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7 Stocks Where Big Earnings Growth Could Lead To Big Dividends In 2023Indian investors tend to assign a higher value to dividend-paying companies. That is why more than 70% of companies (from BSE 500) pay a dividend every year.
The reason behind this is simple. Dividends can be an excellent source of alternate income. Especially in this market, when stock prices have been at their volatile best.
But bear in mind that dividends are only sustainable to the extent a company's earnings are sustainable.
Usually, in a tough market environment, dividends tend to disappear. This is because companies pay dividends from their profits after paying for capital expenditures, debt repayments, and working capital.
However, in a healthy market environment, companies could amp up their dividend disbursals to reward their shareholders.
In 2023, there are several companies that have the potential to see significant earnings growth, which in turn could lead to big dividends for investors. These companies span a range of industries from IT (information technology to FMCG (fast moving consumer goods).
While previous performance is no guarantee of future returns, investors looking for potential dividend growth in 2023 may want to keep an eye on these seven stocks.
#1 Polyplex
At the top of our list, we have Polyplex.
Polyplex manufactures polyester films for packaging, electrical and other industrial applications.
The company is an industry leader with a market share of about 25% in Thailand and Turkey, and around 10% in India, the US, and Indonesia.
While the past few years have been good for the business it has been suffering off late on the back of high raw material prices (that track crude oil prices) and an apparent slowdown in demand due to weak market sentiment.
In its latest quarterly results, Polyplex reported a 57.6% YoY decline in net profit. However, going forward, the management is confident of higher profitability led by the softening of raw material prices during the year.
A cursory glance at the company's history boosts our confidence in its ability to distribute higher dividends.
The company has been investing in itself, expanding continuously. And despite spending on expanding its capacities, it has been generating excess free cash flow for many years in a row.
For the last five years, the company's sales and net profits have grown at a CAGR (compounded annual growth rate) of 15.2% and 21.7%, respectively.
It has a healthy track record of being generous to its investors with a 5 -Yr average dividend payout of 36% and a dividend yield of 8.7%.
While the company has debt on its books, the debt to equity is still reasonably low at 0.1x. The interest coverage ratio stands at 70x in the financial year 2022.
#2 Cyient
Next on our list is Cyient.
Cyient is an IT company that offers a complete range of software services to various sectors such as aerospace and defense, healthcare, telecommunications, rail transportation, semiconductor, geospatial, industrial and energy.
The company has done well in the past five years, with its sales and net profit growing at a CAGR of 4.7% and 9.8% respectively.
It has also reported strong quarterly results in the past few quarters. For the December 2022 quarter, the company's net profit was up 97% YoY.
The net profit expansion comes from the numerous acquisitions done by the company and the growth in the existing business.
The business is a cash cow. This has enabled it to undertake a slew of acquisitions. These acquisitions have been funded by a mix of debt and internal accruals (debt to equity of 0.1 in 2022). But debt is not a grave concern as the company generates enough cash to honour all its payments. This is visible from the healthy free cashflow generation over the last two decades.
Going forward, the company is confident of growth from the acquisitions and the existing business driven by growth in aerospace, mining, comms & automotive. The large OEMs (original equipment manufacturers) the company works with are starting to invest more in technology boosting their confidence in the near term.
The business has a track record of healthy payouts in the past 5 years, reporting a dividend payout stand of 44% and a yield of 2.8%.
#3 Oracle Financial Services
Third on our list is Oracle Financial Services.
Oracle Financial Services is a subsidiary of Oracle Global. The company enjoys strong in-house R&D, offering products to banks in more than 150 countries.
Apart from this, it serves customers across a variety of industries, including banking and financial services, healthcare, manufacturing, telecommunications etc.
Oracle mainly assists companies in implementing artificial intelligence in their IT processes, effectively helping institutes minimise human errors and gain business insights. While 90% of the business comes from the products they offer, the balance 10% comes from the services end.
The business has been growing well over the past five years. The sales have grown at a 5-Yr CAGR of 3% whereas the net profit has grown at a CAGR of 9.8%.
While the net profit in the December 2022 quarter is up 10% sequentially, the net profits are down 5.7% in the nine months ending December 2022, compared to the same period last year.
But despite this slight dip in profits, there is a good chance the IT service provider may reward its shareholders well. The skyrocketing 5-Yr average dividend payout and yield at 95% and 5%, respectively bear witness to the same.
The company has made some strategic investments which will propel future growth. Moreover, the company has added a slew of large customers, including some of the largest banks across the globe.
The business is also cash rich, a common trait most IT companies share. The cash and bank balance stand at Rs 44 bn in the half year ending September 2022 with no debt.
A long history of positive free cashflows boosts our confidence in the IT player's ability to reward shareholders.
#4 Sonata
Fourth on our list is Sonata Software.
Sonata Software is a global IT services and software solutions company. It caters to a wide array of industries including travel, retail, distribution, software product companies and technology.
The business has grown at a robust pace in the past five years. While the sales have more than doubled, the net profit is up 1.5x. This growth comes on the back of no debt on the books.
The quarterly results have also been strong on the back of higher utilisation and strong growth in the domestic business.
While the net profit in the December 2022 quarter is up 4%, the net profit of the company, in the nine months ending December 2022 is up 22% YoY.
The company is very optimistic about its long-term growth prospects led by a strong pipeline and lead indicators from a sales perspective. It aims to double business over the next 4 years.
The aggressive growth plans come with strong free cash flow, allowing it to be generous to the shareholders.
The company has been generating free cash flow and boasts a hefty cash and bank balance of Rs 32 bn in the half year ending September 2022. There is no debt on the books.
This has allowed the business to maintain a history of strong payouts, with the 5-Yr average dividend payout and yield at 60% and 4.5%, respectively.
These numbers speak volumes of the company's ability to continue disbursing outsized payouts in the near term.
#5 Mazagaon Dock Shipbuilder
Fifth on our list is Mazagaon Dock.
Mazgaon Dock is one of India's leading defence public sector undertaking shipyards. The company builds and repairs ships, submarines and other types of vessels for the Indian Navy, Coast Guard, and ONGC as well as several international clients.
Its product line includes cargo ships, passenger ships, water tankers, fishing trawlers, destroyers, conventional submarines and corvettes.
And now, the company is looking to diversify into underwater heavy engineering equipment and offshore platform.
The business has been growing in the past 5 years. While the sales have grown at a 5-Yr CAGR of 7.5% and the net profit has grown at 1%. The quarterly results depict an upward trend.
The net profit in the December 2022 quarter was up by 73%, while the net profits in the nine months ending December 2022 were up 79%. Apart from stellar performance, the company's dividend history has been strong, indicating higher payouts in the near term.
The 2-Yr average dividend payout and yield stands at 32% and 3.5%, respectively. Besides this, the company has been free cashflow positive for many years now.
#6 Britannia Industries
Seventh on our list is Britannia.
The FMCG giant is one of India's leading food companies with a 100-year legacy. Britannia is among the most trusted food brands manufacturing household names such as Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold.
Despite the sheer size of the business, it has grown well in the past five years. While the sales have grown at a 5-Yr CAGR of 9.3%, the net profit has grown at 11.4%.
The healthy performance continues well into the financial year 2023 as well.
The net profit in the December 2022 quarter rose 90% YoY. This growth comes from an increase in market share and price hikes undertaken by the company to tame increased cost pressures.
While going forward if concerns over competition persist, the business will employ price methods to drive up its market share.
Britannia has been expanding its capacities and plans to spend over Rs 7.5 bn in the financial year 2023. The expansion will be funded with a mix of internal accruals and borrowings. While the company had some debt on its books, it plans to borrow more in the financial year 2023.
The debt to equity stands at 1x in the financial year 2022.
Going forward, as capital spending tapers substantially and a large part of the installed capacity commences operations, Britannia will generate strong free cash flow.
The company has been cashflow positive for decades and been generous to the shareholders. While dividend payouts have been high in the past five years, the company has rewarded shareholders with bumper dividends in the last two years.
This gives impetus to the company's ability to continue rewarding shareholders. The reported 5-Yr average dividend payout and yield are 80% and 1.7%, respectively.
However, in the financial year ending 2021 and 2022, the payout stood at a staggering 205% and 90%, respectively.
#7 Escorts Kubota
Last on our list is Escorts Kubota.
The company operates in three primary business segments: agricultural machinery (78% of total sales), construction equipment (12%) and railway equipment (10%).
Its products are designed to cater to the needs of farmers in India and other emerging markets.
The business has been growing exceedingly well thanks to the growing exports and increasing penetration in the south and west markets. While the sales have grown at a 5-Yr CAGR of 11.8%, the net profit has more than doubled in value.
This performance has continued well into the financial year 2023. The net profit for the December 2022 quarter was up 21% YoY, while the net profit for the nine months ending December 2022 was up 15% YoY.
This performance in an inflationary period speaks volumes of the company's ability to grow over the long term.
The auto industry estimates the tractor market to grow 6-7% in 2023, which bodes well for the company's agricultural machinery segment.
Demand for construction equipment should also touch high double digits led by government spending on infrastructure projects, particularly in rural areas.
The business is a cash cow, as depicted by its free cashflow positive status and a cash and cash equivalent stood at Rs 2.7bn.
With no debt on its books, the company has been disbursing healthy dividends in the past 5 years. The 5-Yr average dividend payout and yield stand at 9% and 0.4%.
In conclusion
As value accretive as dividend-paying stocks may be, you must never invest in a stock based on dividends alone.
Dividend payments are a discretionary item. This makes them highly dependent on a company's earnings and management policy. Both of these are bound to change anytime and are highly unpredictable.
Moreover, despite high dividend payouts, investors can still lose money to stock price swings.
Therefore, never invest in a company based on its dividend policy alone as there is a good chance you will be disappointed.
Bear in mind that no single metric reveals the financial health or future of a company.
The key is to study and look for fundamentally strong companies with great potential. A prudent mix of growth and regular dividends can help you multiply your wealth over the long term.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
The reason behind this is simple. Dividends can be an excellent source of alternate income. Especially in this market, when stock prices have been at their volatile best.
But bear in mind that dividends are only sustainable to the extent a company's earnings are sustainable.
Usually, in a tough market environment, dividends tend to disappear. This is because companies pay dividends from their profits after paying for capital expenditures, debt repayments, and working capital.
However, in a healthy market environment, companies could amp up their dividend disbursals to reward their shareholders.
In 2023, there are several companies that have the potential to see significant earnings growth, which in turn could lead to big dividends for investors. These companies span a range of industries from IT (information technology to FMCG (fast moving consumer goods).
While previous performance is no guarantee of future returns, investors looking for potential dividend growth in 2023 may want to keep an eye on these seven stocks.
#1 Polyplex
At the top of our list, we have Polyplex.
Polyplex manufactures polyester films for packaging, electrical and other industrial applications.
The company is an industry leader with a market share of about 25% in Thailand and Turkey, and around 10% in India, the US, and Indonesia.
While the past few years have been good for the business it has been suffering off late on the back of high raw material prices (that track crude oil prices) and an apparent slowdown in demand due to weak market sentiment.
In its latest quarterly results, Polyplex reported a 57.6% YoY decline in net profit. However, going forward, the management is confident of higher profitability led by the softening of raw material prices during the year.
A cursory glance at the company's history boosts our confidence in its ability to distribute higher dividends.
The company has been investing in itself, expanding continuously. And despite spending on expanding its capacities, it has been generating excess free cash flow for many years in a row.
For the last five years, the company's sales and net profits have grown at a CAGR (compounded annual growth rate) of 15.2% and 21.7%, respectively.
It has a healthy track record of being generous to its investors with a 5 -Yr average dividend payout of 36% and a dividend yield of 8.7%.
While the company has debt on its books, the debt to equity is still reasonably low at 0.1x. The interest coverage ratio stands at 70x in the financial year 2022.
#2 Cyient
Next on our list is Cyient.
Cyient is an IT company that offers a complete range of software services to various sectors such as aerospace and defense, healthcare, telecommunications, rail transportation, semiconductor, geospatial, industrial and energy.
The company has done well in the past five years, with its sales and net profit growing at a CAGR of 4.7% and 9.8% respectively.
It has also reported strong quarterly results in the past few quarters. For the December 2022 quarter, the company's net profit was up 97% YoY.
The net profit expansion comes from the numerous acquisitions done by the company and the growth in the existing business.
The business is a cash cow. This has enabled it to undertake a slew of acquisitions. These acquisitions have been funded by a mix of debt and internal accruals (debt to equity of 0.1 in 2022). But debt is not a grave concern as the company generates enough cash to honour all its payments. This is visible from the healthy free cashflow generation over the last two decades.
Going forward, the company is confident of growth from the acquisitions and the existing business driven by growth in aerospace, mining, comms & automotive. The large OEMs (original equipment manufacturers) the company works with are starting to invest more in technology boosting their confidence in the near term.
The business has a track record of healthy payouts in the past 5 years, reporting a dividend payout stand of 44% and a yield of 2.8%.
#3 Oracle Financial Services
Third on our list is Oracle Financial Services.
Oracle Financial Services is a subsidiary of Oracle Global. The company enjoys strong in-house R&D, offering products to banks in more than 150 countries.
Apart from this, it serves customers across a variety of industries, including banking and financial services, healthcare, manufacturing, telecommunications etc.
Oracle mainly assists companies in implementing artificial intelligence in their IT processes, effectively helping institutes minimise human errors and gain business insights. While 90% of the business comes from the products they offer, the balance 10% comes from the services end.
The business has been growing well over the past five years. The sales have grown at a 5-Yr CAGR of 3% whereas the net profit has grown at a CAGR of 9.8%.
While the net profit in the December 2022 quarter is up 10% sequentially, the net profits are down 5.7% in the nine months ending December 2022, compared to the same period last year.
But despite this slight dip in profits, there is a good chance the IT service provider may reward its shareholders well. The skyrocketing 5-Yr average dividend payout and yield at 95% and 5%, respectively bear witness to the same.
The company has made some strategic investments which will propel future growth. Moreover, the company has added a slew of large customers, including some of the largest banks across the globe.
The business is also cash rich, a common trait most IT companies share. The cash and bank balance stand at Rs 44 bn in the half year ending September 2022 with no debt.
A long history of positive free cashflows boosts our confidence in the IT player's ability to reward shareholders.
#4 Sonata
Fourth on our list is Sonata Software.
Sonata Software is a global IT services and software solutions company. It caters to a wide array of industries including travel, retail, distribution, software product companies and technology.
The business has grown at a robust pace in the past five years. While the sales have more than doubled, the net profit is up 1.5x. This growth comes on the back of no debt on the books.
The quarterly results have also been strong on the back of higher utilisation and strong growth in the domestic business.
While the net profit in the December 2022 quarter is up 4%, the net profit of the company, in the nine months ending December 2022 is up 22% YoY.
The company is very optimistic about its long-term growth prospects led by a strong pipeline and lead indicators from a sales perspective. It aims to double business over the next 4 years.
The aggressive growth plans come with strong free cash flow, allowing it to be generous to the shareholders.
The company has been generating free cash flow and boasts a hefty cash and bank balance of Rs 32 bn in the half year ending September 2022. There is no debt on the books.
This has allowed the business to maintain a history of strong payouts, with the 5-Yr average dividend payout and yield at 60% and 4.5%, respectively.
These numbers speak volumes of the company's ability to continue disbursing outsized payouts in the near term.
#5 Mazagaon Dock Shipbuilder
Fifth on our list is Mazagaon Dock.
Mazgaon Dock is one of India's leading defence public sector undertaking shipyards. The company builds and repairs ships, submarines and other types of vessels for the Indian Navy, Coast Guard, and ONGC as well as several international clients.
Its product line includes cargo ships, passenger ships, water tankers, fishing trawlers, destroyers, conventional submarines and corvettes.
And now, the company is looking to diversify into underwater heavy engineering equipment and offshore platform.
The business has been growing in the past 5 years. While the sales have grown at a 5-Yr CAGR of 7.5% and the net profit has grown at 1%. The quarterly results depict an upward trend.
The net profit in the December 2022 quarter was up by 73%, while the net profits in the nine months ending December 2022 were up 79%. Apart from stellar performance, the company's dividend history has been strong, indicating higher payouts in the near term.
The 2-Yr average dividend payout and yield stands at 32% and 3.5%, respectively. Besides this, the company has been free cashflow positive for many years now.
#6 Britannia Industries
Seventh on our list is Britannia.
The FMCG giant is one of India's leading food companies with a 100-year legacy. Britannia is among the most trusted food brands manufacturing household names such as Good Day, Tiger, NutriChoice, Milk Bikis and Marie Gold.
Despite the sheer size of the business, it has grown well in the past five years. While the sales have grown at a 5-Yr CAGR of 9.3%, the net profit has grown at 11.4%.
The healthy performance continues well into the financial year 2023 as well.
The net profit in the December 2022 quarter rose 90% YoY. This growth comes from an increase in market share and price hikes undertaken by the company to tame increased cost pressures.
While going forward if concerns over competition persist, the business will employ price methods to drive up its market share.
Britannia has been expanding its capacities and plans to spend over Rs 7.5 bn in the financial year 2023. The expansion will be funded with a mix of internal accruals and borrowings. While the company had some debt on its books, it plans to borrow more in the financial year 2023.
The debt to equity stands at 1x in the financial year 2022.
Going forward, as capital spending tapers substantially and a large part of the installed capacity commences operations, Britannia will generate strong free cash flow.
The company has been cashflow positive for decades and been generous to the shareholders. While dividend payouts have been high in the past five years, the company has rewarded shareholders with bumper dividends in the last two years.
This gives impetus to the company's ability to continue rewarding shareholders. The reported 5-Yr average dividend payout and yield are 80% and 1.7%, respectively.
However, in the financial year ending 2021 and 2022, the payout stood at a staggering 205% and 90%, respectively.
#7 Escorts Kubota
Last on our list is Escorts Kubota.
The company operates in three primary business segments: agricultural machinery (78% of total sales), construction equipment (12%) and railway equipment (10%).
Its products are designed to cater to the needs of farmers in India and other emerging markets.
The business has been growing exceedingly well thanks to the growing exports and increasing penetration in the south and west markets. While the sales have grown at a 5-Yr CAGR of 11.8%, the net profit has more than doubled in value.
This performance has continued well into the financial year 2023. The net profit for the December 2022 quarter was up 21% YoY, while the net profit for the nine months ending December 2022 was up 15% YoY.
This performance in an inflationary period speaks volumes of the company's ability to grow over the long term.
The auto industry estimates the tractor market to grow 6-7% in 2023, which bodes well for the company's agricultural machinery segment.
Demand for construction equipment should also touch high double digits led by government spending on infrastructure projects, particularly in rural areas.
The business is a cash cow, as depicted by its free cashflow positive status and a cash and cash equivalent stood at Rs 2.7bn.
With no debt on its books, the company has been disbursing healthy dividends in the past 5 years. The 5-Yr average dividend payout and yield stand at 9% and 0.4%.
In conclusion
As value accretive as dividend-paying stocks may be, you must never invest in a stock based on dividends alone.
Dividend payments are a discretionary item. This makes them highly dependent on a company's earnings and management policy. Both of these are bound to change anytime and are highly unpredictable.
Moreover, despite high dividend payouts, investors can still lose money to stock price swings.
Therefore, never invest in a company based on its dividend policy alone as there is a good chance you will be disappointed.
Bear in mind that no single metric reveals the financial health or future of a company.
The key is to study and look for fundamentally strong companies with great potential. A prudent mix of growth and regular dividends can help you multiply your wealth over the long term.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com