately, the woes for loan takers are expected to continue for some time to come. With inflation hovering at around 9%, and with the RBI's hawkish approach, we don't see any respite in interest rates any time soon. Although inflation rates have come down in recent times, however they are still higher than RBI's (Reserve Bank of India) internal targets. The central bank is expected to raise rates further in its next meeting on monetary policy.

The battle between the developed and emerging nations continues. Because of the recovery in growth in the emerging markets and the loose monetary policies adopted by the West, money has poured into emerging markets. This has led to a surge in asset prices in the latter and caused their currencies to appreciate. As a result, many of these nations have started imposing capital controls to restrict the flow of money into their economies. But the emerging world wants no help whatsoever from the IMF (International Monetary Fund) in this regard. The IMF planned to guide emerging nations on managing huge flows of capital into their economies. It has contended that these economies should treat capital controls as the last resort after they had first tried using other tools, such as policies on interest rates, currency values and government budgets. Most emerging economies have rebuffed IMF's plan and believe that it is more to constrain their actions than do any good. Meanwhile, the currency blame game has carried on. Emerging economies blame the developed world for their loose monetary policies for unleashing a wave of liquidity that has found its way into the former. The developed world, especially the US, opines that China's fixed exchange rate policy is what is causing problems. That may well be but we believe that the US would do better to realise that its policies are also not really achieving the desired results. Rather than blaming China, it needs to focus on getting its economy back on track.

If 9% GDP growth projections are what you are looking for while investing in stocks, it's time for a rethink. We had earlier pointed at several issues that are expected to put pressure on the economy's growth prospects. With tighter liquidity and high deposit rates, banks may have to struggle to retain the current rate of loan growth. Further, coal shortages are likely to play havoc with incremental power capacities. As it is in FY11, just 60% of the targeted capacities were put up. Infrastructure build up especially roadways are way behind schedule. Most of the planning cited in the 11th 5 year plan (2007-2012) is just half way near completion. Thus, we are not surprised with the chief of Planning Commission reiterating his opinion on GDP growth coming in below 9% this fiscal. It would be better to be conservative than unrealistic in this regard.

After opening the day on a positive note, the Indian stock markets lost ground and are currently trading below the dotted line. At the time of writing, BSE Sensex was trading lower by 200 points. Stocks from IT and realty space are leading the losses. However, auto and energy stocks are witnessing gains. Asian stocks markets have closed on a mixed note with China and Malaysia in the green, while markets in Hong Kong and Japan have closed in the red.

 Today's investing mantra
"Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies." - Benjamin Graham

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9 Responses to "Your only escape from falling share prices.."

Rusto Dalal

Apr 19, 2011

Certainly dividends are important, especially for retired persons, provided the accounts are not fudged. A company which gives more than 50% div and earns around 25% of Net worth, depending on industry, cannot go wrong in the long run



Apr 19, 2011

Dividends are only one measure while deciding a stock purchase. The contrarian view is that companies that pay high dividends are not growth oriented since they are not putting the surplus available for expansion organically or inorganically. Moreover, the yield to the investor is negligible when compared to the return on capital invested and the expected return from that stock.



Apr 19, 2011

Yes, dividends are the best way for genuine investors. It is only now that the Insurance sector is opened up and there are so many agents mktg it, but previously for taking care of your retirement, dividends were one of the best options. long term investors always prefer Co.s which give good and steady dividend payouts. And in this regards, the best have been the house of Tatas', which pay out regular dividend, and the worst are Birla group, which give measly dividends.
Been in the market for almost 23 yrs, and more particulary having seen G/Father also dabbling in shares, he always had seperate stocks to trade and seperate dividend paying shares as his investments - preferably not to be sold.
Thanks Damani



Apr 18, 2011




Apr 18, 2011

Dividend history of companies are available on the internet



Apr 18, 2011

"we believe could prove to be a very profitable product for you in the years to come."

NEVER...small investor can't make any money but loose like in the ocean big fish eat the small fish. Not only burn fingures but burn the whole self.
And the so called wise men, everrywhere, lure and take the rest whats left.



Apr 18, 2011

Dividends = Hope (short term); Yes it cultivates in a NEW investor (with patience) a habit to hold a little longer (when stock up or down) if one understands returns and risk. Ofcourse, the caveat being it should be a proven chip for him or a company which has proven to be a long term value incrementor be it like an FMCG, a PE multiplier or a book builder.
He/she can hold on to THAT hope. Hope that i may not have done well but i would reward you for the faith you have shown in me and look for the coming quarter-year i am going to prove it to you.



Apr 18, 2011

10% groth is not impossible next year provided government five free hand to basic and fundamental industries like mining and agriculture. Leasing of forest reserve area for plantation can contribute in biggest way. Government do not have money for plantation


Shivdeep Garud

Apr 18, 2011

I think one should hold stocks of companies that pay good dividends, but how do we find out the dividend history of companies? Can somebody help with this question?

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