Lithium Upside for Best Dividend Stock? 

Peter Lynch is renowned for his approach to bottom-up investing. He ran the Fidelity Magellan Fund for 13 years from 1997 to 1990, delivering an annual return of over 29%.

He has also authored bestselling books on investing: One Up on Wall Street and Beating the Street.

• The reason that stocks do better than bonds is not hard to fathom.
  
  As companies grow larger and more profitable, their shareholders share in the increased profits. The dividends are raised.
  
  The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row. - Peter Lynch in his book Beating the Street

Peter Lynch later discussed his fascination with the Handbook of Dividend Achievers. A dividend achiever is a company that has increased dividends for at least ten years in a row.

In the 1990s, this list of dividend achievers was printed in a book by Moody's.

If Peter Lynch was to build a portfolio of Indian stocks in the 21^st century, one stock would have a fair degree of certainty in finding a place by virtue of being a 'Dividend Achiever'.

That stock is Coal India.

The government owned mining company is notorious for keeping the coal supply chain in India inefficient and cost heavy.

Nevertheless, the stock has always been on the radar of investors looking for healthy and consistent dividends.

While most PSU stocks are known to be generous with dividends, Coal India's dividend yield often trounced the fixed income rates by wide margins.

Like its PSU peers, Coal India had a fantastic run on the bourses over past 5 years.

Interestingly, with policy and investor focus shifting from fossil to green fuels, Coal India has improved its efficiency and profitability.

With almost 5x gains in the stock of Coal India, since the pandemic led market crash of 2020, the dividend yield has shrunk from 12% to almost 4.5% in 2024.

So, the dividend yield alone cannot be the reason for investors to bet on the stock from a long-term perspective.

What If Coal India Becomes a Lithium Stock?

India is a net importer of critical minerals.

So, in a bid to boost domestic mining, the government passed the Mines and Minerals (Development & Regulation) Amendment Bill in 2023. Herein it introduced exploration licence for critical minerals.

In June 2023, the Ministry of Mines came up with a list of 30 minerals critical to India's economy.

Several of these minerals are key for energy transition, defence, and telecom equipment manufacturing.

Lithium, in particular, is among the highest in demand given its use in batteries used it mobile phones, electric vehicles, and grid-scale storage systems, for which India is completely import dependent.

The Geological Survey of India (GSI) last year found lithium reserves of about 5.9 million tonne in Jammu & Kashmir. More lithium reserves were later reportedly discovered in Chhattisgarh, Rajasthan, and Jharkhand.

While a few of these blocks have already been put up for auction, the response from the private sector miners has not been too encouraging. So, a government backed entity will probably be the first to lead the lithium mining megatrend.

Meanwhile, Coal India needs to prepare itself for the transition from fossil fuels to green fuels.

Coal India's diversification plans are spread across multiple segments, including renewable energy, thermal power, coal gasification, coal bed methane (CBD) projects, as well as fertilizer, and aluminium businesses.

Although in the near-to-medium term, coal production is set to increase, production of the mineral is likely to plateau by 2045 and eventually stop. Therefore, it is inevitable for Caol India, the world's largest coal mining company, to look for newer growth avenues.

There is immense opportunity in diversification towards critical minerals as seen in countries like Australia and China, which have rapidly ramped up production.

So, Coal India is looking to directly undertake projects in certain rare earth mines. Given that it is a PSU, it can apply for certain mines directly.

It's also expected to be the one to lead lithium mining after the J&K mine auctions. The company has already been looking for acquisition opportunities for critical mineral mines abroad.

It is exploring the acquisition of lithium, cobalt, and nickel assets abroad and has amended its Memorandum of Association (MoA) to include non-ferrous and critical minerals.

Coal India's ability to ride the cyclical mining business reasonably profitably also works to its advantage. That the company's balance sheet and profitability have been stable for over a decade aids its ability to bid and win projects.

However, predicting success in mining lithium is a challenge.

India's lack of domestic availability of world-class deposits of critical minerals like lithium, nickel, cobalt, and others remains a concern from an energy security perspective.

Further, the technology to extract lithium from clay deposits, as found in Jammu & Kashmir, is not yet proven commercially. We may have to wait and see how things evolve.

So, we are not sure yet if Coal India will bite the bait to diversify into lithium and critical minerals mining. Moreover, if it will be successful at the endeavour.

However, the valuations of the stock seem to be factoring in too much too soon. And the near-term trajectory of the stock warrants caution.

If you wish to find out other Coal India like stocks that can be called the Peter Lynch stocks of India, check out the Equitymaster Screener.

Hope you like this video. Thanks for watching.