Coal India just announced a massive dividend. It will pay a whopping Rs. 29 per share, and it’s traded price is just Rs. 289. This is a 10% yield, which is significant. The ex-date is Jan 17, which is friday, so should you rush to buy the stock?
The massive dividend means a few things. So let’s decode that first.
If you buy the stock now, you will get the Rs. 29 dividend, but the stock will fall by Rs. 29 on Friday. Net of that, you make no money. Silly articles like this Firstpost one that FIIs will be “richer” by 1,000 cr. because they own 5% of the company are misinformed. The FII’s current market value of the stock will fall by Rs. 29 per share, and they will receive Rs. 29 per share. They don’t get richer, sorry.
If you’re thinking: I’ll buy shares now, get the dividend, and when the share falls by Rs. 29, I’ll sell at a loss, and claim that against my profits in other short term share purchases like that windfall gain in Apollo Tyres, then please stop to note one thing:
The Income Tax Department is not stupid.
This is a useful guiding principle in life, and one of the reasons our tax policies are so obscure. Dividend stripping – the concept above has a name – is not allowed. You either have to own the stock for three months before the record date, or have to sell three months after the record date to be able to claim the loss. Otherwise, the loss is “ignored” for tax purposes.
The Government owns a significant chunk of Coal India, a whopping 90% of it. The dividend comes to Rs. 18,000 cr. and the government will get Rs. 16,000 cr. which is great to bridge the widening fiscal deficit.
The company has the money. It has over Rs. 62,000 cr. lying around as cash. (They have just Rs. 1,100 cr. as loans). That’s about Rs. 100 per share it owns in cash, and it’s being returned.
The government will get another Rs. 2,700 cr. as dividend distribution tax.
Coal India is listed in the F&O segment. Since the future will be settled at expiry – which is AFTER the record date – the future should immediately quote Rs. 29 lower.
Today the future quoted at Rs. 279, while the stock was at Rs. 10 higher. This discount was because the market expected a Rs. 10 dividend.
But the 10% dividend changes everything. In such large dividend cases, the NSE will adjust the futures prices downwards without any impact to both long and short positions. On Jan 17, the price of the future will be lower by Rs. 29 (from the previous day’s close) without any mark-to-market paid or earned. If you are short the future, then the price will fall by Rs. 29,and you will make no money. Of course if it closes that day down Rs. 30, then you earn Rs. 1 (the difference). Long positions are the opposite.
If you own a call option at Rs. 290, then that call option will be adjusted to have a strike price of Rs. 261 instead (290 – 29 dividend = 261) All strikes will be lower by Rs. 29.
This means there is no way you can profit between Jan 15 and Jan 17 by taking a futures or options position in Coal India. There is no risk-free trade here.
I couldn’t get myself to just stop, so I’ll put in the obligatory stock chart.
The stock’s in a narrow range and in a wedge where the stock’s huddled in. It needs to break out above Rs. 300 decisively (Rs. 271 after the dividend) in order to be a useful buy.
This stock saw it’s IPO in 2010 at Rs. 245, and has paid out Rs. 28 in dividends since, and now it will pay out Rs. 29 more, for a total dividend of Rs. 57. Assuming the stock goes to Rs. 260, the total return is Rs. 317, which is a return of about 30% in three years, or about 9% per year compounded. A good deal, but not one which is spectacular.
This could be a useful stock but only because it is a coal monopoly in India. However, to please power companies, the government could easily decide to force losses on this company, and make it deliver cheaper coal. Or do a Kejriwal and force it to provide coal at lower prices. The overhang of idiotic government action is a reason why PSUs are often undervalued. Coal India is no different.