Dividend payouts of Nifty firms climb to 4-year high
- A change in the taxation policy on dividends also played a major role in companies distributing higher dividends
India’s largest publicly traded companies returned the most surplus earnings to shareholders in four years in the just-ended fiscal, indicating a paucity of investment options amid disruptions because of the pandemic.
Companies were encouraged by an increase in profits during the year ended March 31 even as they suffered in the first two quarters because of the strict nationwide lockdown that halted economic activity, experts said.
A tight leash on costs helped companies, especially the large ones, to report better earnings.
A change in the taxation policy on dividends also played a major role in companies distributing higher dividends, the experts said.
A Mint analysis showed that the dividend payout ratio, or dividends as a share of earnings, of 46 companies in the Nifty 50 benchmark index rose to 38.1% in FY21 from 37.3% in FY20.
The ratio was at 30.7%, 33.7% and 49.4% in FY19, FY18 and FY17, respectively, showed data compiled by corporate database Capitaline.
The high ratio does not necessarily reflect more dividends for shareholders, said Amit Shah, head of India equity research, BNP Paribas.
It could also mean some firms just want to maintain the absolute dividend level, he said.
“This was true in FY21, especially when new investment plans were put on hold due to the uncertainty with regard to the spread of Covid. Unclear demand outlook and availability of spare capacity meant incremental capex and investments were put on hold during FY21, which was also one of the reasons for a higher dividend. But the change in treatment of dividend from a tax perspective also played a big role,” Shah said.
He said a key reason for the higher dividends is the shift in how dividends are taxed, moving from corporates to shareholders in FY21.
India Inc. saw two weak quarters from a Covid-19 perspective last fiscal, and even within that scope, some businesses prospered, especially consumer staples and pharmaceuticals.
“The second half of FY21 saw faster-than-expected recovery as pent-up demand was very high and companies had already incorporated material cost-cutting initiatives as an immediate response to covid. This drove strong profitability, enabling dividend payouts. Dividends also rose as PSU firms paid higher dividends so as to ensure high returns to the government,” Shah said.
Pankaj Pandey, head of research at ICICI Direct, agreed that the dividend payout for FY21 should also be looked at in the context of the abolition of dividend distribution tax, leading to dividends now being taxed at the hands of investors.
Data showed the aggregate net profit of the Nifty firms under review grew 33.3%, and dividend payouts rose 36% in FY21. However, in FY20, aggregate net profit slipped 3.54% while dividend payout rose 17.25%.
Harsha Upadhyaya, chief investment officer, equity, Kotak Mahindra Asset Management Co. Ltd, attributed increased profits as a key reason for the higher dividend payout ratio despite the covid-induced disruptions. “Also, since there were a lot of uncertainties last March due to the lockdown, companies, to some extent, delayed or paid a lower dividend to stay prepared to face the crisis. That may be reflecting in the marginal year-on-year increase in FY21 dividend,” he said.
Upadhyaya said bigger companies were able to manage costs and, therefore, had better profitability in FY21, but it was tough for smaller companies.
The dividend payout ratio of 398 companies in BSE500, however, fell to 36.2% in FY21 from 38.4% in the previous year, highlighting that smaller firms bore the biggest brunt of the Covid crisis.
Investors also see bigger dividends as indicative of a firm’s strength and the management’s positive expectations for future earnings.
Dividends are essentially return of capital to investors. “More firms are becoming capital conscious (return on equity and return on capital employed focus) and, hence, with surplus cash on the balance sheet, they find it more appropriate to distribute greater dividends to shareholders,” Pandey of ICICI Direct said.
Among Nifty firms, Bharat Petroleum Corp. Ltd, Tata Consultancy Services Ltd, ITC Ltd, Infosys Ltd and Indian Oil Corp. Ltd paid the highest dividends last fiscal.