It is raining dividends
Investors tend to be influenced by others when they decide what to do with their money. After all, investors always try to be on the same side of the majority. By that logic, Indian investors must have bought last year when the FII’s invested heavily in Indian equities. But, that hardly was the case in 2013. Extrapolating the same trend, Indian investors must not be overly bothered about FII’s selling in 2014. Will Indian investor ignore it and continue buying equities in 2014? That may not be the case either. Investors choose to follow or avoid following the majority according to their perception of volatility. If fear is high, they follow the majority. If fear is lower, they diverge in investment behaviour. Going by past indicators, Indian investors rarely show enough courage to go contrarian to buy equity when FII’s sell. So, the chances are that both domestic and foreign investors will sell at the slightest sense of instability. With heightened political churn and changing global investment allocations towards developed markets, India seems to be heading for a phase of volatility in equities.
Conviction anyway comes to everyone. When it comes is what matters.
High dividend payouts should usually be an indicator of management confidence in their business prospects. But, that need not necessarily be the case if the management takes the expedient route of forcing its companies to payout higher sums to meet its expedient needs. This seems to be the case with PSU’s. GOI seems to be bent upon taking out its targeted 50000 crores through the dividend route. This move has two implications. On the one hand, it will deplete the cash reserves of the companies leaving them with lesser resources for future capex. This will put pressure on future earnings to fund capex needs. On the other, it will reduce the net worth of companies making them leaner and thereby improve their return metrics. For example, the ROE will rise in the future on a lower net worth base. Thus, PSU’s that have good growth prospects in 2014 -15 will see better return metrics and higher valuations in the future. For the moment, investors in these companies have generous dividends on offer. That is an upside too good to miss.
Istrat: Target dividend income coupled with good 15 month growth prospects.