Mumbai: Investors in large-cap firms who saw their wealth erode by some 37% because of a drop in share prices last fiscal also saw smaller dividend cheques as firms decided to conserve cash during the credit crunch.

A Mint study of large-cap firms that constitute the Bombay Stock Exchange’s (BSE) bellwether equity index, the 30-stock Sensex, and the broader 50-stock Nifty showed that the dividend payout ratio, or the proportion of net profit distributed to shareholders, declined to a seven-year low. The analysis covers 29 Sensex stocks and 45 Nifty stocks for which comparable data is available. Barring one, all Sensex firms are part of the Nifty.

For the Sensex firms, the dividend payment as a percentage of net profit declined to 25.81% in fiscal 2009, from 26.92% a year ago. The ratio fell to 24.99% for Nifty firms, down from 25.55% in fiscal 2008. These numbers include special or one-time dividends.

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“Companies wanted to conserve capital," said Chetan Parikh, who heads wealth management firm Jeetay Investments Pvt. Ltd. The smaller dividend payout may also indicate that “companies themselves were not sure about sustainability of profits".

In the second half of the last fiscal, the global financial system choked with toxic debt and banks across the world refused to lend to each other, let alone companies, making money dearer. The collapse of US investment bank Lehman Brothers Holdings Inc. triggered the credit crisis that rocked the global financial system.

Also, with the world slipping into a recession, and denting sales and profits, firms generated less cash. For the same set of Sensex firms, profits grew only by 5.37%, the lowest for at least six years, and for Nifty firms, it gained only 1.39%.

To be sure, dividend payouts in India in particular and emerging markets in general are typically lower than those in developed economies.

“There is so much growth potential here, so dividend payout is lower," said Satish Ramanathan, who manages Rs13,300 crore at SundaramBNP Paribas Asset Management Co. Ltd. He said this ratio can go up to 60% in developed markets.

Firms such as Bharti Airtel Ltd, India’s largest telecom firm by subscribers, paid a dividend for the first time in many years only in 2009, because it was able to reward investors thanks to a share price run-up. Between 2003 and 2008, when India’s stock market was in a firm bull grip, Bharti’s stock rose 29 times while the Sensex rose five times.

“It’s a cyclical thing," said Hitesh Agrawal, head of research at Angel Broking Ltd. Fiscal year 2009 “profits were undoubtedly under pressure. Companies also had a lot of debt and capital expenditure plans".

At the same time, the dividend payout ratio for the broader market, or the BSE-500 index firms that make up 93% of India’s market capitalization, grew to 23.75% against 22.44% a year ago.

But as Agrawal explains, “Not all the mid-cap companies had big capital expenditure plans." Besides, these numbers are not adjusted for special or one-time dividends for firms such as EID Parry Ltd, which distributed 38 times more money in fiscal 2009 compared with a year ago. Typically, larger, mature firms have a higher dividend payout ratio. Among India’s top firms, Hindustan Unilever Ltd, the country’s largest consumer goods company, paid some 65% of its profit (of the last 15 months instead of 12 due to a change in the accounting year) as dividend. Rival ITC Ltd distributed some 42% of its fiscal 2009 profits to shareholders.

Consumer goods firms collectively paid at least one-fourth of their profits as dividends. The worst performers were telecom (6%) and realty (10%) firms.

Again, state-owned firms paid 25% of their net income as dividends against 20% for privately-owned firms, partly because they didn’t have much say in the matter. While economic growth has slowed since last year, India’s fiscal deficit rose to 6% in fiscal 2009, from 2.7% in 2008, and is estimated to be 6.8% in the current fiscal, leaving the government scrambling to find new ways to mop up money. It is borrowing Rs4.51 trillion in 2010 to bridge the deficit.

“For the government, this is the best way to raise resources in a legitimate manner," said Mohan K.R. Swamy, head of equity research at the Royal Bank of Scotland Plc’s Indian equity division. “Look at oil companies. Their dividends are typically high despite running huge debts."

Indeed, the firm that distributed the largest amount of cash in 2009 was state-owned Oil and Natural Gas Corp. Ltd, which gave away Rs6,844 crore, or 42% of its net profit. It was followed by NTPC Ltd, a public sector power producer, that distributed Rs2,968 crore, or just above one-third of its profits to shareholders.

Graphics by Sandeep Bhatnagar / Mint