At a time when cyclical and PSU stocks power the rally on Dalal Street, stocks from defensive segment continue to underperform the broader market. Fast-moving consumer goods (FMCG) is one of the instances, in which the Nifty FMCG index is down 5% so far in 2024.
Analysts at Jefferies recently raised concerns about lower investment by companies in the FMCG sector. According to the foreign brokerage, the industry tilt appears to be more towards margins, when it should be more focused on growth. It further added that margin-focused FMCG firms face "serious de-rating risk" if they ignore investors' demand for faster growth.
Nevertheless, companies in the FMCG space are known for their generous dividend payouts. Virtually all Nifty FMCG Index members distributed some dividends in FY23. While Colgate Palmolive doled out more than it earned in FY23, United Breweries distributed 91% of its profits. The ratio for Hindustan Unilever (HUL) stood at 84%, whereas ITC had a payout ratio of 80%.
Many companies pay out more than 80% of their profits as dividends. "While it's a good practice to return, in a country like India, we think investors chase growth, especially at these valuations, and hence, FMCG is not seen as a cash proxy, unlike in the West," wrote Jefferies in an investor note.
For instance, in FY23, Colgate Palmolive distributed a dividend of ₹1057 crore. At the same time, the company reported a net profit of ₹1047 crore. The dividend payout for Colgate Palmolive translates to 101%, according to Bloomberg data.
The only two companies from the index that did not announce any dividends in FY23 were Godrej Consumer Products and United Spirits. However, both companies have given out interim dividends for FY24, amounting to ₹511 crore and ₹290 crore, respectively.
Stocks from the FMCG space have been yielding decent returns to investors. In fact, the Nifty FMCG Index outperformed the benchmark Nifty50 in the previous two years. The Nifty FMCG Index returned 29% in 2023 and 18% in 2022, compared with the 20% return generated by the Nifty50 in 2023 and just 4% in 2022. The Nifty50's gain between January and now stands at 2%.
(Edited by : Anand Singha)
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