High-Yield Stocks May Be Winners of India’s Surprise Tax Boost
(Bloomberg) -- India’s surprise $20 billion tax break to companies bodes well for high dividend-yield stocks that benefit in a low-rate environment, according to ICICI Securities Ltd.
Assuming companies pass on the profit gains from the reduction as dividends, the payout of the NSE Nifty 50 Index may immediately jump 37% as a slowing economy prompts businesses to go slow on new investments, the firm said.
“Sectors where growth is slow and stable but cash-flow generation is high should step up the payout to at least three-fourths of their profit because new investments will be risky in a slowing demand environment,” analysts Vinod Karki and Siddharth Gupta wrote in a note Monday.
High-dividend strategies also perform better in times of falling global and local yields, the analysts wrote. Benchmark yields in India have declined 70 basis points this year after the central bank cut its policy rate four times in Asia’s most aggressive easing cycle. A fifth reduction is widely expected when the authority reviews borrowing costs Friday.
“Interest rates globally are headed lower along with improving liquidity and hence, real yields in India could dip further as the Reserve Bank of India expected to cut rates incrementally,” the analysts wrote.
Finance Minister Nirmala Sitharaman last month unexpectedly slashed the corporate tax rate on local companies to 22% from 30% in an effort to boost growth from a five-year low. Analysts expect the decision to improve earnings for India Inc. by up to 10%
Excerpts from the report:
- Top picks include ONGC, Bharat Petroleum Corp Ltd., Coal India, Hero Motorcorp, NMDC and Power Grid.
- Higher dividend payout to also help improve the government as state-run companies are big contributors.
- Share of financials, largely state-run banks, in high dividend yield strategy peaked in 2014 and is the lowest since 2007. Software stocks now have the highest ever representation within the high dividend portfolio.
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