BackCorporate dividend payouts may have peaked
Trend is expected to turn as firms prepare to invest on expectations that the economy is set for a turnaround
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Mumbai: Corporate dividend payouts, which touched a 10-year high in the year to 31 March, may have peaked as companies seek to plough back earnings into projects in anticipation of an economic turnaround rather than use the money to reward shareholders.
A Mint analysis of 1,200 private sector firms, for which data was available for the last 10 fiscal years, showed that their dividend payout ratios hit a high of 27.7% in the fiscal year 2014—the highest since at least the fiscal year 2005 (FY05). The analysis was based on data from Capitaline.
The dividend payout for the 73 listed public sector undertakings (PSUs), for which data was available for the last 10 fiscal years, was 37.7%—also the highest in 10 years.
The trend is expected to turn as companies prepare to invest again on expectations that the economy is set for revival under the administration of Prime Minister Narendra Modi after two years of below-5% growth partly blamed on high borrowing costs and projects stalled by delays in securing government approvals and completing land acquisition.
In the quarter ended 30 June, economic growth was 5.7%—the highest in two-and-a-half years.
“The economy has started picking up. We should start seeing stalled projects and expansion plans kicking in. It should start happening any time now," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services Ltd.
“With companies having their expansion plans on the horizon, they would prefer ploughing a larger share of their profits into the business, than paying it off as dividends," added Rawal.
Still, PSUs may continue to pay high dividends given that their payout ratios often tend to be linked to the government’s fiscal position, Rawal said.
“PSUs fund a part of the government deficit by declaring higher dividends," said Amar Ambani, head of research at brokerage IIFL.
To be sure, not all indicators have been consistent with the premise of an economic recovery. The Index of Industrial Production, for instance, has remained volatile and rose just 0.5% in July after a 3.7% rise in June.
But analysts expect the capital expenditure cycle to revive.
“Dividend payout ratios are set to decline from here in light of the green shoots we are seeing in the economy. It may make sense for the companies to disburse less and retain more to invest in their own businesses," said Shivram Subramanian, founder and managing director of proxy advisory firm InGovern Research Services Pvt. Ltd.
“More specifically—we should see this happening in industrials and FMCG (fast-moving consumer goods) sectors as the economy picks up and consumer demand rises," Subramanian added.
An analysis of 339 of BSE-500 companies, for which data is available for the last 10 fiscal years, showed that they paid 29% of their profits as dividend to the shareholders—the highest in a decade.
Of the BSE-500 group under study, packaged consumer goods companies have been the highest dividend payers on an aggregate basis. On an average, 13 companies from this sector paid 69.8% of their profits to shareholders—the second best such payout ratio in 10 years.
Toothpaste maker Colgate Palmolive (India) Ltd paid 68% of its profits as dividend in FY14, while cigarettes-to-hotels and consumer goods group ITC Ltd paid 53.6% of its profits as dividend.
Metal companies also remained high dividend payers. They disbursed 57.7% of their profits to shareholders in FY14—the highest in a decade.
Auto companies were at the bottom of the rung when it comes to rewarding their shareholders with dividends. Eleven auto companies in the BSE-500 pack paid only 15.1% of their profits to shareholders in FY14, the lowest in a decade. They had paid out 57.2% of their profits as dividends in fiscal year 2009.
Mahindra and Mahindra Ltd rewarded investors with a 18.5% payout.
Of the five cement companies in the BSE-500 included in the study, the dividend payout ratio was the highest in nine fiscal years at 13.78% in the last fiscal year, but strikingly lower than the 26.6% paid in FY05. UltraTech Ltd paid 11.2% of profit to shareholders as dividend in the last fiscal.
Analysts have been optimistic on the prospects of corporate earnings and expect the earnings per share (EPS) of companies linked to the benchmark 30-share Sensex to grow in the range of 15-21% in fiscal 2016.
“Private companies were consciously not investing in their businesses, as expansion plans were not taking off. Instead of keeping cash, you disburse cash to investors to reward the investors for staying invested," said Ambani of IIFL.
“The ones who had high debt were repaying debt. Ones that were comfortable paid out dividends. Other options such as bonus (share issues) were not justified in tough times," added Ambani.
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