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Hindalco: What’s dividend yield indicating?
Jan 12, 2009

Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group, is an industry leader in aluminium and copper. A metals powerhouse with a consolidated turnover in excess of US$ 14 billion, Hindalco is the world's largest aluminium rolling company and one of the biggest producers of primary aluminium in Asia. Its Copper smelter is the world's largest custom smelter at a single location. In 2007, with the acquisition of Novelis Inc. a world leader in aluminium rolling and can recycling, the company was catapulted into the league of world’s top 5 aluminium producers, as an integrated producer with low cost alumina and aluminium facilities combined with high-end rolling capabilities and a global footprint in 12 countries outside India. The company has also lined up some aggressive organic expansion plans whereby it will expand its alumina capacity by 3.6 m tonnes and aluminium capacity by 1.2 m tonnes, the last phase of which is expected to commence production by FY12.

The company has been continuously paying dividend to its shareholders since 19 years i.e the time since it was listed in 1989. It is among the very few metal companies to have such a continuous dividend paying record. Hence given this long history, there are very little chances that the company might stop paying dividends to its shareholders in future.

It should be noted that the stock has corrected more than 70% from its 52 week high of Rs 194. At the current market price of Rs 50 or thereabouts, the stock is trading at a decent dividend yield of around 4%. The last time the stock traded at such a decent dividend yield more than 3% was way back in FY03, when investors were predicting a gloomy future for the company just as they are doing now. Back then, the company had touched a low of Rs 53 per share indicating a dividend yield of around 3%. If one had bought shares in the company at that depressed price and had reinvested the entire dividend proceeds back into the company at an average price for that year till FY08, the compounded growth rate would have amounted to a decent 29%. However at current prices where the company is trading more than 70% of its 52 week highs, the return would have been much lower, a CAGR of mere 2%. But this would have been the case if the investor had stayed invested in the stock till now.

Hindalco: Dividend v/s EPS
Source: CMIE

Would investing in the company at current levels lead to similar returns in next few years time? This would be the question that would be uppermost in every investor’s mind right now. Well, since dividend payouts depend upon the profitability and the capex needs of the company in the future, estimation of future dividends need to take into account these two important variables in mind. Once again, a peep into the past may provide some guidelines. Since the company may have undertaken capex plans and aluminium and copper prices would have fluctuated in the past as well, did this force the company to cut its dividends significantly? Since FY91, there have been only three instances where the company has been forced to cut its dividends. The cuts had been of the magnitude of 33% on one occasion, while 10% and 25% on the other two occasion. Barring these three instances, the company has never cut its dividend per share since 1991. However, it should be added that on quite a few occasions, it has kept its DPS constant.

We would like to conclude that a company does not operate in a vacuum. The environment keeps on changing. But does it change so much so as to warrant the kind of thrashing it has received in the past few months. The answer is for the investor to find out.

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