A Big Reason to Own More Hindustan Unilever-like Stocks - The 5 Minute WrapUp by Equitymaster
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A Big Reason to Own More Hindustan Unilever-like Stocks

Jun 8, 2016
In this issue:
» IPO activity gaining pace
» Forecasts to be taken with a pinch of salt
» Market roundup
» ...and more!
00:00
Madhu Gupta, Research analyst

Indians are very fond of gold.

And the attraction cuts across economic class barriers.

It forms a major part of the family heirloom passed from one generation to the next.

In fact, Indians view gold not as an investment but as a security against uncertain times.

This is because the value of gold is intrinsic to the metal itself and has remained resilient over long periods of time.

What is the gold equivalent in equity investments?

Nothing but very high yielding dividend stocks.

According to Warren Buffett, well-established franchise-based businesses that operate on little or no investment but generate hordes of cash offer gold-like economic moats. So these are the kind of businesses investors must latch on to.

FMCG companies are a classic example of this type of business model.

Buffett, himself, has invested in a number of FMCG companies - Coca Cola, Gillette and Heinz, to name a few.

In India, Hindustan Unilever, with a sales turnover of over Rs 300 billion, is the largest FMCG company. The behemoth has a presence in the entire gamut of consumer goods through its portfolio of well-entrenched brands. Also, Hindustan Unilever boasts of the largest distribution network spanning both rural and urban India.

The company's strong profitable operations with zero reliance on debt have enabled it to generate huge amounts of cash. In the past five years, Hindustan Unilever, on an average, has thrown operating cash flows equivalent to nearly 12% of its annual sales turnover.

With hardly any investment spends, most of the cash has either been distributed in the form of dividends or has flown into the company's reserves.

Hindustan Unilever's dividend payment track record is remarkable. The company has consistently paid dividends in excess of 60% of its profits for the last twenty years. In fact, if you had bought one share of Hindustan Unilever in 1995, the dividend yield on it today would be 26%! So had you invested a lakh of rupees in the stock in 1995, you would have earned more than Rs 236,000 so far in dividends alone.

Hindustan Unilever's steady dividend track record
Fiscal Dividend per share (%) Dividend payout ratio (%)
2009 7.50 65.38
2010 6.50 67.44
2011 6.50 60.87
2012 7.50 60.23
2013 18.50 105.37
2014 13.00 72.70
2015 15.00 75.20
2016 16.00 84.81

Source: Ace Equity

But despite this largesse, the excess cash after dividend payment has led to a swelling of the company's reserves. As on 31st March 2016, Hindustan Unilever had reserves of around Rs 37 billion, nearly 17 times its equity share capital.

To share the bounty with shareholders in the form of higher dividend payouts, the company has proposed the transfer of entire balance of Rs 21.9 billion lying in its general reserves (as on 1st April 2015) to its profit and loss account.

Why? Well, the company has so far not utilised a relaxation offered in the revised Companies Act, 2013. As per the new norm, there is no compulsion for companies to transfer a certain percentage of profits to its reserves before declaring dividends. In other words, Hindustan Unilever has not transferred any sum from its profit and loss account to the general reserve in financial years 2015 and 2016. And with the new proposal, the first of its kind in India, the company wants to utilise its reserves built earlier to have greater flexibility in dividend payment.

One of the prime reasons for the move is that declaring dividends from general reserves is subject to restrictions on the dividend rate and amount. But dividends can be freely declared from profits. Therefore, going ahead, shareholders can expect even heftier dividend payouts from Hindustan Unilever in the coming years.

This is precisely why we say that even a few Hindustan Unilever-like stocks can do wonders to your returns. Apart from the rise in the stock price, investors can easily fetch mouth-watering returns by way of dividend yields year after year.

In fact, there is a way to ensure that Hindustan Unilever-like stocks become your consistent income generators for decades...!

My colleague Tanushree has outlined this strategy in the special report - "How To Pocket 10-30% Returns without Selling Your Stock."

And mind you, the stocks that she reveals in the report have outdone even Hindustan Unilever's dividend track record!

How do you look for Hindustan Unilever-like stocks for your portfolio? Let us know your comments or share your views in the Equitymaster Club.

02:31 Chart of the day

Ever since the Indian Meteorological Department (IMD) predicted a robust rainfall this season, stock markets in India have been making merry. Indeed, since the IMD's announcement, the Sensex has gained around 7% till date.

Not surprisingly, companies are lining up to issue IPOs too. As reported in the Mint, around 8-10 firms are preparing to launch their IPOs in the next two months.

The interest in IPOs always heightens when there is a bull run in the markets or even when there is an anticipation of one. The chart below clearly highlights this. IPO activity was at its peak in 2007 (in those heydays just before the global financial crisis struck) and in 2010 when there was a strong rally in the markets (India Inc did very well in that year). After a considerable lull, IPOs once again gained pace when the Modi government came to power.

For companies coming out with IPOs, a bull run is always a blessing because for them it's an opportunity to price these IPOs high. That is why more often than not, valuations for IPOs always tend to be very expensive.

For investors though the rationale for investing in IPOs is not any different from investing in already listed stocks. That means it is necessary to assess the strength of the business model, the quality of management and the health of the balance sheet. Not to mention the valuations, which need to be reasonable.

IPO Activity is Gaining Pace


03:44

While the markets seem to be buoyant, how optimistic is the outlook for India's economic growth. The World Bank has taken a cautious view on this and has cut growth projections for India by around 0.3% to 7.6% for FY17 and FY18. Earlier projection stood at 7.9% for both these fiscals.

So why the cut? The World Bank has pointed out that corporate lending has remained sluggish despite five rate cuts by the RBI since 2015. A lot of this has to do with stressed asset quality of banks and the problem of rising NPAs. There's more. Rural demand has taken a hit on account of poor monsoons for two years. As the global economy continues to remain subdued, export growth has not exactly taken off in a big way.

There are some positives though. FDI to India surged 37% from the launch of the 'Make in India' campaign in October 2014 to February 2016. Manufacturing activity seems to be picking up albeit gradually.

How seriously should you take the World Bank forecast anyway? Vivek Kaul, editor of the Vivek Kaul Diary, has written a very illuminating article on this. Vivek has pointed out that forecasting is a very difficult thing to do. He highlights that while it's always easy to explain things in retrospect, it is very difficult to predict how things will play out.

What about economists making forecasts?

Here's Vivek:

  • Most economists find it easier to say what other economists are saying. This is because if and when they are wrong, then they are wrong in a majority.

    And it is safe to be wrong when everyone else is wrong. Nevertheless, if one economist forecasts something which goes against the trend and is wrong about it, then only he has to bear the consequences of being wrong. Life is easy, when everyone is wrong, and hence it makes sense to go with the herd.

We cannot help but agree with Vivek. Thus, in this regard, the World Bank forecast should not be looked upon as a number set in stone.

04:45

Indian stock markets had a volatile trading day today although they managed to stay above the dotted line. The BSE Sensex was trading higher by 52 points (0.19%) at the time of writing. Auto and banking stocks were leading the gainers, while IT stocks were at the receiving end.

04:56 Today's investing mantra

"The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst) and Radhika Pandit (Research Analyst).

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3 Responses to "A Big Reason to Own More Hindustan Unilever-like Stocks"

julit

Mar 14, 2017

hi
can you advise upto how much dividend for hul could go per share. im holding some hul stocks from a long time.would be grateful for yr help.thank you

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Nayan Parikh

Jun 23, 2016

It was very interesting to read this article.
I am holding HUL for the last 30 years and have hardly sold it except for some fund requirement of a big occasion like marriage or educational requirement. The result is that currently this single script has over 45% weight-age of my equity portfolio!!! It is largely because of high holding in this bluest of blue chip stock that my portfolio has shown a decent performance all these years.
I am always worried about substituting it with any other script (A small portion substituted with ITC 2 years back)
However, such a high holding in a single script is entirely against your philosophy of stock investing which talks about no single script should be more than 5% of total portfolio.

Kind request to advise on the same about how to reduce it to a respectable level. Any alternate investments to replace such a sound script (Nestle, ITC or any other can fit into the shoes of HUL?

Do reply,
Thanks and regards

Like 

SJ

Jun 8, 2016

Insightful!

However the only unrealistic bit I find is having invested 1 lakh rupees 20 years ago in a single stock. Considering lower income levels and lower GDP back then, how much does that amount to in terms of optimum asset allocation? And considering that today, what percentage of one's assets should comprise of stocks of the HUL types that have delivered rich dividends consistently?

A good insight nevertheless .

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