>MARKET STRATEGY (CLSA)

Dividend is king?

We analysed 82 companies with market cap of over US$1bn on trend in dividends in FY09 and see if there is any correlation with stocks performance. Interestingly in a year when profits grew by only 6% (for this universe), 42 companies declared higher dividend/ share than in
FY08 and only 23 companies declared lower dividend. Of the companies that declared a higher dividend, 79% have outperformed the Sensex in the last one year. In the same period, 57% of companies that have declared lower dividends have underperformed the Sensex.

Over the last one month, 33% of the 43 companies have underperformed the Sensex, but only 17% of the 24 companies underperformed the Sensex. The above indicates that in uncertain times companies expected to pay higher dividends will likely outperform and as risk appetite returns, as in the last one month, a higher proportion of companies that have paid lower dividends, but may have more exciting “stories” and potentially higher risks, tend to outperform. The average outperformance for companies that increased dividends was 29% over the last one year and 14% in the last one month. In uncertain times, dividend it seems is indeed the king.

We looked at companies with market cap of US$1bn

■ Of the 82 companies with market cap of over US$1bn, 42 companies have declared higher dividend/ share in FY09 vs FY08, 23 companies declared lower dividend.

■ Financials, particularly PSU banks, have declared higher dividends in FY09. Consumer, utilities and healthcare companies are other sectors where many companies have declared higher dividends. Materials, industrial and 4-wheeler companies have declared lower dividends.

■ It is interesting to note that in a year of uncertainty and slowdown, over 59 of the 82 companies have declared higher or unchanged dividend, a likely pointer to the fact that the outlook within India is not very gloomy.

Stock performance vs dividends

■ 79% of companies that declared higher dividend have outperformed the Sensex in the last one year and the average outperformance was 29%. The nine stocks that underperformed had an average underperformance of 12%.

■ On the other hand, 57% of the companies that declared lower dividends underperformed the Sensex over the last one year and the average underperformance was 15%.

■ The trends over the last one month are equally interesting. Of the companies that have declared higher dividends, 33% underperformed the Sensex, but only by 6%, whereas the 67% that outperformed, had an average outperformance of 14%.

■ Of the stocks that have declared lower dividends, only 17% underperformed the Sensex in the last one month by 6% on an average. The 83% stocks that outperformed had an average outperformance off 13%, not very different from the basket of stocks that declared higher dividends.

■ We believe that in uncertain times, stocks that are likely to maintain or increase their dividends are likely to do better over a longer time period. In the short term, even as risk appetite returns, the average performance of companies that declare higher dividends is comparable to the presumably riskier universe of stocks that have declared lower dividends.

To see full report: MARKET STRATEGY