Having the cake and eating it too!

Is it possible that a stock investment makes sense both from a capital gain point of view as well as dividend point of view. Unlikely, since it is like pulling a rope from two different directions. As company’s share price increases (resulting in capital gains), its dividend yield (defined as dividends/stock price) falls for the simple reason that as the denominator in the equation (stock price) increases, the yield decreases. A perusal of top stocks (in the table) clearly shows that if they are high on capital gains, they are definitely low on dividend yield.

Having said that, we can identify companies that have done well not only from a capital appreciation point of view but also from a dividend yield point of view.

The table lays out this dilemma by looking at the past five years average on both dividend yield and price performance. Among the large caps, if the stock tops the list on dividend yield, it lags in price returns and vice-versa. For eg. NTPC has a healthy dividend yield of 2.6% while it has a negative price performance of 5%. Where the price performance is very healthy (for eg., Tata Motors at 64%), then the dividend yield is 1.4%[1]. There may be minor exceptions to this but in general if the dividend yield is healthy, then price performance is poor. Large caps generally suffer from this tension where if it scores well on capital appreciation, it tends to lag on dividend yield. A good example would be Kotak Mahindra Bank, whose capital appreciation was a healthy 32% annualized for the last 5 years, while its dividend yield average is a paltry 0.1%.

So, if we chase dividend yields, then we may risk incurring capital loss and if we chase capital appreciation, then we have to settle down for paltry dividend yields. However, if we can find companies that not only produce good capital appreciation but also pays handsome dividends, then that is a list worth looking at. After quantitative research, here is such a list.

Stellar Stocks	Years since inception	Mcap (USD mn)	5Yrs CAGR*	5yrs avg DY
Hexaware Technologies Ltd	17	726	66%	5%
Supreme Industries Ltd	20	1,247	79%	3%
Finolex Industries Ltd	20	588	41%	6%
SRF Ltd	20	619	25%	5%
VST Industries Ltd	20	391	51%	5%
Aarti Drugs Ltd	18	137	43%	5%

Source: Reuters

*Compounded Average Growth Rate

As we can see, the list not only combines strong price performance, they also enjoy high dividend yields. Let us look at them a bit closely.

Hexaware Technologies is the erstwhile Aptech which is now renamed as Hexaware. The company’s share price increased at the rate of 66% p.a. thanks to robust annual growth in top line (22%) and bottom-line (30%) with the price to earnings ratio holding in tact at 10. However, what is surprising is the equal performance on the dividend yield where the D/Y increased from a modest 1.5% in 2009 to 8.4% in 2013 thanks to dividend pay-out increasing from 16% in 2009 to 88% in 2013.

Supreme Industries, is a Mumbai based company that belongs to Thaparia group. The company is into plastics and plastic products. Over the years, the share price improved from Rs.76 in 2009 to Rs. 425 at the end of 2013, yielding an annualized return of close to 80%. The stock is currently trading at Rs. 588. Over this period, the company enjoyed a top line annualized growth of 19% and a bottom-line growth of 16%p.a. However, the capital gain was achieved more due to a p/e rerating that improved from 6.25 to 19. The dividend pay-out ratio has also increased from 29% to 36% though not dramatic. The average dividend yield during the 5 year period was 3%, which though not very high is not bad at all.

Finolex Industries, is a Pune based Petrochem company belonging to the Finolex group. The share price improved from Rs. 56 in 2009 to Rs.167 at the end of 2013 implying an annualized return of 41%. The current share price is even better at Rs. 327 as of 12/11/2014. Being in a commodity industry, where the margins are low, the top line and bottom-line growth was a modest 14% and 6% p.a. However the robust capital gains was made possible by a p/e rerating from 5.2 in 2009 to 12.2 in 2013. During this period, the dividend pay-out also increased from 28% to 51% causing the dividend yield to increase as well. The 5-year average dividend yield was an impressive 6%.

SRF Ltd, is a Delhi based Bharat Ram group company mainly into textiles. This is a strange entry into the list. Its share price performed at 25% annualized during the last five years though its recent profitability has shown a decline from Rs.253 crores in 2013 to Rs. 162 crores in 2014. The company’s top line has been growing at a rate of 13% p.a. during the last five years. The declining profits is more than compensated by the rerating of the p/e that increased from 3.68 in 2009 to 12.7 at the end of March 2014. The company has a generous pay-out of 35% leading to impressive dividend yield of 5% during the last five years.

VST Industries, is a Hyderabad based multinational company selling tobacco products. The company’s share price increased at the rate of 51% p.a. during the last five years aided by a 25% annualized growth in the top line and an impressive 73% annualized growth in the bottom-line. The performance has also been helped by a growing p/e ratio that improved from 13 to 17. Being cash rich, the company has always adopted a generous dividend pay-out stance with the pay-out ratio averaging close to 75% of profits. The average dividend yield during the last five years stands at 5%.

Aarti Drugs, is a Alchemie group company that is into pharmaceuticals. It enjoys an annualized 

price appreciation of 43% and an average dividend yield of 5%. The company’s top line (19%) and bottom-line (22%) improved at a healthy clip leading to higher profitability. The p/e ratio has been stagnant at 4 over the years. The company adopts a conservative pay-out policy.

Concluding Theme:

The list given here is only partial and it is possible to successfully isolate companies that have shown impressive capital gains as well as dividend yield. The running theme among such companies is healthy top line and bottom-line growth, p/e rerating and generous dividend pay-out ratios. However, they all belong mostly to small cap segment whose fortunes can change overnight!

The author thanks Rajesh Dheenathayalan for his assistance

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[1] Price performance refers to annaulized performance in past 5 years (2009-2013); Dividend Yield computed as average yield over the same time period.