Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Your insurance against stock price volatility - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 12, 2011

    Your insurance against stock price volatility

    We are three weeks away from the end of 2011. But, how have your portfolios fared so far this year? The year started off with a lot of promise. Markets were at their peaks at the beginning of 2011 but this excitement quickly fizzled out. The Indian stock markets and the rupee have both gone south in 2011. GDP growth in the country has slowed and global uncertainty is still looming. All this bad news would certainly have had an impact on your portfolio. Unless, you had stayed invested in a certain category of stocks. This could have been your insurance plan against stock market volatility seen this year.

    Companies have four major ways in which they can use their excess cash. They can either make headline grabbing acquisitions. Or they can buy back their shares from the public. They can either sit on their cash nest or they can reward their shareholders in the form of dividends. But, acquisitions are risky, and sitting on cash is unproductive. Thus most companies either opt for buybacks or paying out dividends. We shall focus on the companies which do the latter in this article. Thus even in case of a fluctuation in the share prices, investors can benefit from the yearly dividend cheque they receive from these companies.

    Warren Buffett, one of the world's most successful investors practices this method of investing. His key investments Wells Fargo, Coca Cola, and American Express all exhibit similar characteristics. They all have strong competitive advantages in their respective fields making them strong value picks. But, they also have something else in common. They are able to generate large amounts of free cash flows and pay it out to their investors in the form of dividends.

    Now let's take a closer look at a few companies in the Indian stock market that are strong dividend payers:

    Company Name Dividend yield Increase in dividends
    (5 yr CAGR)
    Increase in earnings
    (5 yr CAGR)
    Hero Motocorp 6.6% 39% 15%
    HPCL 3.9% 31% 30%
    Ashok Leyland 3.5% 11% 12%
    REC 3.0% 31% 26%
    ACC 2.8% 31% 16%
    Source: Ace Equity

    We looked at the BSE-100 index as our universe, and shortlisted the above stocks based on high current dividend yield. We made sure that these stocks showed a positive trend in increase in dividends as well as earnings over the past five years.

    Most companies in the list above have shown an in-tandem increase in both earnings as well as dividends paid out. However some like Hero Motocorp and ACC have been overly generous.

    Hero Motocorp has been extremely generous in doling out dividends to its shareholders, out of which the Munjal family is the biggest beneficiary. In 2009, the company said it was sitting on a cash reserve of over Rs 40 bn and it was looking at a number of ways to use these funds, including special dividends and expansion of capacity. Over the next two years, shareholders were suitably rewarded with bumper payouts.

    ACC saw an increase in dividends paid out in 2011 on occasion of the company's Platinum Jubilee.

    While the dividends paid out were overall impressive, the returns generated over the past 5 years are not equally impressive. Investors should take note that all dividend paying companies are not created equal. As seen in the table below, cyclical stocks including commercial vehicle maker Ashok Leyland and cement producer ACC have seen modest returns in their stock prices over the past 5 years. HPCL's returns are also heavily dependent on crude oil prices.

    Company Name Returns over 5 years
    Hero Motocorp 196%
    HPCL -2%
    Ashok Leyland 1%
    REC* 53%
    ACC 9%
    * Since March 2008 IPO
    Source: Ace Equity

    Hero Motocorp and REC on the other hand have seen impressive returns. Hero Motocorp has benefitted from India's growing consumption class and demand for its two wheelers. REC has benefitted from the growing demand for power in the country, the generation and transmission of which needs to be financed.

    Other companies which have also seen an impressive increase in dividends over the past 5 years include Infosys, Federal Bank, IDBI Bank, National Hydel Power Corporation (NHPC) and ITC.

    To conclude:

    Now, even if the returns on some of these stocks may not be very impressive from a 5 year basis, you could have still recovered some of your money through dividends. Thus these stocks provide an insurance protection to your portfolio against stock market volatility. But all such stocks are not created equal. On a conservative basis investors could avoid investing in cyclical companies. They may be unable to maintain constant profitability. This in turn endangers their ability to pay dividends consistently. Instead, investors should focus on businesses whose products will be in demand regardless of the economic environment. This will ensure that they maintain a steady payout. Consumption driven companies, utilities and companies which provide an underserved need are thus your best bets.



    Equitymaster requests your view! Post a comment on "Your insurance against stock price volatility". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 03:24 PM