After a weak debut, listing at an over 8 percent discount to the issue price, making for the world’s second-worst trading debut among large IPOs this year, shareholders of state-run Life Insurance Corporation of India (LIC) will be counting on a bumper dividend if Prime Minister Narendra Modi’s government wants them to stay put, a report by Business Standard stated.
LIC, which raised $2.7 billion last week in the country’s biggest initial public offering settled as much as 9.4 percent lower on Tuesday.
As per the BS report, investors and analysts are concerned that the price could drop even more because of little growth prospects for the legacy business, risks of further disinvestment by the government and the absence of major incentives for shareholders.
The stock is a “good portfolio hedge against volatility,” said Jayesh Bhanushali, assistant vice president for research at IIFL Securities told BS, but added that the shares could face headwinds in the medium term if the government decides to dilute its stake in LIC further.
A 3-4 percent regular dividend could be a sweetener that will make shareholders stay put, Bhanushali said.
"With the demand for a handsome payout, LIC investors are taking a leaf out of Aramco’s playbook, when the Saudi Arabian behemoth in the world’s biggest-ever IPO assured investors of a minimum dividend of $75 billion a year until at least 2024. That partly helped Aramco’s stock soar in its 2019 debut. While LIC has made no such promises in its offer documents, it isn’t clear if or how soon the company will bow to investors’ wishes," the report informed.
Chokkalingam G, a strategist at Equinomics Research & Advisory also told BS that LIC’s dividend payout needs to be attractive to keep investors’ faith in the stock. It has plunged below the price it was allotted to retail investors and if it falls further, there has to be something that attracts investors to hold it, he added.
“It’s more a case of bad timing than anything else,” said Brian Freitas, an Auckland-based analyst for independent research platform Smartkarma told BS
Freitas said guaranteeing a dividend would’ve made it more attractive to some investors, but that would also require them to hold the shares for a period of time in this volatile market.
"Local investors have often dubbed LIC’s offering as India’s “Aramco moment” in reference to the Gulf oil giant’s listing in 2019 that raised $29.4 billion. Some have called it the “IPO of the decade,” seen as critical to bolstering government finances and narrowing the budget deficit as spending and subsidies increased during the pandemic," said the report
Some investors are looking to hold LIC shares over the long term as part of their wealth portfolio once the price stabilizes.
“As Warren Buffett says if everybody is selling go ahead and buy,” said Rajendra Agarwal, 54, who runs an investment firm and bought 200 LIC shares after the tumble, the report said. “We expect the stock will have more upside than downside," Agarwal added.