CASH RICH - MAKING INVESTORS RICH TOO?
By Ruma Dubey
Apple made history. Within 4 days of its launch, the new iPad sold 3 million units. And this comes back on the news that Apple, which was sitting on a huge pile of cash of $97.6 billion, which is more than the entire market value 15 companies in the S&P's 500, finally, after Dec 1995, decided to pay a dividend of $2.65 a share in the fourth quarter. This was after the shareholders of the company made a huge hue and cry as the company was sitting on a huge pile of cash, which was earning a pitiable 1% interest and instead, felt it would be best to give some returns to the shareholders. It also plans to buy back up to $10 billion of its stock, starting fiscal 2013.
The logic of Apple made perfect sense – rather than sitting on huge piles of cash, which was earning a pitiable 1% interest, and with no acquisitions to use the cash for, the company did the best thing possible – payout a good dividend to the shareholders, buy back its shares – thus hitting two birds with one stone, nay three – increasing the base of shareholders, shoring up its holding and using its cash smartly.
Investors do prefer high dividend paying stocks, not just in America but in India too. The situation is a lot similar in India too. There are scores of companies today which are sitting on huge piles of cash. With no major capex on the anvil and scouting around for good mergers and acquisitions, many in India too – Infosys, TCS, Coal India, Reliance Industries, Wipro, ONGC, Oil India and many more are in the same piquant situation. But unlike the USA, here keeping money in banks earns better money – over 4% in savings account and over 9% if invested in Fixed deposits. Take the case of Oberoi Realty –it is zero debt and waiting for the right time to buy land at the right price. It has invested parts of the proceeds collected from the IPOs - Rs.36 crore in mutual funds, Rs.173.50 crore in FDs and Rs.58 lakh lies in its current account. But it paid just 10% as dividend in Q1FY12.
Wipro is also sitting on huge cash, around Rs.10,058 crore and till end of 31st Dec 2011, it paid Rs.761 crore for acquisitions and it has kept most of its cash in banks to minimize risks while earning good returns. But it has been very liberal when it comes to dividend payouts. Till date, in Fy12, it has already declared 300% dividend. It has declared two bonus issues since 2005. The promoter chose to sell his stake to raise money to invest in the education sector as a social cause rather than use its pile of cash.
Sitting on cash is wasteful as it does not yield too much returns but companies are literally hoarding cash, keeping it as a safety net for uncertain times and for future acquisition and diversification. They prefer to hoard than even payout as they are waiting for some signal on things stabilizing. There were very few big ticket buys despite the huge cash. Like RIL buying stake in EH, Piramal Healthcare buying stake in Vodafone, Oswal Green buying stake in NDTV. There have been many smaller buyings but nothing which justifies the cash pile up. Infosys has been scouting around unsuccessfully for some major acquisition but nothing seems to have worked out. Instead it used the cash to open front offices in Germany and France and also ramped up operations in China, Mexico and Brazil.
The biggest cash balances are held by the 22 listed PSUs, accounting for Rs.205255 crore, led by Coal India with cash at Rs.54,753 crore, NMDC at Rs.20.868 crore. In the private sector, Reliance Industries rules the roost; at the end of Q3FY12, its cash balance was at Rs.36,501 crore, invested in FDs, mutual funds, Govt securities and bonds.
Thus while investing its best to look for companies, among others factors, for companies which not only have a very healthy cash balance but are liberal when it comes to paying dividend to shareholders. ITC leads the race this fiscal as its payout till date is at 445% and in FY11, it paid 1000% dividend and declared a 1:1 bonus. Ashok Leyland is another such company which in current fiscal has declared a dividend of 200% and 1:1 bonus.
Some of the highest and consistent dividend paying companies are : Bajaj Auto, Cipla, M&M, Tata Steel, Tata Motors, Kanoria Chemcials, Piramal Health, Zee Entertainment, Wheels India, Elecon Eng, Madras Cement, VST Industries, ICRA, Tata Global, City Union Bank, Patni, Hero Corp, India Cements, Godavari Power, Chambal Fertiliser, Infosys, TCS, GNFC and GSFC.
The list is illustrious in FMCG sector too – Bosch, Nestle, HUL, Godrej Consumer, Glaxosmithkline and Titan. And in PSUs – ONGC, IOC, NTPC, Oil India.
High cash balance is good when supported with liberal payouts and not sitting on it, waiting for the ‘right’ time to come.