A few government companies like Rural Electrification Corporation, Power Finance Corporation and Coal India have the potential to generate solid dividend yields in the next few months.
However, we believe the Rural Electrification has the potential to generate dividend yields of near 10 per cent or thereabouts, if one has a holding period of 5 months from now.
Current dividend yield of 11.45%
If we go by the past track record of dividends declared for FY 2018-19 and 2019-2020 of Rs 11 per share, the dividend yield is 11.45 per cent, based on the current market price of Rs 96.25.
An important thing to remember is that 2020-21 is likely to be a covid impacted financial year and would the company be able to maintain the same dividends. Going by the first quarterly numbers, it may.
REC reported a superb set of numbers for the first quarter ending June 30, 2020. The company posted a 22.28 percent increase in its consolidated net profit to Rs 1,845.30 crore in the quarter to June 2020, on account of higher revenues. Its consolidated net profit was Rs 1,509 crore in the same quarter a year ago. So, we remain optimistic on the dividends.
Even a slight reduction could see good dividend yield
Even if REC reduces its dividends a tad bit to say even Rs 10 per share, the dividend yields could be pretty decent. We wish to re-iterate that we are working on assumptions and that dividends are almost always uncertain. However, even if we go by fundamentals of the company, the stock remains undervalued.
REC is largely a power finance company and is also Navratna company under the Ministry of Power. The company's domestic credit ratings are the highest from those like CRISIL, ICRA, IRRPL and CARE and internationally it is rated at par with the sovereign ratings. The company has a consistent dividend paying track record.
While dividends are mostly uncertain there is no way one can assure of good dividends, though in this case there is every reason to be more optimistic. REC tends to declare dividends in Feb-March every year.
Strong on fundamentals
The company is also strong on fundamentals. Based on last year's earnings the stock is trading at a price to earnings ratio of just 4 times. Apart from this, the price to book value too is just 0.55 times. This makes the stock a good bet not only for its dividend yields, but, also based on fundamentals.
The management commentary in the month of August, did not leave any reason to be alarmed or worried going forward.
For those looking at a long term view, the stock offers good potential for a rebound.
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