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Will forcing PSUs to pay dividends make them more valuable?


The Gujarat government announced a proposal for three things on Tuesday (April 25), about the public sector companies owned by them:

  • They should pay 30% of their earnings after tax as dividends. Or 5% of net worth, whichever is higher.
  • If they have more than 1000 cr. in the bank, and a networth of 2000 cr. or more, they must do a buy back.
  • Oh, under some strange and irrelevant conditions, the companies must give bonus shares or do a stock split

Stocks today that have “Gujarat” in their name are hugely up the next day (April 26). Simply because oh, some news has come, and it sounds good.

Gujarat PSU Stocks

Is this such a big piece of news?

First, the dividend perspective. It makes sense to “demand” dividends if a company is hoarding cash and not using it to grow either. It appears to be true in a bunch of cases, where companies haven’t grown. But in general, this change will increase dividends substantially for a few companies.

What’s happened is that the dividend payouts will now be substantially higher for a few companies, based on the data we have from FY 2022. Of course, FY 2023 results are not yet in, so we should not make the assumption these will hold.

Dividends in Gujarat PSUs

(All numbers in Rs. Cr.)

Two of these companies – GSFC and GIPC – will see dividend yields go to double digits if they strictly . Note that we’ve calculated the yield AFTER the big rise today.

Given a higher dividend yield, some of these companies look interesting. Why is this good? Many such companies stagnate over years. For example the 10 year revenue growth of GSFC, GIPL and GMDC are less than 5% annualized!

Return on equity is calculated as net profit as a percentage of a company’s book value. If you don’t grow your profits too much and you still keep cash on your balance sheet (as an asset) then the shareholder equity portion of your balance sheet is bloated for no reason. Same returns but a growing equity means lower and lower ROE. For a stagnating company (in terms of growth) which is profitable and doesn’t have too much debt, the best way to build a better ROE profile is to reduce shareholder equity by doing either buybacks or paying out dividends. Cash bloat is unnecessary.

Good enough for such a massive rise?

Consider this – other than Gujarat Gas (which has a P/E of 19) the rest of the companies above trade at a Price to Earnings of less than 10. In fact GNFC is at about 5x profits, which implies that for every Rs. 100 you pay for the share, the company has earned Rs. 20 in the last twelve months.

Valuations and growth

More of this money comes back as dividends, which is therefore attractive in low P/E companies. Yet, the core thesis of high dividend yields may be overblown, because:

  • Dividends are taxed, so earning less than a fixed deposit rate isn’t quite as helpful. (Other than GIPL and GSPC, which look attractive for a high pre-tax yield even compared to fixed deposits)
  • Most of these companies are cyclicals and margins seem to be dropping in the last two quarters. Meaning: they may not generate enough profits in the future to pay those higher dividends.
  • For a good dividend yield, the core stock price shouldn’t fall too much. As we have seen, stock prices have fallen to abysmally low P/E ratios already, so there is a considerable chance of loss of capital.

Still, creating a larger dividend payout pool in a low-debt PSU makes shareholders feel they are going to make a higher return on investment when dividends increase. Mainly because these PSUs cannot reinvest the dividends and increase their rate of growth.

What about the buybacks?

Buybacks are a good way for companies to pay dividend – in fact it’s the best way. But the new rules require a 1000 cr. net profit number before they are forced to do buybacks. Only two companies come close – GNFC and GSPL. These are reasonably cash-rich and can do a buyback.

For them, such a policy is good. The buyback amount though isn’t likely to be very high – probably 2% to 5% of equity for the first year. However, buybacks reduce the ability of such companies to take on debt.

Buybacks here will likely be tender offers rather than market buybacks, because the government wants to participate too. (Read more about buybacks)

Why’s the government doing this?

Because they want two things:

  • A higher valuation in the market if they need to sell a small stake
  • A higher dividend and buyback payout to meet their own budget requirements

Governments shouldn’t be in business but in India, we have massive socialist creep, so the government can’t un-own businesses easily. Then the best way to move forward is to ensure they are more shareholder friendly.

This is a good thing for shareholders, as demanding dividends of excess, unused cash sets a good example. Note however that such a policy (on dividends) applies already to all central government PSUs. Only the buyback clause is new (and welcome)

Oh yes, Bonuses and Splits are USELESS.

Some of the new rules require companies to issue bonuses and splits in certain circumstances. Bonuses and splits are entirely useless. All they do is:

  • increase the number of shares in existence
  • change nothing for shareholders in terms of earnings or anything like that

This causes the share prices to fall by about the same ratio as it has before the bonus. Of course, you could argue that stocks whose prices are very very high can make it a little more affordable by reducing a price through a bonus, but honestly, unless prices cross 10,000 rupees per share, it doesn’t make sense. People shouldn’t participate in stock markets with really small amounts of money anyhow.

Bonuses used to be given to be used for bonus-stripping , a tax loophole that was plugged in 2022. There is now no reason to feel happy about bonuses or splits.

Price charts

The companies have not done quite that much even with a growing profit in the last year. With this rise, the companies may have a temporary respite from the beating they’ve got in the last year. Remember though, that knee jerk reactions will usually not last. In the long term, it’s only growth that makes companies more valuable, not dividends.

Price Charts

The Core: Are they value traps or opportunities?

A stock going up 20% because they are being “forced” to pay dividend is an immediate reaction. But we have to ask: is this sustainable? There are things we call value traps. Where it looks fantastic for the numbers but the stocks just don’t go up. What was a 5 P/E becomes a 3 P/E despite solid earnings. There are a very large number of value traps in the market.

Markets simply won’t do what a good analysis will say it will do. What’s good on paper, sometimes remains on paper. The more experience you get, the more you learn to accept the irrationality of a market.

Remember this: the central government has forced its PSUs to pay 30% of profits as dividends, and most of them continue to languish at sub-10 P/E ratios. Yes, there are successes, but they are few and far between.

Unfortunately, it’s impossible to tell if the above companies are as good as their one-day stock move indicates. The longer term, however, says they have been value traps. Will this dividend and buyback policy change that character? Time will tell.


None of this is a recommendation, or even a suggestion that these stocks are useful. We may own some of these stocks, now or in the future. This is just an educational post to understand how these rules affect the stocks.



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