HUL: Stay invested for higher dividend

Last Updated: Sat, Jul 06, 2013 05:17 hrs

Unilever Plc managed to get a good response to the buyback offer of its Indian arm, Hindustan Unilever (HUL). After the offer, the parent company's stake will rise to 67.28 per cent from the current 52.5 per cent.

Around 320 million shares were tendered by investors for the 487-million-share open offer, or around 65.71 per cent of the buyback issue, data suggests. Besides the grateful shareholders, the Indian government, too, was glad since the offer resulted in nearly $3.19 billion of inflows into the country. So, now what should you do stock in case you did not avail of the offer?

Those who missed the buyback can still buy the shares in the open market, as the price trades only marginally over the offer price of Rs 600. HUL currently trades at around Rs 605. An added benefit will be that the seller can receive his money much earlier than those who submitted in the open offer.

Many were under the impression that the share would revert to the levels at which it was trading just before the offer. However, this did not happen, signalling good demand from strong buyers, even at such high prices.

At the current price, HUL trades at a price-to-earnings (P/E) ratio of 51-times the trailing 12 months (TTM) profit. This is a huge premium by any standards, especially for a company near the peak of its growth stage. Buying at these levels will be beneficial only for the really long-term investors.

Unilever's buying at such huge premium is understandable as India is one of its main growing markets. As a promoter, it would like to extract the most from one of the few markets in the world that is growing. Given the demographics of India, Unilever will benefit from the increasing younger population in the country. However, returns will be slow and over a longer period of time.

De-listing hopes
In the short-to-medium term, however, there will always be a hope that the parent would make a second open offer to increase its stake or to de-list the company.

Higher stake with the parent can also result in higher dividend payout ratio. Even at the current price levels, the scrip offers a dividend yield of 3.08 per cent. It is this dividend yield that makes the scrip a decent buy even at these levels, despite the high valuations. With fewer shares in the market, the premium to its peer will only increase.

For those who have not submitted their shares, it is best to hold on to them and pass it on to your children.

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