Monthly Insight January 2018

Transcription

1 Monthly Insight January 2018

2 1 P a g e January Economic Releases in January-2018 Policy Rates Period Actual Previous Repo Rate^ 31-Jan % 6.00% Reverse Repo^ 31-Jan % 5.75% CRR^ 31-Jan % 4.00% Key Indicators Actual Previous Index Of Industrial Production (IIP) Wholesale Price Index Inflation(WPI) Export (Y-o-Y) Import (Y-o-Y) Current Account Deficit ($ Billions) Fiscal Deficit FYTD (INR Trillion) 8.40%(Nov-17) 3.58%(Dec-17) 12.36%(Dec-17) 21.12%(Dec-17) -7.20(Sep-17) 6.21 (Dec-17) 2.00%(Oct-17) 3.93%(Nov-17) 30.55%(Nov-17) 19.61%(Nov-17) (Jun-17) 6.12(Nov-17) Source: RBI, Thomson Reuters Eikon; ^Based on RBI Bi-monthly Monetary Policy Statement on 06- Dec-2017 Growth ( in %) Indian Economy Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Source: Office of the Economic Adviser, Ministry of Commerce & Industry Growth (In%) Growth (In %) Monthly WPI Movement Nov-16 Mar-17 Jul-17 Nov-17 Source: MOSPI Source: MOSPI IIP (%MoM) WPI & CPI Movement over last 1-year Dec-16 Apr-17 Aug-17 Dec-17 WPI IIP Movement IIP (%YoY) CPI In the Union Budget , government increased its fiscal deficit target from 3.2% of Budgeted Estimate (BE) to 3.5% for the current financial year. For FY19, fiscal deficit is projected at 3.3% of BE, which is also higher than 3% estimated in the previous budget. The budget has proposed to tax long term capital gains exceeding Rs. 1 lakh from listed equities at 10%, without allowing any indexation benefit. India's fiscal deficit during Apr to Dec 2017 stood at Rs lakh crore or 113.6% of the budgeted target for FY18. During the corresponding period last year, fiscal deficit was at 93.9% of the BE. Total receipts were Rs lakh crore or 67.4% of the BE, while revenue expenditure amounted to Rs lakh crore or 79.6% of the financial year estimates. India s Index of Industrial Production (IIP) grew 8.4% in Nov 2017 from downwardly revised 2.0% in Oct 2017 (2.2% originally reported) and 5.10% in the same period of the previous year. This is the highest IIP level since Oct The manufacturing sector surged 10.2% in Nov 2017 from 4.0% in the same period of the previous year. However, IIP growth for Apr to Nov 2017 slowed to 3.2% from 5.5% in the same period of the previous fiscal. Consumer Price Index (CPI) based inflation or retail inflation surged to a 17-month high of 5.21% in Dec 2017 from 4.88% in the previous month and 3.41% in Dec Consumer Food Price Index also grew 4.96% in Dec 2017 from 4.35% in the previous month and 1.37% in Dec India s Wholesale Price Index (WPI) based inflation slowed to 3.58% in Dec 2017 from 3.93% in the previous month. However, it increased from 2.10% during the corresponding month of the previous year. WPI Food Price index also slowed to 2.91% in Dec from 4.10% in the previous month. WPI for vegetables slowed to 56.46% in Dec from 59.80% in Nov. India s trade deficit expanded to $14.88 billion in Dec 2017 from $10.55 billion in Dec 2016 and $13.83 billion in Nov Exports grew 12.36% to $27.03 billion in Dec 2017 as against an increase of 30.55% to $26.20 billion in the previous month. India s exports in Dec 2016 stood at $24.06 billion. India s imports in Dec 2017 grew 21.12% to $41.91 billion from $34.60 billion in Dec 2016.

3 2 P a g e January Indian Equity Market Index PE Ratio & Returns* Closing Values # 1 Year 3 Year 5 Year Nifty 50 11, Nifty 50 PE S&P BSE Sensex 35, S&P BSE Sensex PE Source: NSE, BSE, * Returns less than 1 year are absolute, greater than 1 year are Compounded Annualized, # As on 31-Jan % -0.94% -1.62% -2.57% -2.61% -2.67% -3.01% 11.34% 7.38% 6.61% 6.43% 5.60% 4.72% 3.53% 3.27% 0.52% 0.15% 0.03% -11% -2% 7% 16% Source: MFI Explorer In Rs. 2,600 1,800 1,000 Growth of Rs 1,000 over Last 10-Yrs S&P BSE IT S&P BSE Bankex S&P BSE Teck S&P BSE Capital Goods S&P BSE Sensex Nifty 50 S&P BSE100 S&P BSE Metal S&P BSE Oil & Gas S&P BSE FMCG S&P BSE Realty S&P BSE PSU S&P BSE Consumer Durables S&P BSE Health care S&P BSE Mid cap S&P BSE Power S&P BSE Small cap S&P BSE Auto 200 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 S&P BSE Mid cap S&P BSE Sensex S&P BSE Small cap Source : MFI Explorer P/E - S&P BSE Sensex, Nifty 50, Nifty Midcap Monthly returns as on January 31, Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Source : Thomson Reuters Eikon, NSE Domestic Benchmark Indices Trailing P/E Nifty 50 Nifty Midcap 50 S&P BSE Sensex Indian equity markets ended the first month of CY2018 in the green with Sensex and Nifty surpassing the coveted 36,000 mark and 11,000 mark respectively. The key factors contributing to the market rally included optimism over corporate earnings, government s initiatives to help banks deal with non-performing assets, raising of the foreign direct investment ceiling in the banking sector, International Monetary Fund s (IMF) report on the economic growth outlook of India and lowering of additional borrowing requirement for the current fiscal by the government. A couple of disappointing economic numbers kept investors wary, thereby restricting gains. During the month, key benchmark indices S&P BSE Sensex and Nifty 50 rose 5.60% and 4.72% to close at 35, and 11,027.70, respectively. Meanwhile, broader indices underperformed with S&P BSE Mid-Cap and S&P BSE Small-Cap falling 2.57% and 2.67%, respectively. Initially, investors took positive cues after the Nikkei India Manufacturing Purchasing Managers' Index (PMI) came in at a three-year high in Dec The final reading of a private survey showed that Indian services sector witnessed modest growth during the same period, after contracting in the previous month. Meanwhile, banking stocks found support from Lok Sabha s approval of Rs. 80,000 crore recapitalisation of bonds for strengthening public sector banks and helping lenders deal with non-performing assets. Optimism ahead of the Union Budget and corporate earnings for the third quarter of the current fiscal helped investors shrug off concerns after the government lowered its Gross Domestic Product (GDP) forecast for FY18. Gains were restricted when four Supreme Court judges raised concerns over the administration of the top court. Markets soon regained as industrial activity in India increased to 25-month high in Nov. Meanwhile, WPI-based inflation eased in Dec 2017 as prices of food articles declined while fuel cost witnessed a surge. However, rise in CPI-based inflation to 17-month high in Dec 2017 following increase in food prices played spoilsport. The retail inflation breached the Monetary Policy Committee's (MPC) medium-term target for the second straight month, which may intensify pressure on the committee to raise policy rates in the next few months. Sentiment turned sour when official data showed that India s trade deficit reached $14.88 billion in Dec 2017, up by about 41% year-on-year, as crude oil and gold import bill inflated. Investors soon overcame the weakness after the government lowered its additional borrowing requirement for the current fiscal to Rs. 20,000 crore from Rs. 50,000 crore estimated earlier, thereby easing fiscal deficit worries.

4 3 P a g e January Net Investment by FII/FPI & DII in Rs. Cr. 2,700 1, ,500 33,400 1-Jan Jan Jan Jan-18 Regulatory Update 37,000 35,800 34,600 FII/FPI Net investment DII Net investment S&P BSE Sensex Source: MFI Explorer Net Investment by FII/FPI & DII in Rs. Cr. 35,500 19,000 2,500 37,000 33,700 30,400-14,000 27,100 Jan-17 May-17 Sep-17 Jan-18 Source: MFI Explorer FII, DII Investment & Sensex - January 2018 FII/FPI, DII Net Investment & Sensex Movement in last 12 Mths FII/FPI Net investment DII Net investment S&P BSE Sensex S&P BSE Sensex Index value S&P BSE Sensex Index value Markets extended the rally after the government decided to cut tax rates on certain products and services. Later, Sensex and Nifty 50 surpassed the coveted 36,000 and 11,000 mark, respectively, following IMF's report showing India could regain the title of the world s fastest growing major economy in Additionally, the Economic Survey report showed that economic growth would accelerate in FY19 and would grow by 7-7.5%, compared with 6.75% growth projected for FY18. However, the report also noted that a pause in government s fiscal consolidation cannot be ruled out. However, mixed cues from global markets ahead of the outcome of the U.S. Federal Reserve's (Fed) interest rate decision weighed on market sentiment. On the BSE sectoral front, majority of the indices closed in the green. S&P BSE IT was the major gainer, followed by S&P BSE Bankex and S&P BSE Teck respectively. Buying interest was seen in banking stocks after Lok Sabha approved the additional spending under which India's biggest state-owned banks are likely to get Rs. 80,000 crore of fresh capital this fiscal year. Deputy governor of the Central Bank has stated that the Central Bank won t intervene to protect banks from fluctuation in interest rates. The remark comes after the Central Bank lowered the prices of select government securities as bond yields surged after the government breached its fiscal deficit target. Some state-run banks had earlier approached the Central Bank and sought exemption from recognizing mark to market losses and instead requested the Central Bank to allow them to spread these losses over two quarters. The government has eased norms for investment in single brand retail, construction and power exchanges. The government has approved 100% foreign direct investment (FDI) under automatic route for single brand retail trading. Earlier also 100% FDI was allowed in the segment, however, the same required approval of the government. The move would give boost to foreign retailers. Also, the government has relaxed FDI policy for medical devices and audit firms associated with companies that receive funds from overseas. This comes apart from the government s permission for 49% investment by foreign airlines in India s national airline, Air India. According to a gazette notification issued by the government, bonds that will be issued to state-run banks under capitalisation plan of the government will have tenures of years and carry coupon interest rates of 7.35%-7.68%. The amount set aside for each bank is adding up to Rs. 80,000 crore for all banks. The special securities will be issued at par and the date of issue of the special securities will be the date of receipt of subscription amount from the eligible banks. The proceeds from the bonds will be used by the government to infuse capital in these banks, thereby making the entire transaction cash neutral for the government. The Securities and Exchange Board of India (SEBI) permitted commodity derivative exchanges to levy the highest transaction charge in turnover slab of any contract at a maximum of double the lowest charge in the same segment. Currently, 1.5:1 is the maximum permissible ratio for the highest and lowest transaction charge in a slab. SEBI has unveiled online mechanisms for depositories and stock exchanges for ease of doing business. The new system will help these entities in completing registration and other regulatory filings with SEBI in a much faster and cost-effective manner. Also, SEBI stated that all applicants who want to seek registration as a depository and renew licence will have to submit their applications online. The Unique Identification Authority of India (UIDAI) announced the creation of a "virtual ID" that can be used in lieu of the 12-digit Aadhaar number at the time of authentication for any service. The move aims at alleviating widespread concern over security breaches. Source : Reuters

5 4 P a g e January Indian Fixed Income Key Rates (%) Reverse Repo Rate Repo Rate CRR SLR Bank Rate Debt Indicators (Yield %) Call Rate FBIL 1 Mn Term Mibor 10-Yr Benchmark Bond 91-Day T-Bill # 182- Day T-Bill # 364-Day T-Bill # RBI Policy Rates Current^ ^Based on RBI Bi-monthly Monetary Policy Statement on 06-Dec-2017 Jan-18 Previous Dec % 6.10% 6.36% 6.40% 7.43% 7.33% 6.35% 6.17% 6.43% 6.31% 6.54% 6.36% # Indicates Monthly Average cut off during Auction Source: RBI Yield (In %) Jan-17 Jun-17 Sep-17 Jan-18 Source: CCIL Yield (In %) Yr Benchmark Bond Yield India Yield Curve Shift (Y-o-Y) Change in bps Bond yields surged for the sixth consecutive month following rise in international crude oil price. It triggered fears that domestic inflation may stay above Central Bank's target. Investors risk sentiment dampened after the deputy governor of the Central Bank stated that it will not intervene to protect banks from fluctuations in interest rates. Market participants turned bearish amid oversupply of government bonds during FY18 and concerns over government s fiscal consolidation drive. However, losses were restricted after the government reduced its additional borrowing plan for this fiscal year by more than half to Rs. 20,000 crore from the earlier Rs. 50,000 crore. Yield on the old 10-year benchmark bond (6.79% GS 2027) rose 27 bps to close at 7.60% from the previous month s close of 7.33%. During the month, bond yields moved within a wide range of 7.28% to 7.66%. Yield on the new 10-year benchmark bond (7.17% GS 2028) rose 30 bps to close at 7.43% from the first trading day s (Jan 8, 2018) close of 7.13%. Bond yields moved within a wide range of 7.08% to 7.48%. Bond yields in the initial days remained in a broad range. Initially, bond yields rose due to lower appetite for buying after the government announced it will borrow more than budgeted during the Mar quarter of Higher crude oil prices further dampened the sentiment but losses soon neutralized on value buying as market participants rejoiced after 10-year benchmark bond yield hit record high and the auction of the new 10-year benchmark paper came along market expectations Yr 5 Yr 10 Yr 20 Yr 30 Yr Change in bps Jan-18 Jan-17 Yield (In %) India Yield Curve Shift (M-o-M) Yr 5 Yr 10 Yr 20 Yr 30 Yr Change in bps Jan-18 Dec Change in bps Later, market participants turned bearish amid oversupply of government bonds during FY18 and concerns over government s fiscal consolidation drive. Yields accelerated at afasterpacetrackingriseinu.s.treasuryyieldsandglobal crude oil prices. Investors risk sentiment got dampened after the deputy governor of the Central Bank stated that it will not intervene to protect banks from fluctuation in interest rates. He advised banks to use hedging instruments to manage their interest rate risk and shield themselves against large movement in bond yields. Sharp fall in rupee also weighed on sentiment. However, yields retreated broadly after the government reduced its additional borrowing plan for this fiscal year by more than half to Rs. 20,000 crore from the earlier Rs. 50,000 crore. In the end, yields went up drastically after the Economic Survey showed that Indian government s fiscal consolidation could be on hold for the current financial year.

6 5 P a g e January Call Rate (In %) Repo, Reverse Repo, CRR, SLR & Bank Rate (In %) Source: RBI In bps Movements of Key Policy Rates in India Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan Reverse Repo Repo CRR Bank Rate SLR 5 Year Corporate Bond Spread (for AAA & AA bonds) 10 Jan-17 May-17 Sep-17 Jan-18 AAA Bond Spread (in bps) In bps ,000 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Call Rate Net Borrowings AA Bond Spread (in bps) 10 Year Corporate Bond Spread (for AAA & AA bonds) 0 Jan-17 May-17 Sep-17 Jan-18 Liquidity Monitor - Call Rate and Net Borrowings AAA Bond Spread (in bps) 140,000 80,000 20,000 AA Bond Spread (in bps) LAF (In Rs. Cr.) SLR (In %) In the Union Budget , government increased its fiscal deficit target from 3.2% of BE to 3.5% for the current financial year. For FY19, fiscal deficit is projected at 3.3% of BE, which is also higher than 3% estimated in the previous budget. The budget has proposed to tax long-term capital gains exceeding Rs. 1 lakh from listed equities at 10%, without allowing any indexation benefit. On the liquidity front, the interbank liquidity surplus increased. The overnight call rate traded below the policy repo rate for most of the month and ranged from 5.81% to 5.93%, which reflected that liquidity remained at comfortable levels during the month under review. Data showed that banks net average lending to the Central Bank through the LAF window increased to Rs. 14, crore in Jan 2018 from the previous month s average lending of Rs. 10, crore. Banks average borrowings under the Marginal Standing Facility (MSF) window fell to Rs crore in Jan 2018 from the previous month s average borrowing of Rs. 3, crore. To suck out excess liquidity from the banking sector, the central bank conducted variable reverse repo auctions of various tenors. Average net absorption of liquidity through variable repo rate and reverse repo auctions stood at Rs. 9, crore in Jan 2018 compared with net lending of Rs crore in Dec After considering the entire gamut of LAF, MSF, term repo auction, and reverse repo auction, and market stabilization scheme the average net absorption of liquidity increased to Rs. 24, crore in Jan 2018 from Rs. 7, crore in Dec The Central Bank conducted auctions of 91, 182, and 364 days Treasury Bills for a notified amount of Rs. 55,000 crore in Jan 2018 compared with Rs. 44,000 crore in the previous month. The cut-off yield stood in the range of 6.27% to 6.58% during the month under review compared with that of the previous month when the cut-off yield was in the range of 6.15% to 6.42%. Yield on gilt securities increased across maturities in the range of 2 to 32 bps. Highest rise was seen on the 12-year paper while lowest increase was on 10-year paper. Yield on corporate bonds rose across maturities in the range of 9 bps to 24 bps. Highest rise was seen on 1-year paper while lowest increase was on 3-year paper. Difference in spread between AAA corporate bond and gilt expanded on 1, 2, 8, 9 and 10- year papers in the range of 4 to 18 bps while 3 and 5 to 7 year papers contracted in the range of 3 to 8 bps. Spread on 4 and 15 year papers remained unchanged.

7 6 P a g e January Currency Movement of Major Currencies (Denominated in Indian Rupee) Value(as of31-jan- 1 Mth 3 Mths 1 Year Currency 2018) Ago Ago Ago INR/1 USD INR/1 EURO INR/1 GBP INR/ 100 YEN Source: RBI Commodities Performance of various Commodities Returns (in %) Value(as of31-jan- 1 Wk 1 Mth 6 Mths 2018) 1 Year Crude Brent ($/Barrel) Gold ($/Oz) Gold (Rs./10 gm) Silver ($/Oz) Silver (Rs./Kg) , MCX In U.S.Dollar Rupee per Dollar Source: RBI Jan-17 May-17 Sep-17 Jan Commodity Rupee Versus Dollar during the year 70 Jan-17 May-17 Sep-17 Jan-18 Source:Thomson Reuters Eikon Movement of Commodity Prices Over 1 Year (Rebased to 100) Gold (US$) Silver (US$) Brent Crude INR The Indian rupee initially strengthened against the U.S. dollar following selling of the greenback by banks and weaker than expected U.S. jobs data for Dec However, the trend reversed following dollar demand from oil importers and state-run banks. Rupee fell further after India s trade deficit widened for Dec 2017 and global crude oil prices continued to remain at elevated levels. The rupee rose again following gains in domestic equity market and after the U.S. President stated that a strong dollar is needed. Euro Euro surged against the greenback on perception that the ECB could end its bond purchase programme soon if the economy and inflation develop as expected. Concerns over a possible U.S. government shutdown also kept the dollar under pressure. Gains were extended following eurozone s strong consumer confidence data for Jan 2018 and amid comments from the U.S. President that a strong dollar is needed. However, gains were capped following upbeat U.S. economic data and after ECB officials raised concerns over the euro's strength against the greenback. Crude Brent crude prices touched multi-year high amid unrest in Iran that raised concerns of supply disruption in the region. Positive demand outlook further supported oil prices after China reported that its crude oil imports for the year 2017 rose 10.1% to 420 million tonne. However, the upside was limited on concerns over supply glut after the International Energy Agency in its monthly report mentioned that rising U.S. crude oil production might offset the Organization of Petroleum Exporting Countries effort to rebalance the crude oil market. Gold Initially, the safe-haven appeal of the precious metal gained following downbeat U.S. economic data. Investors optimism over further rate hike by the U.S. Fed, despite lower economic data, also supported prices. Prices also got support on weaker dollar after the Bank of Japan (BoJ) suddenly reduced the size of its long-dated bond purchases. Speculation that the BoJ and the ECB might reduce their monetary stimulus programmes added to gains. Meanwhile, the BoJ maintained the monetary policy and kept its inflation and growth assessment unchanged. Later, ECB President s stimulus measures fell short of investor expectations that the central bank is poised to shift towards steeper monetary policy measures. However, upside was limited after the U.S. Senate approved short-term funding to keep the U.S. government running for about three weeks.

8 7 P a g e January Performance of Major International Markets (as on January 31, 2018) Country 1 Mth Indices United States Nasdaq 100 S&P 500 DJ Industrial Average Asia Pacific SET IDX JSX Composite FTSE Straits Times KOSPI Hang Seng NIKKEI 225 Shanghai SE Composite S&P BSE Sensex S&P/ASX 200 Europe FTSE 100 CAC 40 U.S. U.S. U.S. FSE DAX Germany Source: MFI Explorer & Thomson Reuters Eikon Yield (In %) Global Equity Market Global Fixed Income - U.S Month 3 Months Thailand 4.17 Indonesia 3.93 Singapore 3.85 S. Korea 4.01 Hong Kong 9.92 Japan 1.46 China India Australia U.K. France U.S. Treasury Yield Curve Shift (M-o-M) 6 Months 1 Year Change in bps 31-Jan Dec-17 Yield ( In %) Years 3 Years Jan-17 Jun-17 Sep-17 Jan-18 5 Years U.S. 10 Year Treasury Yield 7 Years 10 Years 30 Years Change in bps Movement during the Month United States U.S. markets traded high amid optimism around the U.S. economy despite mixed key economic data and after China dismissed a media news of slowing or halting purchases of U.S. debt. Market participants cheered following the end of the U.S. government shutdown. Towards the end, Fed kept its interest rates unchanged as was widely expected but hinted to raise rates at its next meeting in Mar Europe European markets mostly traded up following some upbeat economic data, positive corporate earnings and political developments in Germany. Investors also welcomed the new rules for the region's financial markets known as Mifid II which aims to bring in transparency in the financial industry. However, the upside was limited as ECB's stimulus measures fell short of investor expectations. Asia Asian markets gained on optimism over ongoing talks between South Korea and North Korea and China's ruling out of news connected with lowering its U.S. bond purchase. The BoJ kept its massive monetary stimulus programme unchanged, thereby easing worries that it might shift towards a tight policy. However, upside was limited as the Chinese central bank lowered its lending amount in Dec to curb credit growth and as the BoJ reduced its bond purchase suddenly. Yield on the 10-year U.S. Treasury bond surged 31 bps during the month to close at 2.72% compared with the previous month s close of 2.41%. The paper moved in a range of 2.41% to 2.73%. U.S. Treasury prices fell following investors confidence in the health of the economy. Comments from a ECB official added to expectations that central banks globally will reduce stimulus as the economic outlook improves, thereby adding to losses. Losses were extended amid strong U.S. private sector jobs data, rise in U.S. monthly wages, and gain in U.S. consumer prices for Dec U.S. Treasury prices fell further after the BoJ said it will trim its purchases of Japanese government bonds, leading to speculation that BoJ may wind back its monetary stimulus this year. Reports that China may slow or halt its purchases of U.S. Treasuries added to the losses. However, the downturn was restricted when the U.S. Treasury secretary and the U.S. President contradicted each other in their statements. The secretary had said a weak dollar will help boost America's global trade, but the President stated that a strong dollar was needed.

9 8 P a g e January Investment Classroom How do dividends affect stock valuation? Many companies distribute dividends and these payouts affect the stock price of a firm in various ways. First let s understand what a dividend is when a company pays out a part of its earnings (as decided by the board of directors) to shareholders, it is called a dividend. There can be special dividends as well over and above the regular distribution. Companies pay dividend from their retained earnings, which is the profit a company has gathered over time that has not been used. Companies first declare the dividend amount and the dividend pay-out date. The last date by which shares can be bought to receive the dividend is also announced. This date is called the ex-dividend date and is generally two business days prior to the date of record or the day on which the company reviews the list of its shareholders. The clear effect Dividend declarations are usually accompanied by rise in interest in the stock as investors want to cash in on the payout. This lifts the stock s price up by an amount which corresponds to the dividend paid out, but the rise is governed by market activity only. On the date of ex-dividend, the stock exchange cuts the stock price by reducing the dividend amount as after that date new investors will not be eligible to get the dividend and thus would not want to pay the extra amount. However, if the stock price has risen substantially before the exdividend date, the net effect after the cut would be still be an increase. Certain investors time their purchase and sale in order to collect the dividend they buy just ahead of the ex-dividend date and sell right after the record date. The underlying effect Other than the obvious effects dividends can have on stock price near the declaration dates, there are some underlying effects too that dividends create on a company s share price. When a company raises its dividend more than market expectations, investors could take that as a sign of good health boosting the stock's price. At the same time, a dividend cut can be treated as a cause of concern and can hit the stock price. The dividend discount model Stocks can be valued on the basis of dividends they pay this is called the dividend discount model. The model assumes that a stock is worth the sum of all of its future dividends. The most popular dividend discount model is the Gordon Growth Model wherein next year's estimated dividend, its estimated future dividend growth rate and the company's cost of equity capital are used to calculate the intrinsic value of the stock. The drawback of this model is that it is only taking the dividend factor in to account and leaves important parameters like financial condition of the company out of the equation. Assuming a constant dividend growth rate can also be dangerous. So, it is best to keep in mind a whole lot of other factors together with this metrics when evaluating a stock. Rounding up Dividends are an important part of stocks, but what matters most is the stock s earnings. Sometimes even the regular dividend distributing companies hold back dividends as they want to use the amount to finance future growth projects to expand the company. In such cases, the break in dividend should not be seen as a cause of concern. But in some cases, the financial condition of a company forces it to stop dividends. So, one should use utmost prudence while making any judgement around dividends.

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