After procrastinating for months, I am finally sharing names of companies which are part of Dead Monk’s Portfolio (DMP).
But before that, here is a gentle reminder of what to expect from this portfolio.
In previous post discussing (or rather rethinking) Portfolio Structure & Composition, I mentioned that for DMP, I would stick with Core Satellite structure and a maximum of 15 stocks in the portfolio. You can read more about the reasoning here.
Structure of Dead Monk’s Portfolio
In a follow-up post deliberating the need to find more dividend paying companies & stocks from other sectors, I mentioned that most of the stock in existing DMP pay decent dividends. But just to be on a safer side, I would also keep an eye for new dividend candidates, in case I decide to kick out some of the existing stocks. There is good bad news and bad news on this front. I have removed one dividend payer – Graphite India from the core. And next bad news is that I have not found a suitable replacement for this company. 🙁 Hopefully, I would find it soon enough.
Another point to note here is that no. of stocks in DMP has been reduced from 15 to 9. This is because of one above mentioned removal, as well few more removals from satellite part of the portfolio. I have also not named specific companies in Misc (Satellite) part of the portfolio. This part deals specifically with short term and speculative bets and is more dynamic (changing) than rest of the portfolio.
Out of the 9 stocks, 7 were part of original portfolio too. Two new entrants are marked with a ‘*’.
So here are the 9 stocks –
Balmer Lawrie & Co.
Tata Investment Corporation
9 Stocks in Dead Monk’s Portfolio
I would have personally loved to add more stocks in this list to achieve higher diversification. For record, only 4 sectors namely Energy, Chemicals, Financials & FMCG are part of this portfolio. You can say that this kind of diversification may not be sufficient. But this portfolio is in line with my own risk appetite and understanding of certain sectors. I would prefer to stick with only a few companies and business which I understand rather than venturing out dangerously in areas I don’t understand. I may be missing out on potential multibaggers here. But that is a price which I am ready to pay to have a stable, ever growing portfolio of stocks which I am ready to hold for decades and not just years.
Note – You might say that this portfolio is not stable at all. It has been reworked in less than 2 years itself. Correct. It’s true that I have taken the liberty to change (reduce) the no. of stocks in the portfolio. But this is because I myself am learning newer things about myself and my personal investment psychology. I am arranging a long term portfolio around my personality rather than it being the other way round. Anyways, most of these 9 stocks were already a part of the original portfolio. So change is there, but it’s not an earth shattering one. 🙂
I have already covered about most of these companies in detail as provided in a list below.
One particular business which has seen some drastic changes in last few months is Clariant Chemicals. I am personally not very sure as to how to take a call on this one. But because of management’s proven track record and respectable dividend policy, I have decided to stick with the company for time being. But you can take a call yourself by reading my thoughts on Clariant Chemicals and also weighing the consequences of some recent developments (link).
I would leave you with these thoughts and this ‘link-heavy’ post. Rest assured that I have put most of my money where my mouth is. 😉 Do share your views about these nine companies and also share your list of stocks which you would be buying for next few decades.
Our last case study on ONGC & analysis of 9 year old investment in its IPOhad us exhausted. 🙂 And with 1600+ words, even our readers were exhausted. 🙂 We even received a mail asking us to reduce the size of our future posts!! So we decided to keep this case study a little shorter.
Indian Oil (IOC) is India’s biggest public sector oil refiner. Unlike ONGC, Oil India & Cairn India which are in business of oil exploration and production, IOC is in business of crude oil refining and marketing of petrol, diesel, kerosene, ATF, etc. You can read more about the company here. Though we haven’t included IOC in our Dead Monk’s Portfolio, we do hold it in our personal portfolio for its high dividend yield. It has been consistently paying dividends for last 14 years.
In this case study, we try to look at the following issues:
We look at how IOC has increased its book value per share over the last 14 years. How this data can be used to make decisions about when to enter this stock for long term?
What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?
We also look at reasons as to why this approach might fail.
How IOC has increased its book value and how this data can be used to enter this stock?
IOC’s Book Value has been a support for its stock price
The red line in above graph is IOC’s book value per share (adjusted). As evident, it has been continuously increasing over the evaluation period (10+ years). It is similar to a series of steps. On the same axis, we plotted the adjusted share price (blue line0.
And it is not difficult to see that in past, book value has acted as a strong resistance for the stock price. Pardon us for borrowing a term (resistance) from the trading community. 🙂 But the trend is actually ‘un’missable. The stock price has rarely fallen below its book value. And when it has, and if an investor went ahead and bought the shares, he has been handsomely rewarded. You may say that in past, we have been against timing the markets. But here we are advocating the same. True. We don’t feel that it is worthwhile to time the market unless and until you have some insider information. But if you are a disciplined investor, who invests regularly, it makes sense to periodically boost your portfolio returns, by buying good stocks when they are available at multiples below historical averages… Isn’t it?
What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?
To check the relation between returns & P/BV Ratio, we plotted two graphs. One between P/BV & rolling 3 year returns and another between P/BV & rolling 5 year returns.
3 year Rolling Returns & P/BV per share of IOC
5 year Rolling Returns & P/BV per share of IOC
On X-Axis, P/BV Ratio has been plotted on an increasing scale. On Y-Axis, returns (CAGR %) have been plotted. And as evident from the graphs, an investment at lower P/BV values (towards left part of x-axis) in IOC’s stock has resulted in higher returns. The scatter in the graph is downward slopping. Simply speaking, if one invests in IOC’s stock at low P/BV multiples, then probability of high capital appreciation is very high.
Why this approach might fail?
A few immediate concerns about this approach are as follows:
This approach relies solely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
The above book value based approach does not give any weightage to company’s management (appointed by government of India in this case). And though oil prices (in particular petrol) have been deregulated, govt. still has a shadow control over the prices. But in last 2-3 months, things have started looking brighter for oil companies like IOC.
Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other refiners like HPCL, BPCL. And BPCL itself has profitable interests in oil exploration business too.
The above approach uses just one parameter (P/BV) to evaluate the stock. You as a reader, should remember that this is just a case study. Real life and case studies are generally out of synch. 🙂 One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.
Some time back, we did a post on ONGC’s dividend history. Since, we hold this stock in our long term personal portfolio as well as Dead Monk’s Portfolio, we thought we could (or rather should) give it a deeper study. We were debating on how to go about it, when we came across a great post by Joshua (link) analyzing an investment in Starbuck’s IPO. We really liked the thoroughness with which the investment was analyzed. This prompted us to take a similar approach to evaluate ONGC.
Caution – This is a long and number intensive post.
ONGC’s IPO came sometime in first half of 2004. The price band was initially set as Rs 680 – Rs 750. And retail investors were offered a discount of 5%, i.e., shares were allotted to them at Rs 712.50 (non-adjusted as of today price). Retail category comprised of those who invested less than Rs 50,000. The proceeds of the share sale were going to Government of India and not ONGC.
This ONGC case study looks at following issues:
What a Rs 50,000 investment in company’s IPO would have turned into over a 9 year holding period? We look at all aspects including capital appreciation and dividends.
We also try simulating results of another approach where we make regular investment in ONGC’s stock over this 9 year period.
We also look at how ONGC has increased its book value per share over these years and how it can be used to make decisions about when to enter this stock for long term.
We also evaluated why the above approach might fail.
This is the first time we are trying to evaluate a company in this manner and would like to get your feedback and suggestions. Though this post took several hours, we think its result was worth it, atleast for us. J
What a Rs 50,000 investment in company’s IPO would have turned into over a 9 year holding period?
Suppose you had Rs 50,000 to spare in 2004. You decided to invest in ONGC’s IPO as a retail investor. The shares were sold at Rs 712.50 apiece to retail investors. You received a total of 70 shares (rounded for ease) for your investment.
First of all, after these 9 years, your 70 shares would have grown to 421 shares as a result of 2 bonuses (2:1 and 1:1) and a split (from face value of 10 to 5). At a market price of Rs 320 (at time of writing this post), your stocks would be worth Rs 1,34,737. To top it, you already know that ONGC is a generous dividend payer due to government’s mandate. This means that in past 9 years, you would have received 19 dividend payouts totaling a sum of Rs 30,035.
That means that between capital gains and dividends, your Rs 50,000 investment grew to Rs 1,64,772 in nine years. That is a compound annual growth rate of 14.17%. Compare this with Sensex journey from 5600s to 19500s, i.e. a compound annual growth rate of 14.87%. Not bad for a dull and boring company like ONGC when compared to glamorous Sensex. J
(Edited to add): The Sensex returns would be higher than 14.87% if we also consider the dividends issued by the constituent companies.
Investment in ONGC IPO: Calculation of returns (including dividends paid in last 9 years)
This also means that in less than nine years, ONGC has returned more than 60% of the initial investment as dividends (that too pretty regularly: 19 times)!! It is here that one can truly understand John D. Rockefeller’s feeling when he said – ‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’
Dividends Paid in last 9 years & comparison with initial investment in ONGC’s IPO
Note – John D. Rockefeller was the richest man ever. More than 10 times richer than the current richest man!! You can read about him and his company Standard Oil’s story here.
What a Rs 10,000 investment every quarter (3 months) in ONGC’s stock would have turned into over these 9 years?
This approach is born out of our interest in disciplined investing. Suppose you decide to invest Rs 10,000 every three months in ONGC’s stocks. This can be considered similar to having a regular SIP (Systematic Investment Plan) in mutual funds. This approach would have resulted in you investing Rs 3,50,000 in last 9 years. Result?
First of all, after these 9 years of quarterly investments, you would own about 1656 shares of the company. At, current market price of 320, these shares would have a value of Rs 5,30,077. Apart from that, these shares would have earned a total of Rs 73,828 as dividend income. That is, your total investment of Rs 3,50,000 has turned into Rs 6,03,906.
Quarterly Investment of Rs 10,000 in ONGC during last 9 years: Analysis of total returns (including dividends)
What has been the trend in Book Value per share for ONGC in last 9 years and how this data can be used to decide when to invest in the stock?
The company has been growing its book value at a decent 13.6% (CAGR) for last 9 years. The great thing about this growth is that it has been uniform, i.e., all yearly increases have remained in the range 11-15%.
ONGC’s Adjusted Book Value Per Share (2004-2013) – (Note: 2013 book value is estimated)
ONGC Book Value Per Share & Annual Growth Rates
The above trend shows that the company has been successful in increasing its book value over the years. You may question this as the book value can be rigged. Also there are much better parameters available for valuing oil exploration businesses But lets just delay that discussion for a while. So, now what we have at our hand is a company (ONGC), operating in a capital intensive business of oil exploration, which has consistently grown its book value in last nine years.
So, now if we consider a very simple ratio: Price To Book Value Per Share (P/BV), can we find some trend which can actually help us in knowing whether it is a good time to invest in ONGC’s stock or not? Let’s first look at the graph below:
Price/Book Value Ratio: Lowest, Highest, Average – An indicator of when to enter the stock
The blue line is a plot of P/BV ratios of ONGC’s stock over the years. As we can see, the lowest which it has ever reached is P/BV=1.62. The highest it ever went was in late 2007 when it hit 4.14. The average in last nine years has remained at 2.51. So, when the stock was trading in the band 1.6-1.7 in late 2012, it was one of the cheapest multiple (P/BV) at which the stock could have been possibly bought!! Nevertheless, government’s deregulation news pimped up the stock and now you can see the abrupt rise in blue line near the end of graph. The stock is headed towards its mean. And this is a historical pattern. Any stock cannot remain far off from its historical averages for long durations. There is always a regression towards the mean. As far as our personal portfolio is concerned, we bought a few ONGCs near Dec 2012, when it was available at one of its cheapest valuations ever. J So is this the right method to decide whether to buy a stock like ONGC or not?
Because there are many other factors which play an important role in deciding whether to purchase a stock or not. We look at a few which are relevant in this context.
Why the above approach should be taken with a pinch of salt? What are the possible loopholes in this approach?
A few immediate ones are as follows:
The above approach relies entirely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
Oil exploration companies like ONGC offer a unique problem of valuation due to their large value based on oil reserves. There is also a large uncertainty in many of the assumptions, such as value and quality of their reserves. So, unless and until this data is taken into account, a comprehensive analysis of oil stocks cannot be done.
Other oil and gas specific metrics includes valuation based on barrel of oil produced per day, etc.
The above book value based approach does not give any weightage to the management team (appointed by Govt. of India in this case). Experience is crucial and ONGC has loads of it. But with ageing oilfields and increasing complexity of newer projects like ones taken up by ONGC Videsh (& its Imperial Energy fiasco), this aspect should be given its due importance.
Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other explorers like Oil India Limited and Cairn (India), which sometimes offer higher growth potential due to better reserve quality.
Its common knowledge that most of ONGC’s oil fields are ageing and in no position to increase their output. Such questions on future growth potential, in wake of lack of new oil finds, can also be attributed to lower P/BV multiple being assigned to this stock in last year and a half.
Oil & Gas companies are generally complex to value because of above mentioned limitations. But they offer solid investment vehicles for safety of principle, long term growth and consistent dividend payments. The above approach uses just one parameter P/BV to evaluate the stock. You as a reader, should remember that this is just a case study. Real life is much different from case studies. One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.
ONGC is an Indian oil exploration company majority owned by government of India, i.e. it’s a PSU. As a stock, it has a very long history of dividends. It’s a company with solid business model and has highly reliable cashflows. If you are an Indian investor focusing on dividends, it would be strange if you do not hold shares of ONGC. Ask anyone to name few great Indian companies which have paid generous dividends. We can bet that ONGC would definitely figure in such a list. We ourselves have chosen it for our Dead Monk’s Portfolio. We personally hold ONGC and another oil explorer Cairn Indiaas long term investments.
This post is about ONGC’s dividends, frequency of payouts, payout ratios and all related information.
Why are we doing this? As already mentioned, we hold ONGC in our long term portfolio for primary purpose of dividend income. We are doing this to reaffirm our faith in ONGC of being a good dividend stock to hold for years to come. J As far as capital appreciation is concerned, we believe Cairn India is a better stock in oil sector.
Dividend Rate (%)
ONGC is known to be a regular dividend payer and this notion is validated by data. It has been consistently paying dividends for more than 10 years. The table below shows the dividend rates (as % of face value). The great thing is that the dividends have been continuously increasing during the last 5 years.
ONGC’s Dividend Rates (%) : Last 10 years
Dividend Payout Ratio (%)
A company with high dividend payout ratio can mean two things: Either the company has no future investment plans OR high dividend payouts are temporary (due to some asset sale) and hence not sustainable. ONGC for last 10 years (!) has maintained a very stable payout ratio of 40% i.e. it shares 40% of its earnings with investors as dividends. This shows that company is balancing its growth (investment) plans and wealth sharing objective on a consistent basis.
ONGC’s Dividend Payout Ratio : Last 10 years
Company’s dividend policy (available on its website) has the following 2 highlights:
Factors to consider while deciding dividends: Future capital expenditure plans, profits earned during the financial year, cost of raising funds from alternate sources, cash flow position and applicable taxes including tax on dividends.
As per govt.’s guidelines, all profit-making PSUs in oil sector (like ONGC) should declare the higher of a minimum dividend of 30 % on equity or a minimum dividend payout of 30 % of post-tax profit.
Since company has maintained 40% payout ratio for last 10 years, it is safe to assume that same would be maintained in future too. Since great companies generally increase their earnings over years, it can be safely assumed that dividends would increase in years to come.
How many times ONGC pays dividend in a year?
In last 8 years, ONGC has paid dividends twice every year. Interim dividend (generally higher than final dividend)is paid in December. This is followed by Final Dividend paid in September. We have plotted all dividend payouts by ONGC in last 12 years. The same can be seen below. This dividend calendar is a good depiction of when (& how much) to expect as dividends from ONGC every year.
Click to enlarge
Though we haven’t discussed ONGC’s future business prospects, we believe that being a mature company with ageing oil fields (except those owned by its subsidiaries ONGC Videsh Ltd), it would be wrong to expect it to become a multi-bagger in years to come. But what can be expected is a stable flow of dividend income, stability in portfolio and potential of positive surprises in case there are any bumper oil & gas discoveries.
All in all, we would stay invested in ONGC and keep investing as and when its prices fall substantially.
After witnessing substantial falls in good, stable stocks like Bharti & SBI (Almost 10% in 2 days), it occurred to me that what would happen if suddenly, the markets decide to correct? My first reaction was that I would start picking up good stocks.
But what actually happens is that when the markets fall, a large number of stocks start appearing on the buying screen. And because one is spoilt of choices, it becomes very difficult to choose among so many good stocks available at cheap prices. I faced a similar situation in early 2008 when all indices and stocks were falling like there was no tomorrow. But I was lucky to make some money during that period.
So how to be prepared for such falls?
The answer is to have a Stock Watchlist.
It is always wise to be ready to grab an opportunity rather than allowing opportunity to take us by surprise. A watchlist helps in this case. How? Once you create a watch list of great companies, you can monitor these companies. As share prices fall, sooner or later they will become good investments too (in addition to good companies).
Though we do follow a number of stocks mentioned in our Stocks We Stalk section, below is a list of stock which we would be delighted to buy in case market corrects and these stocks are available at lower prices –
Stocks to buy during market corrections
So now we know which stocks we want to buy in case markets correct. So what should we do now? Pray for a major correction, what else? 🙂
We continue with our focus on dividends and dividend investing. Though dividend yields can attract an investor in short term, when investing for long term dividend income, it is important to look at the consistency with which the companies have paid dividends. We tried to find lists of Indian companies similar to ones offered in US Markets like Dividend Aristocrats, Dividend Champions (companies that have consistently raised dividends for last 10, 20 and 25 years). But sadly, such a list is not available in India free of cost. (Please let us know if you find one). This forced us to compile our own list of such companies (using a professional data source – MVXenius : Educational version). But, we could only manage to find data for last 10 years.
We first tabulate dividend history of stocks in our portfolio (DMP) and then move onto other known good dividend paying companies.
We have only tabulated data of stocks which have a current dividend yield of more than 2.4% and which we believe would continue paying out decent dividends in future.
Click to enlarge
Apart from collecting 10 year dividend data, we have also calculated average annual increase in dividends doled out in last 5 years (2nd last column). Though ONGC is India’s largest dividend payer in absolute terms, it should be noted that it has not increased its dividend substantially in last 5 years (only 3.17%). On other hand, smaller companies like Balmer Lawrie, Clariant Chemicals (I) Ltd., Graphite India have shown amazing consistency and above average dividend growth rates (24%, 48% and 33%). But unlike ONGC, NTPC & Tata Investments Corporation, a few large caps like Bank of Baroda and BHEL have increased their dividend by an average of 28.5% & 35% respectively. You can read more about dividend policies of these companies in our previous post.
Apart from stocks in DMP, we also collected 10 year dividend data of a few other large companies. The data is tabulated in table below.
Click to enlarge
Though we have tried our best and adjusted dividends for bonuses and splits, we do not claim that this is an accurate list. The purpose of these lists is to share the information we collected for our personal use. At your own risk, you are free to use this in any form you may want.
Dead Monk’s Disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.
We highlighted in an earlier postthat DMP would be built, primarily around dividend investing. The core of DMP is made up of 5 stocks, namely ONGC, Clariant Chemicals (I) Ltd., Balmer Lawrie & Company, Graphite India, Tata Investment Corp Ltd. And let us confess. We did receive a few brickbats about our stock selection for forming the core of DMP. So here we would like to offer a few thoughts –
These 5 stocks are selected on basis of our (not your) risk appetite.
These stocks have been selected for long term (10+ years) and not for trading on daily or even monthly basis.
We do not expect these to be multibaggers. Though we would love them if they become one.
Selecting these 5 stocks in core does not rule out any further addition to core in future.
These stocks do not disturb our sleep at night.
We may or may not be comfortable with stocks current price.
We are comfortable and very happy with present dividend policy and consistency of these 5 stocks.
As you can see in above table, all 5 stocks have been consistent dividend payers for last 5 and 10 years.
But at present, multiples at which Clariant Chemicals (I) Ltd is trading are not cheap. A P/E of 17.5 is much above our liking and so is P/BV of 3.3 (Read a good analysis on Clariant at SN). As far as we are concerned, we would start accumulating once the stock comes down on these parameters. Tata Investments is primarily an investor in famous Tata companies which include cyclicals like Tata Motors and Tata Steel. Current P/E of 15.4 is not to our liking and we would rather wait before further buying.
Part from these 5, we also proposed 7 large cap stocks in DMP. Though we picked these stocks for their stability, a good and regular dividend payout can be an added advantage.
BHEL, NTPC, BOB and NHPC have quite tempting dividend yields considering the fact that initially, we picked them for their large capitalization and stability
(Note- NHPC has not been as stable as we would have liked and has been consistently falling after its IPO. But we feel that at CMP of 18, it can be a decent bet for long term.)
As far as growth stocks are concerned (Yes Bank, Cairn India, GSPL & Sterlite Industries), we don’t expect such stocks to pay dividends (consistent or not) for a few years as they are in growth phases and would be reinvesting money in their own businesses.
Dead Monk’s Disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.
PS – Please do check ‘Stock Screeners’ in widget area on right side. These can be good starting points for shortlisting good stocks.
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