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  • Jul 14, 2022 - The Average 7 Year Dividend Yield for this Stock is 8.1%...

The Average 7 Year Dividend Yield for this Stock is 8.1%...

Jul 14, 2022

  • The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies. - Benjamin Graham

Last month we wrote to you about how prudent investors could consider dividend aristocrat stocks.

These stocks can create a passive, predictable, and growing income to rely on whether the market moves up or down.

If you missed it, you can read it here: The Greatest Dividend Stock of All Time.

A dividend aristocrat is a company in the S&P BSE 500 index that not only pays a consistent dividend to shareholders but increases the size of its pay-out annually.

Historically, the fundamentally strong high dividend stocks

have presented growth opportunities even during bear markets and periods of uncertainty.

We are continuing our series on the best dividend aristocrats to add to your watchlist. This week we look at a stock that has declared 25 dividends in the last 15 years!

And not just that. The average dividend yield of this stock over the last 7 years is a mind-boggling 8%.

But does the stock qualify as per our parameters to be among the best of the best.

In our previous article, we had identified five parameters for a stock to qualify for our list:

But to make our discussion even more comprehensive this time, we decided to dig in even deeper.

We put our chosen dividend aristocrat through the rigorous test of our 5 parameters and combined it with some aspects of the CANSLIM method where ever applicable.

CANSLIM is a techno-fundamental strategy that helps pick quality stocks by focusing on companies that show an acceleration in earnings.

The word CANSLIM is an acronym for a seven-step process or a set of seven rules an investor can follow to pick quality stocks with very high growth potential.

We wrote about this method a while ago. You can read all about it here: Top 15 Stocks Using the CANSLIM Strategy.

Does our stock make the cut? Read on to find out...

Fixed Deposit, Cryptocurrency, High-Growth Stock or a Dividend Aristocrat?

Interest rates offered by banks on fixed deposits (FDs) hardly beat inflation these days.

A 365-days fixed deposit of HDFC Bank yields about 5.4% whereas the current inflation rate hovers around 7%.

Then there are stocks that have zoomed over 1,000% this year but these companies have little (or in some cases nothing) to show in their financials.

On the other hand, we have seen some cryptocurrencies zoom by over 5,000% last year only to lose all the gains and much more within a matter of weeks in 2022.

And finally, we have a large-cap stock that has robust financials and has been consistently paying dividends over the last 15 years.

And not just a pittance of dividend. The average dividend yield over the last seven years has been a massive 8.12%.

So what would you pick from these choices in the current market situation?

Well, I'm pretty sure that just like any wise investor, you too would choose to invest your hard-earned money in a large-cap stock with a track record of paying enormous dividends consistently.

If we are all in agreement, then without further ado, let us look at our Dividend Aristocrat of the month...

Hindustan Zinc Ltd

Hindustan Zinc Limited (HZL) is India's only and the world's leading producer of zinc, lead, and silver.

Over the last decade, the company has rewarded its investors with over Rs 700 bn through dividends alone.

Take a moment to process this.

Hindustan Zinc has paid its shareholders more money in just dividends since 2013 than the combined profits of Bajaj Finance, Asian Paints, and Titan Company over the same period!

Even then, the company has a strong liquid surplus of over Rs 200 bn as on date.

Let us take a look at HZL's dividend history for the last 17 years.

Year Face Value Dividend Per
Share (Rupees)
Dividend %
of FV
Yearly Price
Yield %
2007 10 2.5 25.0% 724.0 0.4%
2008 10 5.0 50.0% 528.0 1%
2009 10 4.0 40.0% 668.0 0.6%
2010 10 6.0 60.0% 1132.0 0.5%
2011* 2 1.0 50.0% 334.0 0.3%
2012 2 2.4 120.0% 128.6 1.9%
2013 2 3.1 155.0% 121.0 2.6%
2014 2 3.5 175.0% 150.0 2.3%
2015 2 4.4 220.0% 158.7 2.8%
2016 2 27.8 1,390.0% 201.0 13.8%
2017 2 29.4 1,470.0% 288.0 10.2%
2018 2 8.0 400.0% 293.0 2.7%
2019 2 20.0 1,000.0% 237.8 8.4%
2020 2 16.5 825.0% 199.6 8.3%
2021 2 21.3 1,065.0% 315.8 6.7%
2022 2 18.0 900.0% 272.0** 6.7%
* Stock Split from Rs. 10/- to Rs. 2/- and Bonus issue of 1:1
** Current Market Price

Starting with a modest dividend pay-out of just 5% of its face value in financial year 2001- 2002, the company has increased the dividends exponentially to as high as 1,470% per year.

In 2017, HZL made history by making the largest aggregate dividend pay-out by any Indian company in a single financial year of Rs 271.6 bn.

On the date of writing this article, the company has announced another massive dividend of Rs 21 per share i.e. 1,050% on face value of Rs 2 per share for the financial year 2022-23 amounting to Rs 88.7 bn.

At the current market price of Rs 271, the dividend yield is 7.75%.

The record date for the purpose of payment of interim is 21 July 2022.

And over the years, it's not just with dividends the company has rewarded its shareholders.

For a 10-year period starting from July 2012 till date, HZL has given a CAGR of 8.5% to its shareholders.

For an investor looking for stable returns by investing in strong and large companies in the market, 8% to 10% is considered a reasonably good CAGR over the long term.

Hence, now that we have established HZL's dominant dividend track record, we can tick off two of our five parameters.

  • A multiyear track record of paying phenomenal dividend pay-outs
  • Stocks that have consistently grown their dividends over the last 20 years

For the next part of our analysis, we have done something radically different for our readers.

We tried to integrate the CANSLIM method (using each letter of the acronym) where possible along with our parameters.

However, it is important to note that CANSLIM is a method used to identify high growth stocks whereas we are analysing a high dividend yield stock.

Hence, our goal here is to try and create a study using the best of both worlds. Let's take a look.

The letter 'C' in CANSLIM refers to 'Current Quarterly Earnings'.

According to the method, investors should compare the earnings per share for the last four quarters of a company.

A growth of 25% and above in EPS indicates that the company is both profitable and fast-growing.

Hindustan Zinc Ltd

In Crores Mar-22 Dec-21 Sep-21 Jun-21
EPS 6.9 6.3 4.7 4.6

EPS has grown from 4.6 in June 2021 to 6.9 in the quarter ended March 2022, a growth of 47.7%.

'A' in CANSLIM refers to the 'Annual Earnings Growth'.

The method emphasises that a company's revenue and annual earnings should grow at least 25% for the last three years.

According to the method, ROE must exceed 17%.

Hindustan Zinc Ltd

In Crores 2020 2021 2022
Revenue 18,561.0 22,629.0 29,440.0
% Change in Revenue -12.1%  21.9% 30.0%
Net Profit 6,805.0 7,980.0 9,630.0
% Change in Net Profit  -14.4% 17.2% 20.7%

This is a mixed bag. Although there has been a strong growth in revenue and profits in FY 2022, the growth has been below the expected rate as per the CANSLIM method.

Revenue and Net Profit declined in FY 2020 due to a halt in operations in late March 2020 on account of the COVID-19 lockdown and cyclically weak zinc and lead prices that were down by an average 12% and 8%, respectively, during the year.

If we look at the Return on Equity (ROE), the company checks the box with an ROE of 28 which is much higher than the 17% prescribed by the method.

Growth Prospects

Hindustan Zinc is one of the world's largest and India's only integrated Zinc-Lead-Silver producer.

The company has mined metal capacity of around 1.2 million tonne per annum and it is aggressively expanding its mining capacities with six ongoing major mining projects.

Hindustan Zinc, the world's second biggest zinc producer, operates the world's third largest open-pit mine, and world's largest zinc mine in Rampura Agucha, Rajasthan.

In 2021, the company delivered its highest ever annual silver production of 706 tons. The company aspires to become the third-largest silver producer in the world by increasing its production to 1,000 tonne a year from 700 tonne.

With a reserve base of 150.3 million MT and mineral resources of 297.6 million MT, HZL's mine life is over 25 years.

This is in addition to bidding for new mining blocks in India to increase local production.

The company has confirmed that it will bid for new blocks of zinc and lead when the government of Rajasthan holds its auction later this year.

Recently, the company has been looking at acquiring mining assets overseas in its bid to boost total annual production up to 2.5 million tonnes.

This would help HZL hedge against having all its resources concentrated in India and also improve the logistics of carrying goods across the globe to cater to US or Europe.

HZL is also setting up a 30,000-tonnes per annum plant to manufacture zinc alloys shortly which will not only help India cut its dependence on exports but also aid the company's bottom line.

Zinc prices have rallied since 2020 over a long-standing mismatch between supply and demand, and despite global refined zinc output ramping up over recent months compared to 2020, it has been outpaced by demand.

Global base case mine production capability of Zinc is forecast to peak at 14.9 MT in 2025 and gradually reduce, dwindling to just 4.9 MT in 2050 from its 2025 peak.

Demand for zinc is closely linked to the galvanised steel industry, which consumes around 70% of the zinc produced in India.

A downturn in the economy could reduce demand for galvanised steel. Zinc also faces competition from substitutes such as aluminium and other alloys to produce galvanised steel.

"N": New Product, Service or Management

Being an old economy stock there aren't many new product or service offerings for a company like HZL.

However, as mentioned earlier, the company is looking at acquiring mining assets overseas and also setting up a new plant to manufacture zinc alloys.

"S": Supply and Demand

As per CANSLIM, investors should look for stocks with fewer shares outstanding. These stocks can perform well as supply is restricted.

HZL's promoter, Vedanta Limited owns 64.9% stake in the company while the Government of India holds a minority stake of 29.6%. Institutions and FIIs hold 3.8%

This leaves just 1.69% of the total shares available for day-to-day trading. Just as it is easier to tow a bike than a car, companies like HZL with a small number of shares for trade are more likely to catapult higher than a company with a large free float.

"L" - Leader or Laggard

According to CANSLIM, investors must look at buying "the leading stock in a leading industry." The idea here is to distinguish the leaders from the laggards.

With market share of 78% by volume, HZL enjoys leadership position in the domestic zinc market.

High entry barriers such as capital-intensive operations and lack of zinc ore mines lend a competitive edge to the business risk profile. Presence in the global market also enhances revenue diversity.

Fundamentally Sound Company with Strong Promoters

Does Hindustan Zinc have strong parentage, you ask?

Well let's see...

HZL is a subsidiary of Vedanta Ltd which owns 64.9% stake in it. Vedanta Limited in turn is a subsidiary of Vedanta Resources Limited.

It's one of the world's leading Oil & Gas and Metals company with significant operations in Oil & Gas, Zinc, Lead, Silver, Copper, Iron Ore, Steel, and Aluminium & Power across India, South Africa, and Namibia.

Any other strong hands holding the stock? Well, there is the Government of India (GOI) if that impresses you. That takes care of the "I" in CANSLIM. A company must have some institutional sponsorship. It doesn't get any better than having the backing of the GOI.

The Government of India holds a minority stake of 29.6% in the company. HZL was incorporated as a public sector firm in 1996, and the NDA government disinvested 26% in 2002 and a further 19% in 2003.

Through this two-phase transaction, the government sold 45% of the company and since has retained 29.6%.

One may argue that HZL has a very small free float with just two dominant stakeholders holding almost 95% of the stock making it illiquid.

But on the other hand, if such a company is well-run, it can be a great place to invest. Simply because the dominant investors have their interests aligned with yours over the long term. This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold. Strong hands hold the stock, which is ideally a great place to be.

In May 2022, the union cabinet approved the sale of the government's residual 29.6% stake in the company as part of the government's disinvestment drive in the current fiscal.

Vedanta could bid for a 5% stake when the government sells its residual stake in HZL, the company's chairman, Anil Agarwal, had said recently.

We have already covered the company's impressive dividend track record and growth in revenues and profits. Let's take a quick look at some key figures and ratios for financial year 2021-22.

Hindustan Zinc Ltd

In Crore 2022
Total Share Capital 845.0
Reserves and Surplus 33,437.0
Revenue 29,440.0
Profit Before Tax 14,101.0
Finance Costs 296.0
Net Profit 9,630.0
EBITDA Margin % 59.2%
Net Profit Margin % 32.7%
Return on Capital Employed (ROCE)% 37.6%
Current Ratio (x) 3.9
Quick Ratio (x) 3.6
Debt / Equity (x) 0.08

EBITDA margin increased from 52% in FY2021 to 59% in FY2021 primarily due to increase in revenue from operations on account of higher LME prices and increased zinc production.

Net profit margin at 32.7% is much higher than the average net profit margin of the world's top 40 mining companies that stood at 17% in the same period.Finance costs are down from Rs 386 crore in the previous year to Rs 296 crores in FY 2022. Current ratio has improved to 3.9 from 3.1 in FY 2021. This is on account of lower borrowings during the year.

HZL has a healthy quick ratio of 3.6 which indicates the company can comfortably meet its short-term obligations with its most liquid assets.

Finally, the debt-to-equity ratio at a mere 0.08 shows the overall strong health of the company. Although, there are many debt free companies in India, HZL has achieved a rare feat by staying debt free over a long period even though it is engaged in the capital-intensive metals and mining industry.

With this we can tick another one of our boxes- the company is fundamentally sound and has robust financials.

The final criterion of the method considers the general market direction, "M". Most companies tend to follow the current direction or trend of the market.

It is increasingly difficult for anyone to predict the market direction these days with the sharp volatility that we have witnessed this year.

Technically we are not in a bear market yet, at least not by definition which is a decline of 20% from its peak levels.

The Nifty has come close with a decline of 17% earlier in June but has bounced back since then and is currently trading close to 16,000 levels.

It serves no purpose for an investor to predict the markets. Instead, one must find tried and tested methods to determine what is the best suited investment option in the present time.

The very purpose of us looking at dividend aristocrats is that even during bear markets when stock prices in general are falling, dividend investors seem to do better than growth-stock investors.

With companies like these, investors are rewarded regardless of movements in stock prices.

Fairly Undervalued?

Is the stock price of Hindustan Zinc Ltd undervalued? Let's take a look at some numbers-

Hindustan Zinc Ltd

P/E 11.9
PB 3.3
ROE 28.0
Enterprise Value (EV) 127,929.0
Price to Dividend Ratio 12.9

If we look at the P/E ratio for the last 7 years, it has averaged at 13.1. The current P/E of 11.9 is comparatively lower.

The return on equity at 28% is considered good as per industry standards. The price to book ratio at 3.35x is also fairly low. Some value investors consider any value under 3 as a good PB ratio. Of course deep value investors would hope to buy a stock at book value or lower.

However, the standard for good PB value varies across industries.

The enterprise value at Rs 127,929 crore is more than the market cap of Rs 114,865 as per today's closing price.

As the name implies, enterprise value (EV) is the total value of a company, which includes both the market capitalisation and the cost to pay off all debt minus cash.

In this case, the EV exceeding the marketcap indicates that the stock may be undervalued.

Finally, let us look at the price to dividend ratio which is often overlooked as investors usually look at P/E and other metrics.

The price to dividend ratio accounts for cash flows and is a more trustworthy ratio. Cash is actually being paid out which means the company is actually making money.

HZL has a low price to dividend ratio of 12.90x at the current market price.

Effectively, this ratio also indicates how many years it will take for dividends to yield the original share price. If an investor invests for dividends, this is a useful metric.

Why You Should Consider Dividend Aristocrats in 2022

Dividend investing can be a great investment strategy as dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price.

This total return can add up to create substantial wealth over time.

Regular dividend increases lift the yield on an investor's original cost price. Just as we saw with HZL, if you stick around over the long term, a tiny 0.35% yield in 2002 can gradually increase to the current yield of 7.75%.

One of the best things about dividend aristocrats is these companies have long histories of annual dividend growth. This offers peace of mind to investors in uncertain times like the present.

When a company manages to raise its dividend year after year, through bear markets, wars, recessions, and crisis, it proves its financial resilience and its commitment to shareholders.

Prudent investors should consider adding such high dividend stocks to their watchlist as they are less risky in the current environment.

Since you're interested in dividends, check out the list of companies which have announced dividends recently and upcoming dividends.

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Before you make that decision, here’s something you should know...

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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Yazad Pavri

Yazad Pavri
Cool Dad, Biker Boy, Terrible Dancer, Financial writer
I am a Batman fan who also does some financial writing in that order. Traded in my first stock in my pre-teen years, got an IIM tag if that matters, spent 15 years running my own NBFC and now here I am... Writing is my passion. Also, other than writing, I'm completely unemployable!

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1 Responses to "The Average 7 Year Dividend Yield for this Stock is 8.1%..."


Jul 15, 2022

Everything else is good except the Pledged percentage of 86% this stock. how will you rate a company with such high pledge percentage?

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