Mumbai: Indian companies are rewarding their investors handsomely with liberal dividend payouts for fiscal 2008 even as they struggle with a sharp drop in profit growth.
A Mint analysis of 318 firms that have declared dividends this year, and for whom comparable data is available for the previous year, shows that the dividend payment has grown by 43.19%, against a 12.50% drop in the previous year. Meanwhile, the net profit of these firms has grown by some 24% in fiscal 2008, down from 42% in the previous year.
Separately, for public sector firms that are also listed on stock exchanges, of the 27 that have declared dividends, the payout has grown by 56.24%, against a fall of nearly 18% last year. The net profit of these 27 firms has grown 34%.
DIVIDEND BONANZA (PDF)
Big public sector firms that traditionally pay high dividends, such as Oil and Natural Gas Corp. Ltd, Indian Oil Corp. Ltd and NTPC Ltd, have not announced their payouts as yet, but the trend is quite clear: Indian firms are willing to reward their shareholders despite clear indications of a distinct slowdown.
The scenario was very different last year when firms preferred to reinvest their profits for expanding existing business amid an economic boom.
Dividends are payments made by a corporation to its shareholders out of its profits. When a corporation earns a profit or a surplus, that money can be put to two uses—it can either be reinvested in the business or paid to the shareholders as dividend. Most of the firms retain a portion of their earnings and pay the remainder as dividend.
A rise in dividend payout is also significant in the context of a falling stock market. After rising some 45% in 2007, the Bombay Stock Exchange’s benchmark index, the Sensex, has lost more than 34% since January. In a falling market, a hefty dividend is one attraction for investors and, as long as a company paying dividend isn’t in a danger of serious downsizing, stocks that offer dividends are considered less risky than others. Investors also do not pay any taxes in India on their dividend income.
“Fiscal 2008 was one of the best years for Indian companies with strong cash flows. The profit growth was on a higher base. But, I expect fiscals 2009 and 2010 to witness a significant slowdown in dividend payout, as interest rates are high and rising, cash flows are challenged and many corporations have large expansion plans,” said Hitesh Agrawal, head of research at Angel Broking Ltd, a Mumbai-based domestic brokerage.
However, not too many would possibly like to slash dividend payouts, as according to Agrawal: “Reduction in dividend payout questions the ability of the management to sustain growth.”
“Most of the companies have strong balance sheets. We think they will continue to offer handsome dividends, particularly when the market sentiment is not that good. This is one way of keeping the investors happy,” said a senior executive of a rating agency, who did not want to be named as he is not authorized to speak to the media. According to this person, the public sector firms will not lag behind in dividend payouts as the government, their majority shareholder, would like to earn dividend income as this brings down its fiscal deficit.
Inflation in India has been hovering at record levels in the recent weeks, with the latest measured Wholesale Price Index touching a 13-year high of 11.6%. The Reserve Bank of India has already raised its policy rates, prompting commercial banks to hike their lending rates. This will certainly impact the profitability of firms in fiscal 2009.
Hindustan Unilever Ltd tops the list of dividend-paying firms in 2008, distributing Rs1,976.12 crore in dividend to its shareholders. This was nearly 50% more than what it had paid in fiscal 2007. Infosys Technologies Ltd’s dividend payout grew about 193% over last year to Rs1,902 crore, while India’s largest company by market capitalization, Reliance Industries Ltd, saw its dividend go up by more than 13% to Rs1,631.24 crore.
From the public sector group, State Bank of India paid the highest dividend at Rs1,357.66 crore, up more than 84% from last year.
Ketan Karani, vice-president (research) at Kotak Securities Ltd, said he does not expect dividend payouts to come down in 2009 despite a slowdown. “Economic slowdown does not necessarily mean that the corporate profits will also go down. Lot of companies will still be able to sustain a decent profit growth going forward; it will be, however, lower than the growth percentage witnessed in fiscal 2008,” he said.
Karani is one of those who doesn’t believe that a fat dividend alone can attract investors. “Dividend considerations are more important in a market that is coming out of a bear phase. As of now, this is not the case,” he added.