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Remember the story of the man who killed the golden goose? In his greed to get more, he kills his steady source of gold. Some investors tend to make a similar mistake when they invest all their money in growth stocks, chasing only big gains. Investors often forget that they expose themselves to risks of very large drawdowns from time to time.
Like the man, who would have been better off keeping the goose alive, investors are often safer diversifying into dividend stocks. These stocks tend to give comparatively stable income, capital growth at a milder pace (as compared to growth stocks), and also serve as a cushion during market downturns (as risk off works in their favour). Growth stocks are often the most popular and hotly debated choice among investors, but for many, dividend stock investing should be just as effective.
In general, companies with cash flows and strong financial health tend to have a history of declaring regular dividends. When we talk about dividend stocks it would be hard not to mention public sector undertakings (PSUs). They often pay stable dividends compared to private companies.
Oil companies are high on the list of PSUs. Since crude oil prices are benign, bordering on low, it becomes important to look at these oil companies because declining crude oil prices might lead to potentially bigger dividends. Let's examine three oil PSUs that may pay big dividends as crude oil prices decline.
#1 Bharat Petroleum Bharat Petroleum Corporation (BPCL) is India's second-largest government-owned downstream oil producer. It operates three refineries in Bina, Kochi and Mumbai. In FY24, the company declared a total dividend of 31.
5 per share (a final dividend of 10.5 and an interim dividend of 21). The company has a long history of declaring dividends.
At its current share price, this amounts to a dividend yield of 6.5%. The company has declared varied amount of dividends over the past years.
In the past 24 years it has declared dividend 42 times. A brief look at the company’s recent dividend payment history: As one can see, the payouts have been volatile, broadly in sync with movement in crude oil prices. In FY23, for instance, the higher crude oil prices have taken their toll on the company’s payout.
More on this later in this article. According to BPCL’s chairman G Krishnakumar the company is planning to invest 1.7 trillion over the next five years.
It aims to grow its core oil refining and fuel marketing business as well as in future big bets of petrochemicals and green energy. It currently owns about 14% of India's oil refining capacity and about a quarter of the fuel retailing network. It plans to grow these businesses while foraying into newer areas.
The company is targeting net zero carbon emissions from its operations by 2040. #2 HPCL Hindustan Petroleum Corporation (HPCL) is mainly engaged in refining crude oil, marketing petroleum products, producing hydrocarbons, and providing services for managing E&P blocks. In the previous financial year, it paid a final dividend of 11 per share and an interim dividend of 15 per share.
Owing to its rich history of dividend payouts over the years, the company has a dividend yield of 5.4% on its current market price. HPCL has consistently paid dividends since 2000, except for 2023.
In the last 25 years, it has declared dividends 35 times. HPCL has laid out big growth plans for the future. It has earmarked 75,000 crore towards capex over the coming five years.
By incurring the said capex, it will undertake projects to expand its presence in existing and emerging business areas while ensuring energy access, affordability, and sustainability. Furthermore, the company is focused on strengthening the core business of refining and marketing by expanding refining capacities, supply chain capabilities, and customer reach. It aims to expand its refinancing capacity to 45.
3 million metric tonnes per annum (mmtpa) by FY28, up from its current capacity of 34.5 mmtpa. HPCL is gearing up to create value and deliver growth responsibly by strengthening existing businesses, leveraging new growth engines, and seizing green and emerging opportunities with focus on technology and innovation.
#3 IOCL IOCL is the largest oil producer in India. The company has business interests straddling the entire hydrocarbon value chain from refining to exploration, production, and marketing of natural gas and petrochemicals. In FY24, the company declared a total dividend of 12 per share (a final dividend of 7 and an interim dividend of 5).
The company has a long standing history of declaring dividends. On its current share price, this amounts to a very attractive dividend yield of 8.5%.
The company’s dividend payouts have been volatile over the years. In the past 24 years, it has consistently declared dividends 38 times. The company’s dividend payouts in the last five years have been as volatile as crude oil prices.
IOCL is targeting to become a $1 trillion company by 2047. It aims to combine growth in traditional oil refining and fuel marketing with clean energy avenues like green hydrogen and EV charging, It also aims to achieve net-zero emissions by 2046. The company will continue to invest in fossil fuels and new energy avenues to have a balanced portfolio that will help achieve net-zero carbon emissions target.
While the first phase of petchem expansions at Panipat in Haryana and Paradip in Odisha is complete, the one at Gujarat refinery is scheduled for commissioning in 2024-25. The firm is also setting up a polypropylene unit at Barauni refinery. It aims to scale up its capacity by targeting an increase to 13 million tonnes and achieving a petrochemical intensity index of 15% by 2030.
Dividend history of OMCs during declining crude oil price When a company reports higher profits, it typically has greater resources to share with its shareholders. Increased earnings allow companies to enhance their dividend payments, reflecting their financial strength and ability to return value to investors. This leads to the belief that when companies experience unusually high profits, they tend to declare larger dividends.
But does this hold true for oil marketing companies (OMCs)? If so, declining crude oil prices could lead to higher profits and bigger dividend payouts for these companies. The best way to determine this is to examine the historical relationship between crude oil prices and OMC dividend payments. If this trend has been observed in the past, there is a strong possibility it could occur again.
Here’s a 10-year overview of historical dividend payouts alongside crude oil prices. The above table clearly shows that the relationship between OMCs' dividend payout and crude oil price is not completely linear. Normally, when crude oil prices declined across years, like in 2016 and 2017, OMCs increased their dividend payouts.
BPCL and HPCL paid robust dividends in 2016 and 2017, reaffirming the belief that oil PSUs will declare higher dividends as crude oil price decline. Similarly, as crude oil prices started to rise, especially from 2019 onwards, OMCs faced margins pressures due to cost escalations and reduced their dividend payouts. BPCL showed resilience during this period compared to the other two companies.
FY23 presents a particularly interesting scenario. In May 2022, crude oil prices spiked as Russia invaded Ukraine (in February 2022). Crude oil prices surged to $114.
7 per barrel in May 2022 and by the end of March 2023 they slipped back to $75.7, averaging at $89.4.
This volatility and the government’s desire to shield consumers from it led to a situation where the profitability of the OMCs got squeezed. As a result, oil PSUs significantly reduced their dividend payouts during FY23. By 2024, all three companies have witnessed a recovery in their dividend payout.
The above table suggests that BPCL's dividend policy has proved pretty resilient over the years. On the other hand, HPCL and IOCL have a volatile dividend history. Overall, it shows that crude oil prices have a linear relationship with dividend payout if other factors like geographical conditions and taxes remain constant, which, as we know, is impossible.
As mentioned earlier, profit earned by a company is an important yardstick to understand probable dividend payouts. One has to understand the relationship between falling crude oil price and financial performance of the oil PSUs. Conclusion Earlier this month, crude oil prices climbed after Iran launched roughly 180 ballistic missiles targetted at Israel.
This raised concerns that Israel might retaliate by targeting Iran’s oil infrastructure. However, now crude oil prices are once again on a downward trajectory as the geopolitical risks eased mildly (though at the time of writing this, the situation has again worsened). Additionally, the market was disappointed as Chinese officials didn’t unveil any new economic stimulus for the country.
Even before the recent conflict between Iran and Israel, the market was weighed down by bearish sentiment. This was due to weak demand in China, the world’s biggest oil importer, and concerns that oil supply could exceed demand by 2025. In early September, oil prices had already hit their lowest level since December 2021.
As noted earlier, when crude oil prices decline, oil PSUs like BPCL, HPCL, and IOCL generally increase their dividend payouts, providing investors with larger returns. If all plays out well, these companies could pay more dividends in the future. However, this situation remains fluid, as tensions in the region could escalate further.
Therefore, while falling crude oil prices currently signal potential dividend bonanzas, investors must stay alert to the global energy landscape. Dividend stocks remain a solid option for consistent returns, but factors like geopolitical risks can ultimately impact both dividends and market performance..
