Mumbai: Indian investors saw lower growth in dividend income in the past fiscal, compared with the preceding year, as they faced a subdued stock market, with the benchmark 30-share Sensex index rising 11% in fiscal 2011 after posting an 81% increase in 2009-10.
Growth in dividend payouts by listed firms declined to the 11-13% range in the year ended 31 March after growing around 30% in fiscal 2010 as lower profit margins and increased reliance on internal funds to fund capital expenditure left companies with less cash to disburse to shareholders.
As profit margins are expected to decline in the current fiscal, and firms continue to depend on internal funds to expand, owing to the high cost of debt, analysts say dividend payouts will remain subdued in the current fiscal too.
“Dividend growth has slowed as profitability of companies is falling,” said Deepak Jasani, head of retail research at the broking arm of India’s second-largest private lender HDFC Bank Ltd. “Also, in a rising interest-rate environment, firms have largely used internal funds for expansion plans, rather than debt, leaving less cash for dividend payouts.”
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Dividend payouts of 28 Sensex firms grew 11% to Rs 41,537 crore in fiscal 2011 after growing 32% in the year-ago period, according to Capitaline. These 28 firms are those for which data is available for the past three fiscals. The trend in the broader market was similar. A Mint analysis of 455 firms of the BSE-500 index, for which data is available for the past three fiscals, shows dividends rose 13.7% to Rs 80,299 crore after growing 31.7% in the previous year.
Firms in the BSE-500 index account for 93.5% of market capitalization on the bourse.
The high growth in dividends in fiscal 2010 was partly due to a base effect: dividends fell in fiscal 2009 after the global financial crash in that fiscal. Also, firms that were sitting on cash spent less on capacity expansion (capex) in fiscal 2010, owing to low business confidence, which led to high dividends.
As the capex cycle recovered in fiscal 2011 and profit margins declined, dividend payouts saw a more modest rise. Net profit margins of Sensex firms fell 127 basis points (bps) to 14.85% while that in the BSE-500 universe fell 33 bps to 10.75% in fiscal 2010. One basis point is one-hundredth of a percentage point. Dividends as a proportion of net profits in the broader market declined nearly one percentage point to 24.8% in fiscal 2011 as firms used up cash in capex.
Higher expenditure on capex in the past fiscal by manufacturing firms, mostly from internal accruals, was a reason for lower dividend payouts, said Rajesh Iyer, head of research at the wealth management arm of Kotak Mahindra Bank Ltd.
In fiscal 2011, the capex of Sensex firms grew 23% to Rs 91,674 crore and the capex of firms in the BSE-500 grew 26% to Rs 2.43 trillion, after excluding banks and financial institutions. The capex to sales ratio of BSE-500 firms rose to their five-year average of 0.11 last fiscal.
Higher spend on capex saw the levels of free cash flows declining even as operating cash flows rose and contributed to the subdued dividend growth. Free cash flows turned negative for manufacturing firms on the BSE-500 in the past fiscal. Free cash flows of Sensex firms at the consolidated level fell 70% in the past fiscal to Rs 8,120 crore over the year-ago period.
Free cash flows, an indicator of the health of a company’s balance sheet, refers to the cash a company is able to generate after making provisions for maintaining and expanding its asset base.
The share of promoters in the dividend pie fell nearly 3 percentage points to 47.3%, although for state-owned firms that are the biggest dividend payers, the drop was smaller. Promoters’ share of dividends for state-owned firms fell 1 percentage point to 72% for 61 state-owned firms on the BSE-500.
State-owned Oil and Natural Gas Corp. Ltd was the highest dividend payer, with a payout of Rs 7,486 crore in the past fiscal, followed by IT bellwether Infosys Ltd, which paid Rs 3,445 crore.
PDF by Sandeep Bhatnagar/Mint