Vedanta controlled Cairn India has declared its maiden dividend of Rs 5 per share (of face value Rs 10). In April 2012, Cairn India had approved its dividend policy, which aimed at payout of around 20% of its annual consolidated net profits.
Regular readers would agree that we have been openly advocating dividend investing for building long term wealth (Why?). So, though Cairn India has declared its very first dividend, is it a good candidate for dividend investing?
We think it is. Our arguments:
- While selecting stocks to hold for long term, we had chosen Cairn for its growth potential. The company is still in its initial stages and is looking to ramp up its production. It has investment plans of $600 million over the next two years in Rajasthan exploration blocks, which will increase output from those oilfields. Any ramp up would eventually lead to increase in revenues and profits. This was our initial logic for putting Cairn in our long term Dead Monk’s Portfolio; i.e. we were looking at Cairn for its growth.
- Cairn has now declared that it would pay 20% of its annual profits as dividends. When we compare this to its peer ONGC, we find that on an average, ONGC’s dividend payout is around 33%. This is more than what Cairn plans to pay. But ONGC’s oil fields are mature and scope for production increase from existing oil fields is low. Hence, with lower planned investments in existing fields, ONGC shares ‘more’ profits with its shareholders. On the other hand, Cairn India is a growing company. It is keeping more funds for investment in increasing its production. This approach is totally in line with a normal growth stock. Lower dividend payouts and higher investment in business. While deciding the quantum of payout (20%), the company has kept in mind the twin objectives of stable dividend payout and investment for growth.
- So will Cairn continue paying dividends? At rates atleast 20% of net profits? Common sense says Yes… Otherwise it would hurt investor’s sentiments if company decides to change its dividend policy (reduce) or refrained from giving any dividend in later years.
- With ONGC, a mature oil company commanding a multiple of x9.2 and a growing company like Cairn commanding x6.0, it appeals to common sense to start buying Cairn India for long term.
- Generally, oil exploration companies world over are cash rich and have generous dividend payout policies. So, Cairn India, growing at present, would (most probably) increase its dividend payout upwards from 20% at present, once it business stabilizes and oilfields mature.
All in all, Cairn India seems a potentially good stock to hold for dividend as well as growth potential. Please note that our views may be biased as we hold both these companies in our personal long term portfolios.