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ONGC: Exploring dividends

Mar 19, 2009

In the previous article, we had discussed the application on Hindustan Unilever, of a frame work through which one could achieve returns entirely from dividends. In this article, we shall analyse ONGC's dividend record through the same frame work. ONGC is India's largest oil and gas upstream company accounting for more than 80% of the domestic production. It holds 85 blocks out of 162 blocks in the 6 rounds of NELP, 97 nomination exploration licenses and 284 mining leases. Its overseas subsidiary, ONGC Videsh has 38 projects in 18 countries. It has recoverable reserves of 8.1 bn barrels of oil equivalent and the average production is 1.2 m barrels of oil equivalent per day. It holds a 72% stake in Mangalore Refinery & Petrochemicals. The company also has stakes in Petronet LNG, Pawan Hans Helicopter, ONGC Petro-additions, ONGC Mangalore Petrochemicals, Kakinada Refinery & Petrochemicals, ONGC Tripura Power, Dahez SEZ, Mangalore SEZ and ONGC Mittal Energy.

ONGC has been continuously paying dividend to its shareholders during the last two decades. The company had been able to grow its dividend per share at a CAGR of 24% between the period FY95 and FY08. The average dividend payout ratio during the period stood at around 30%, while the average return on net worth was around 20%. This is quite an impressive achievement by the company as it operates in a capital intensive industry. It may be noted that the company is a public sector undertaking and prior to Mar 2004, government was the only stakeholder. However, in March 2004 the government diluted around 26% of its stake. Dividends are the major route through which the company can disburse profits to the government. Given the long track record and the government's need for funds, there is very little chance that the company might stop paying dividends to its shareholders in future.


Source :CMIE
*Issued bonus

At the current price level, the dividend yield for ONGC is around 4%. Assuming the company continues to grow its dividend per share over 20% per annum, the investor would be able to get a 10% return annually on his investment from dividends alone from the 5th year onwards. It may be also noted that ONGC had around Rs 685 bn of reserves and surplus at the end of FY08.

Conclusion
A decent 4% dividend yield, healthy reserves and a sustained growth is likely to make ONGC a sound dividend income generator for the long term investor. However, investors should bear in mind that the desired returns of 10% from dividend alone can be achieved only if one stays invested in the company from a long term view. However, the management policies, capex plans and the environment in which the company operates can significantly impact the future dividend payout.


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