When interest rates on fixed deposits are low, it is time to look for various options to generate returns. One such option is dividend from shares. Coal India is one stock that has the potential to generate better returns in terms of yields than bank deposits and here's why.
Last year’s dividends take yield to almost 11%
Coal India declared a dividend for the FY 2019-20 of Rs 12 per share. In fact, in the previous years the company has declared even higher dividends. Now, if you consider the current market price of Rs 110, your dividend yield works to nearly 11 per cent.
For example, if you invest Rs 10,000 in the shares of Coal India, based on the dividend of last year, you can Rs 1,100 as dividends. Now, we are basing our assumption on dividends declared last year and there is no guarantee that the same dividend would be declared for the FY 2020-21, yet we believe that even if the dividends are lower they could beat returns from fixed deposits.
Would Coal India retain the same dividends like last year?
It is unlikely that Coal India would retain the same dividend and we believe that the Dividend would be lower. This is simply because the Covid-19 induced lockdown saw Coal India's production being hit for one quarter.
However, we believe that even if the company reduces the dividend to Rs 9 from Rs 12, assuming that one quarter's production was very low your dividend yield could still be as high as 8.18 per cent, based on the current share price of Rs 110, which is not bad at all. The dividend is unlikely to drop sharply as the government may ask PSU to declare good dividends, given the likelihood of strain on finances because of Covid lockdwn.
Recently, Coal India witnessed a near 65 per cent increase in the coal booked through the e-auction mode. CIL booked 41.4 million tonne of raw coal in the four rounds of e-auctions that it held during the April-September 2020 period compared to 25.1 MT in the corresponding period last fiscal.
Coal India: Cheap on valuations
The medium term prospects for Coal India look good, given the fact that it is a virtual monopoly and the fact that India is a coal importer currently. The stock of Coal India is also cheap on valuations.
For the quarter ended June 2020, the company reported a sharp drop of 55 per cent in net profits thanks to the Covid-19 related lockdown. However, with production back on stream and the company looking to increase production every year, to reduce demand for imported coal, we could see production higher. If you are looking from a long term perspective to hold the shares, it could generate a good dividend and regular yearly dividend yield.
The stock is also trading at very low price to earnings multiples, based on likely 2021-22 EPS.
The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article. The author does not own shares in Coal India as on date.
About the author:
Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, commodities, debt, mutual funds and tax planning. Sunil is currently Managing Editor for Goodreturns.in