Speeding Ahead on a High-Octane Yield

05/06/2009 12:51 pm EST


Nick Lanyi

Editor, High-Yield International

Indian automaker Tata Motors offers a lofty dividend and virtually boundless growth, writes High Yield International editor Nick Lanyi.

For several years, India has been a popular destination for international growth investors, but income investors haven't found many opportunities. Companies there tend to reinvest their profits—which makes sense, given the country's rapid economic growth over the past 15 years.

However, the global recession and related bear market [have] hit India hard, pushing the yields of some dividend-paying stocks into the lofty altitudes that get us interested. That's terrific news for long-term investors looking to buy high-yield stocks, as India is certainly worth some exposure.

India's economy is expected to grow 4% to 5% in 2009—a veritable boom by the standards of a developed economy, though a slowdown from India's recent pace. Tata Motors (NYSE: TTM) is a high-yield selection that looks to be a prime beneficiary.

Tata is India's largest car maker and #5 worldwide, with more than $7 billion in 2008 revenue. Bolstered by its dominant share of the Indian car, truck, and bus market, Tata enjoyed rapid growth as India has boomed over the past decade: Its revenue rose about 25% annualized from 2003 to 2007.
Tata is regarded as an entrepreneurial company that has invested in several experimental cars that could boost its sales, including the Tata Nano, the most affordable car in the world at around $2,000, and several eco-friendly cars (including one run on compressed air).

In June 2008, Tata paid $2.3 billion to acquire two storied car brands—Jaguar and Land Rover—from Ford Motor. Ford struggled to make [them] profitable, and it remains to be seen how Tata performs with this new challenge.

Tata has a strong balance sheet with growing cash flows, but it took on quite a bit of debt for the Jaguar Land Rover purchase. It's now looking to refinance; with Indian banks relatively strong and interest rates falling, I'm confident that Tata will work this out.

But the debt level probably will constrain dividend growth over the next couple years.  While I don't expect the 2009 dividend to increase much, if at all, at the current rate of 35.3 cents a share, the stock yields 4.8%.

Tata's share price has dropped substantially from its high, due to the recession. Sales probably fell 10% in fiscal 2008 (ended March), and earnings for fiscal 2009 are expected to be a tenth of those for the just-completed year.

However, investors are warming up to the company—its share price has nearly doubled over the past month. (The stock closed at $7.82 Tuesday—Editor.)

And Tata's launch of the tiny Nano, sales for which start this month, could spur sales as many Indians remain eager for their first car and will finally be able to afford one.

Tata represents excellent long-term value now. This recession will end, and when it does, Tata will be among the best-positioned auto makers in the world.

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