Dividend payouts more than double as firms find little use of cash

Dividend payouts in India Inc more than doubled in the last fiscal as companies faced with few investment opportunities and a tax preferred to reward shareholders.

The dividend-payout ratio of BSE 500 companies shot up to 68.33 in 2017 from 28.40 in 2016. It was 30.79 in 2015, 25.31 in 2014 and 25.93 in 2013. A dividend-payout ratio is the percentage of annual dividends per share to earnings per share (EPS).

With companies sitting on huge cash pile in sectors like IT, banking, PSU and FMCG which are showing dismal growth and weak capacity expenditure plans saw a sharp upsurge in the payouts. Frontline players such as TCS, Infosys, State Bank of India, Axis Bank, Godrej Consumer, Nestle and Britannia, among others, saw a threefold jump in dividend payouts.

Experts said Budget 2016 which imposed 10% tax if the dividend income exceeded Rs 10 lakh in the hands of shareholders also spike in payouts as promoters rushed to avoid tax payment for the fiscal before the rule kicks in.

Among sectors, the dividend payouts were highest in the IT sector with the ratio for S&P BSE IT Index firms spiking to 336.78 as against 37.45 in 2014, 42.61 in 2015 and 36.2 in 2016.

The dividend payout ratio for TCS was 35.23 against 32.79, 78.75, 35.4 in 2014, 2015 and 2016, respectively. The payout ratio for Infosys at 41.01 has also swelled from the previous three years, which is similar to HCL at 2712.52. However, some IT players like Wipro saw a reduction in payouts (5.73) this year as against 16.57 last year, while Tech Mahindra dividend estimates stand at 28.10 for this year.

"There is a slowdown in IT sector with no alternative available for investments. So the companies are distributing the cash through higher dividends," Jimeet Modi, CEO, Samco Securities, said.

At 21.8, the payout ratio for S&P BSE Bankex firms was higher than its 2014, 2015 and 2016 ratios which were 17.48, 19.2 and 22.74, respectively.

This year, dividend payouts for State Bank of India are at 36.92, while for Axis Bank the payout was at 30.29. Further, banks like Kotak Mahindra, ICICI Bank and HDFC Bank are also expected to pay higher dividends owing to factors like poor credit expansion and falling bond yields.

"Momentum of dividend payouts for banks is likely to continue given credit expansion is not in line with what had been envisaged. Also, with net interest margins and yields falling, lenders will continue to give out higher dividends," Sanjiv Bhasin, executive vice-president, IIFL, told DNA Money.

The dividend payout ratio for S&P BSE FMCG Index is at 59.15 this year, up from 48.87 in 2014, 52.09 in 2015 and 58.25 in 2016, respectively. Hindustan Unilever, Godrej Consumer and Nestle saw dividend payout ratio at 85.19, 39.18, 64.87 respectively, which are almost three times than those in the past three years. As for Britannia, payouts are expected to increase in 2017 with analysts estimating at 34.37.

Also, with the implementation of goods and services tax (GST) from July 2017, the tax rate for most of the companies will reduce minimum 5%, fortifying bottomlines. Hence, the FMCG sector is likely to continue paying higher dividends to shareholders, experts said.

For PSUs, dividend payouts surged 40.24 as against 2014 (38.26), 2015 (39.6) and 2016 (40.28) as companies returned cash to the biggest shareholder-- the government. While the dividend payout ratios of top PSU companies like ONGC, Indian oil, Coal India, NTPC, Power Grid are yet to come, the same are being estimated at 41.60, 33.98, 107.63, 33.6 and 21.65 for each, respectively.

"PSUs which have surplus cash have been told to give a minimum dividend of 30% of its net profit or 5% of net worth, whichever is higher subject to the maximum dividend permitted under the law, according to a guideline issued last year," according to financial services firm Anand Rathi.

Some market participants say dividend payout trend will decrease because of the proposed amendment to tax dividend income. The market is unlikely to witness an extraordinary increase in dividends, given the economy is picking up momentum, and the surplus cash would be used for expansion and diversification, as opposed to paying shareholders.

However, many feel whether or not the dividend payouts would normalise will depend on the vigour of reinvestment plans of companies.

"While the trend of higher dividends will continue as companies continue to mint sizeable profits due to economic conditions and India's consumption pattern, the objective might vary. There are many companies that are stable and operating beyond growth phase of their business life cycle, which will continue to reward its shareholders," Achin Goel, head- wealth management and financial planning, Bonanza Portfolio, said.