Cairn India: A dividend stock to buy for long term?

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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.

Cairn India Stock
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.

Disclosures: Hold Long term investments in ONGC, Cairn India.

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8 comments

  1. The promoter track record in terms of treating fair to minority investors is not good. Although the business has potential still to have a compelling reason for investing in cairn seems to be not there.

  2. @Ani

    You are right to an extent.
    But with predictable and increasing cashflows, and hence increasing future profits, it may setoff the negatives of the management. But one needs to keep a close watch on management action in future.

  3. Hi Dev. I am new to your blog. Good Job and keep the good working going. I have been following this stock from a year or so. This is a long term story. Now in all your posts you say management/promoter conduct is one among the 3-4 criteria to be considered before investing. I am itching to invest in this company given the potential/prospect oil and gas sector has in India. This sector has ups and downs no doubt but oil and gas we need, no choice. Good bet but the management has not always stand for the minority share holders. Though i had not invested in Sesa Goa, but read about it and the buy back process stalled in Cairn for some reasons, which makes small investors like think twice. Your take on this aspect. thanx

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