Coal India’s Rs. 29 Dividend is Mostly For Government Coffers; Prices Will Fall, No F&O Chance

13 comments Written on January 15th, 2014 by
Categories: COALINDIA

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.

The Stock Will Fall

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.

And There’s Dividend Stripping

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 Gets Some Money

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.

The Futures Go Down

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.

(Look at the NSE Circular)

Options Strike Prices will be adjusted

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.

What’s the Stock Like?

I couldn’t get myself to just stop, so I’ll put in the obligatory stock chart.

image

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.

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

13 comments “Coal India’s Rs. 29 Dividend is Mostly For Government Coffers; Prices Will Fall, No F&O Chance”

Didn’t know that option strike prices get adjusted for dividends. So, Put option strike prices go up by the same amount?

Only for large dividends (10% yield or more). Put option strikes will FALL by Rs. 29. A 290 put option will become a 261 put option.

You have written well…

But isn’t it common sense that one can’t make money after the news is public :-)….

@Deepak – The 10% price change is calculated from the ex-date. What is Coal India closes at 300 on 17th Jan? And if it closes on 285 on 17th Jan? The adjustment will not be the same, correct!!

The adjustment is Rs. 29, regardless of where Coal India closes….

Speaking of silly articles (or at least erroneous ones), here is one more. The ET claims that Tax Free bonds are eating away share of 5 year tax deductible bank FD u/s 80C. Yes, you heard it right.

http://planrupee.com/tax-free-bonds-offer-deduction-us-80c/

Points to ponder. They make sense.

Deepak,

so opportunities to make risk free money by trading futures do exist in declared dividends being less than 10% than? as options and future prices are marked down only for dividend yields higher than 10%?

Yes. Typically PSU banks tend to have decent dividend yields so it is useful to write call options on them in those months that they tend to declare dividends in. Even stocks like Hero Honda which generally give 2-3% dividend yield are good candidates.

Of course the strategy is like a covered call and thus exposed to a large downside. If you sell a call and buy the stock for a potential future dividend announcment, and the dividend is 2% but the stock falls 5%, you’re going to lose all the mojo you made on the dividend discount.

Hey Deepak Should I buy Coal india Shares under Cash Market Today i.e Friday to get Dividend. Will it go down on Monday .

The price is already ex-dividend today so you won’t get the dividend if you buy today…

Deepak,
I purchased 100 shares of coal on 16 january 2014 at a price of 299.
When will I get dividend(money transfered to my account).
The stock is at 272 now,any hope of improvement or I should sell
it on Monday and buy at lower levels.
I got carried away by reading some erroneous articles and bought Coal expecting good gains.
What can be the best way to correct this.

Don’t worry, you’ll get the dividend soon, probably by the end of the month…