PSU stocks soar more than 50% on hopes of higher dividends

Public-sector undertaking (PSU) stocks have never had it so good in a long time. Since the start of this year, the BSE’s PSU index has jumped 10.5 percent even as the Sensex climbed by about 4 percent.

What’s may the reason for this out-performance? Well, in a bid to raise more funds, the government is planning to ask PSUs (of which it is the majority owner) to increase their dividend payout ratio - which will benefit the government, the largest shareholder, the most. Of course, other investors holdings smaller stakes in these companies will benefit too, and that’s what causing the rush to buy PSU stocks at the moment.

Of the 62 stocks in the PSU index, 52 stocks, or 83 percent, have outperformed the Sensex.

Out of those 52, six stocks, whose companies are cash-rich and expected to hand out higher dividends, have risen by more than 40 percent (see table).

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Minerals and Metals Trading Corporation (MMTC) topped the list with a gain of nearly 82 percent since the start of this year. That’s not surprising considering the fact that the company was sitting on cash of almost Rs 8,900 crore at the end of September 2011. National Fertiliser and Hindustan Copper also rose by 62 and 55 percent, respectively.

An increasing fiscal deficit is making the government very creative in its approach to raising money to bridge the gap. Some other options it has considered include asking cash-rich PSUs to buy the government’s stake in other PSUs and buying back their own shares. There has even been a proposal to create a new entity to buy the government’s stake in some companies held under Special Undertaking of Unit Trust of India (SUUTI).

A recent report by BNP Paribas provides a list of stocks that could declare-one time dividends or step up their dividend payout ratio. “…some companies like Coal India, NMDC and Nalco could have very high short-term dividend yields, in the range of 18-30 percent”, it said. (see table below for potential list)

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However, the report also advises investors to exercise caution as not all companies that appear to have cash are actually loaded with money. For example, Bharat Electronics Ltd. appears to have large cash reserves, but a significant portion is actually accounted for by advances collected against orders and will have to be reinvested in working capital. Those funds, therefore, might not be available to pay dividends.