November 13, 2023 (JS Research)
Given recent outperformance of dividend plays (+17%) vs KSE100 (14%), we present a sensitivity of required dividend yields on stocks further receding, leading to capital gains opportunity in key dividend plays in our coverage universe.
Mapping the required / prevalent yield on equities vis-a-vis the 3 & 5 year PIB yields highlights a two pronged opportunity: i) further reduction in yields of the said PIBs, in addition to the 2-3ppt decline to 17.2% and 15.7% already seen in 3-year and 5-year PIB respectively and ii) contraction of spread between implied dividend yield and secondary market yields to historic level of ~1.75% vs the current expanded level of 4.5%/6% vs 3 & 5 year PIBs respectively.
The current FY/CY24 dividend yield of dividend plays in our universe stands at an average of 22% Reversion to longer term average would need the required average yield on the said stocks to contract by 2.75% to 4.25%.
We trim the required yield on each stock by the same range vs current implied yields which translates into a potential price re-rating of 15-25% from current levels. If all stocks revert to a uniform required yield in line with current 3YR/5YR yields of ~17/15.5%, average price re-rating would be ~30%/45%.
Source: (JS Research)