Markets continue to hit new peaks, making it a risky proposition for investors to just go-ahead and buy into stocks. At such times companies with a strong dividend yield, would have less downside risks should the markets drop.
Shares of Coal India have fallen a tad bit in the last few days, which should make it an attractive stock to buy purely because of its dividend yields, which is higher than bank interest rates.
Solid dividend yields, make the stock of Coal India attractive
Last year, for 2020-21, Coal India declared a dividend of Rs 12.5 per share. The company declared a dividend of Rs 7.5 per share in November 2020 and again a dividend of Rs 5 per share in the month of Feb 2021, taking the total to Rs 12.5 per share. If you buy the shares at Rs 145 and assume the company continues to pay the same dividend, your dividend yield on the stock works to around 8.61%, which is pretty good.
In the previous year 2019-20 also the dividend was almost the same at Rs 12 per share. It is unlikely that the company would reduce its dividend in the years to come, which means that your yield is much better than bank deposits. State Bank of India deposits are fetching an interest rate of 5.5% only.
The company is the world's biggest coal mining company, which is also cash rich and debt free. It is unlikely at least there are any threats to the business. Also, with the government facing a huge shortfall in revenues, Coal India maybe forced to pay a higher dividend this financial year.
Who you should buy the stock of Coal India?
Last month, brokerage firm Motilal Oswal said to buy the stock with a price target of Rs 185, which is almost 25% higher from the current levels. ICICI Direct in a recent report last week said that for Q1FY22E, coal offtake was at 160 million tonne (MT), up 33% YoY but down 3% QoQ.
"We expect consolidated topline to increase 37% YoY but decline 5% QoQ to Rs 25,295 crore. The consolidated EBITDA margin is likely to come in at 22.5% (vs. 23.9% in Q4FY21 and 16.5% in Q1FY21). We expect EBITDA/tonne to come in at Rs 355/tonne (compared to Rs 387/tonne in Q4FY21 and Rs 253/tonne in Q1FY21)," the brokerage has said.
Many brokerages remain optimistic on the stock and have a "buy" rating, thanks to the dividend yield. We believe that the downside risk to the stock remain limited given its superior dividend yields, debt free status and robust cash flows.
"At 3.2 times FY22E EV/EBITDA and 6 times FY22E P/E, Coal India remains attractively valued and implies a PV of just 10 years of future cash flows. We maintain our Buy rating on COAL with a target price of Rs 185 per share, based on 4x FY22E EV/EBITDA," brokerage firm Motilal Oswal said in its last report on Coal India in June.
Investing in stocks is risky and investors need to be cautious. Neither Greynium Information Technologies nor the author, nor the brokerage houses mentioned would be responsible for any losses incurred based on decisions made from the article. Investors are also advised caution as the markets are now at a historic high.
About the author
Sunil Fernandes the author of the article has spent 27 years covering stocks markets and mutual funds. He is the Managing Editor of Goodreturns.in and has worked with Hindustan Times, Deccan Herald, Oman Economic Review, Dalal Street Investment Journal and Gulf Times.