ITC: Dividend yield

India’s largest tobacco company ITC share price continue to gather upward momentum as it will offer higher dividend payouts for the ongoing financial year compared to the previous three fiscals.

The company’s announcement alongside its attractive valuations is encouraging investors to do cherry picking.

India’s equity markets are currently at a multi-year low and benchmark indices are experiencing relentless fall which has forced investors to look for quality stocks that are at cheap levels now and may give healthy gains in the long term.

Among the blue-chip stocks, ITC is a stock which, brokerages say, has corrected sharply and is now ready to move upward.

As of March 19 close, shares of ITC have fallen 32% on BSE in the calendar year 2020, in sync with a 31% fall in Sensex during the same period.

ITC’s operating profit growth even during the past three years (FY16-19) was at 8.4% CAGR.

ITC currently trades at a headline PE of 11.5 times on a one-year forward basis (based on FY21 EPS) and 10.4 times on FY22 basis.

ITC’s huge cash surplus hints that the dividend payout may move up going forward.

ITC’s net-cash surplus is estimated to be Rs 36,100 crore at March 2020-end against Rs 30,700 crore at March 2019-end and the company’s yearly FCFF (free cash flow to the firm) generation is of the order of more than Rs 10,000 crore.

The huge cash-surplus at its disposal (about 70% of annual revenue, 19-20% of market cap). The dividend payout ratio may move up from 72-73% in recent years (average) to more than 80% going forward

ITC has declared its dividend policy, increasing its payout to 80-85% of earnings. Moreover, it is expected to pay out a special dividend along with its fourth quarter results. The company is holding cash & investments of Rs 16000 crore as on September 2020

With the strong distribution network of around 6 million outlets along with the robust & wide food portfolio, we expect margins to further improve to double digits in the next four to five quarters.

Given the continuous improvement in FMCG margins along with sustainable growth, it would start contributing to earnings. The company has a vision of reaching 1 lakh crore FMCG sales by 203

Though the current economic conditions would have an adverse impact on ITC’s earnings for a quarter or two, we believe the company would be able to sustain the earnings growth in the long run backed by improvement in cigarettes as well as FMCG segments.

Moreover, with the recent change in dividend policy, the stock is trading at attractive dividend yield (on account of dividend policy & special dividend)

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