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Dividend Multibaggers for 2023 podcast

Nov 15, 2022

In this video, I'm going to discuss dividend investing and three stocks where the business have growth potential and the dividends look attractive.

In today's video, I'm going to discuss dividend investing and three stocks where the business have growth potential and the dividends look attractive.

But to understand the significance of dividends, let me share with you a true story.

We need to go back a century in the town of Quincy, a coastal city in the US. The year was 1920. Spanish flu pandemic was still causing economic dislocation.

The US economy was undergoing a transition from the war economy post first world war to a peace time economy. The transition was marked by a recession and inflation.

In response to post First World War inflation, the Federal Reserve was on the rate hike mission. Between December 1919 to June 1920, the rates were raised from 4.75% to 7%.

Amid these grim times, a banker named Pat Munroe in the town of Quincy noticed that people continued to spend money on a fizzy drink of Coca Cola, despite the shrinking of the economy.

The shrewd banker that he was, Mr Munroe realised the strength of this consumer brand, and sensed a great investing opportunity.

Coca Cola had gone public in 1919 and was worth US$ 25 million (m). In December 1920, the company was clocking full year sales of US$ 32 m and paying a dividend of US$ 1.7 m, around 7% yield on its value as it went public.

He invested in the company's stock and encouraged his neighbours and other folks in the town to do the same. It is said that he even lent money to the depositors for this investment.

While the depression in the economy continued and farm incomes dried up, the dividends from Coca Cola continued to support the families in the town, as the drink gradually expanded to different regions and countries enjoying a strong consumer demand.

In fact, investment in Coca Cola and its dividends, made Quincy the richest town in the US with highest per capita income.

If reports are to be believed, those who invested in Coca Cola share before Great Depression and continued to reinvest the dividends, had made over US$ 10 m from a single share, leaving huge wealth for the next generations.

The residents in the town came to be known as Coca Cola Millionaires.

This is a very powerful story that makes one believe in the power of equity investing, and more importantly, the power of dividends.

Coming back to the present...

Over the last year, the marketcaps of some of the well known companies across the world have shrunk by up to 50%.

With Nifty close to a life time high, and Mr Market known for its fickle temperament, it makes sense to invest not just in growth stocks, but in stocks where you can expect a steady income in the form of dividends as well.

As a wise man once said... Earnings are human, dividends are divine.

As an outside investor you may not know if the accounts are fudged or if the earnings are for real.

Having consistent dividend paying stocks are a source of comfort and suggest that the business is actually earning money.

You could choose to reinvest the dividends back in the stock depending upon the growth prospects and valuations or use it to meet your expenses. It's for you to decide what you wish to do.

That said, it's not just enough to use stock screener based on dividend yields or payouts.

If you are new to investing, dividend yield is defined as dividend per share for the year divided by stock price.

For instance, if Coal India's stock is currently trading at Rs 250, and its annual dividend in FY22 is Rs 17 per share, then the dividend yield is 17 divided by 250, i.e., 6.8%.

Another metric that dividend investors look at is the dividend payout ratio. It is calculated as dividend per share divided by earning per share.

It suggests the percentage of net profit that the board decides to redistribute among the investors in the form of dividends, while the rest is reinvested back in the business for growth or remains as cash or investments on the balance sheet.

So again using the same example, Coal India's earning per share is Rs 28, while dividend per share is 17. As such, the payout ratio is 17 divided by 28, i.e., 60%.

While looking at payouts, you should look at the trend of dividend over last five to 10 years, and not just at a particular year's dividend. This will give you some insight if the dividends are sustainable and regular, or just one offs.

You need to ensure that the stock you invest in does not result in capital loss, as this would negate all the dividend returns, as is often the case in most PSUs.

Let's take a look as some dividend losers in the PSU space. These are stocks with high dividend yields where the stock performance has lagged behind.

While PSUs offer attractive dividend yields, the stock performance underscores the basic issue in them - mismanagement of affairs and regulatory risks.

Running a stock screener for high dividend yield is likely to throw a lot of PSU names that you should be sceptical to invest in.

And it's not just the PSUs.

This is true for non PSU stocks too. You need to be pay attention to business and growth quality for high dividend yield stocks.

The cyclical and commoditised business, or management quality or the growth prospects of the sector are huge factors in driving stock price performance and should not be ignored.

Here are some businesses that look attractive from dividend yield perspective in non PSU space.

For instance, INEOS Styrolution, a chemical business seems to be underperforming due to commodity nature of business in an inflationary scenario.

Jagran Prakashan, a newspaper business seems to be facing the headwind of structural slowdown in the industry along with high promoter pledging, and Vedanta has the same issue.

With these caveats, let's now take a look at some high dividend yield stocks that I believe should be on your watchlist.

The first stock in the list is Polyplex Corporation.

The company makes plastic film substrates for applications in packaging, industrial, building and construction, electricals, and electronics. Within packaging, it caters to food and FMCG, pharma, beauty, and personal care.

Globally, excluding China, company has 10% market share in thin BOPET and is ranked second. Almost 80% of the revenue come from export markets.

It's a B2B business with over 2,600 customers across 75 countries.

The company claims to be the first in the industry to invest in post-consumer and post-industrial plastic waste recycling.

The company enjoys a backward integrated model from resins to value added films that help to some extent in a commoditised business.

Further, 30% of revenue comes from differentiated products where the price is relatively stable.

This has led to healthy profit margins and growing per unit margins or EBITDA per kg for the company.

The debt to equity ratio is close to nil and the return ratios have been healthy.

Coming to dividends...

The dividend yield for the company stands at above 5%.

Please note that this includes special dividends as you can see on the slide. The special dividend has been consistent barring in FY20 when the pandemic hit. The stock is trading at a PE of 9 times.

The second candidate is Redington Ltd...

Redington Ltd is a distributor of a range of IT products, smartphones, solar, services like cloud, logistics, BPO, and 3d printing services.

Its clients include Apple, acer, google, Samsung, oppo, dell, canon, aws and so on.

With such esteemed clients and a long business history, the company is well placed to ride the megatrends like penetration of connected devices, 5G, digital economy, cyber security, and cloud solutions.

The company has presence in 30 countries and serves 38 markets.

Do note that it has no promoter category as such and the shareholding pattern looks like this, with 38% owned by FIIs and FPIs.

Since listing, its revenue and profits have grown in healthy double digits. In FY22, it reported a return on equity and return on capital employed of 24% and 66%.

There is some client concentration risk with Apple alone contributing to 28% of the revenue. The other top clients include Dell, HP, Lenovo, and Samsung.

The company has net cash. In other words, cash and liquid investments are higher than the debt on the balance sheet.

Coming to dividends...

The company has paid consistent dividends, although the payout has varied from 49% to 100% in last five years. Even in FY20, when the world was reeling under Covid, the dividend payout stood at 19%.

The dividend yield for the stock stands at 4.4% and the stock trades at a PE of 8 times.

Coming to the third and the last candidate, MPS Ltd.

MPS started in 1970 as a publishing service provider in India as a captive unit of Macmilan Publishers. It helped journals, research materials, and publishers produce books across the world.

At present, the company provides content services, platforms solutions for content management, and learning solutions .

Within publishing, it works with scholarly publishers and education publishers, including college and K-12.

In 2012, with the new leadership team, the company made many successful acquisitions to gain a lead in providing end to end publishing solutions from content authoring to delivery.

80% of the billing is done in US dollars. 34% of revenue come from Europe and UK.

Here's a breakup of the three segments the company operates in. The management believes that there is significant potential to expand margins in the e-learning segment to up to 30%.

In fact, in the recent concall, the management has stated that it aims to earn the margins in content, platform and e-learning business at 40%, 40%, and 30% respectively.

Across the segments, the company works with 600 customers. Over last 5 years, the contribution from top 10 customers has come down from 80% to 50%.

The company has zero debt, return on equity and capital employed stand at 32% and 23% for FY22.

The cash and cash equivalents stands close to 8% of the marketcap. The stock is trading at a PE of 16 times. Average dividend payout in last five years is above 60 times. The current dividend yield is 3.47%.

So these were the three stocks as I promised. Now if you run a dividend based screener, I am sure you will get a list of stocks with higher yields.

Please note that I have tried to short list names where growth prospects and execution give comfort, so that the chase for dividends does not end up in capital loss.

That said, these are not recommendations and inclusion in the watchlist does not suggest my view on the stock.

Hope you liked the content and found it useful to nail the dividend multibaggers for FY23.

If you do, don't forget to press the like button, and share the video and your feedback.

Thank you for watching.


Richa Agarwal

Richa Agarwal (Research Analyst), Managing Editor, Hidden Treasure has over 7 years of experience as an equity research analyst. She routinely scours the small cap universe for fundamentally strong companies trading at attractive prices. Having degrees in both finance as well as engineering has served her well in analysing business models across the small cap space.

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