Do you get more when you give more? Yes, India Inc. believes so. The country's 500 most valuable companies were generous with dividends. Its hardly surprising then that promoters, the largest shareholders in companies, turned out to be the biggest beneficiaries. Equity dividends paid by these companies touched Rs 2.27 lakh crore in FY20, which was a high of at least five years. They grew 14.7 per cent compared to 2.8 per cent increase in FY19 and average growth of 9.2 per cent in previous three years. This was despite a 26.6 per cent fall in their combined net profit as against a rise of 20.2 per cent in FY19. Revenue growth of the sample was anaemic too.
A Paradigm Shift
So, what made these companies distribute as much as 66 per cent of their earnings as dividends, when the average figure for previous five years was only 43 per cent? "Change in dividend taxation rules with effect from April 1, 2020, enticed a lot of promoters to give higher dividends. The total tax burden was lower before April 1, 2020," says Deepak Jasani, Head of Retail Research, HDFC Securities.
The Budget 2020 had scrapped dividend distribution tax (DDT) on companies and shifted the tax burden to shareholders at applicable rates. Till FY20, companies were required to pay 15 per cent DDT on dividend, plus surcharge and cess, in addition to tax on profits. However, from FY21, India adopted the classical system of dividend taxation under which dividends shall be taxed in hands of recipients at applicable tax rates. This means a promoter or shareholder with income in excess of Rs 5 crore will end up paying up to 43 per cent tax (his/her tax slab) on dividend income. The effective tax rate for dividend paying companies was 20.56 per cent (including cess and surcharge) in the older regime.
Promoters took close to 52 per cent (Rs 1,16,981 crore) of the total dividends paid. Of this, Rs 68,845 crore, went to private promoters followed by government with Rs 35,686 crore. "Promoters will be the largest beneficiaries as they hold the biggest stakes. The policy about the amount and type of distribution (dividend versus buyback) is often decided based on how it impacts the promoter group," says Jasani. For instance, Tata Sons, with 72.02 per cent holding in the top dividend payer, Tata Consultancy Services, received Rs 27,115 crore as dividends. Mukesh Ambani, who held 50.07 per cent in Reliance Industries (as on March 31, 2020) through his family and privately-held companies, got Rs 1,929 crore.
Dividend payments by nearly 30 per cent of companies with promoter stake of over 70 per cent trebled between FY19 and FY20. In almost 17 per cent with promoter holding of over 70 per cent, the payouts more than doubled, while 41 per cent saw an increase of 50-100 per cent.
Nearly one-third payouts came from the top six companies, TCS, Infosys, ONGC, Coal India, ITC and HDFC Bank. TCS, which declared a total dividend of Rs 73 per share in FY20, including a special dividend of Rs 40 per share, paid Rs 37,634 crore (including tax on dividend), a three-fold rise from the previous year.
Another regular dividend payer, which has been rewarding shareholders since inception, was ITC with a 12 per cent increase in payments, while HDFC Bank saw a rise of 61.4 per cent. Approximately 37 per cent companies in the sample have been distributing dividends for the past six years with 42 firms increasing the payouts consistently; 46 per cent saw a steady rise for three straight years.
Public sector units (PSUs) were a drag as they paid out less. This included the top guns - ONGC saw an 18.6 per cent drop in dividend payout as its standalone profit fell 50 per cent while Coal India paid nearly 9 per cent less despite 7.7 per cent growth in its earnings.
PSUs altogether paid 4 per cent less in FY20, which translated into a lower share of 26.7 per cent in overall payouts compared to 32 per cent in FY19. Private companies, on the other hand, saw 52 per cent growth as against 13.4 per cent rise a year ago, increasing their contribution from 46.2 per cent to 61.2 per cent. "Private companies can't attract capital unless they deliver appropriate returns. They will have a higher share of profits and thus even in dividend payouts. We expect this trend to continue as share of state in commercial enterprises progressively declines," says Nirav Sheth, CEO, Emkay Institutional Equities.
Among sectors, the ones having a significant share in overall dividends such as information technology (IT), finance and FMCG rewarded investors handsomely - the IT segment recorded 75 per cent growth while finance and FMCG saw a rise of over 18 per cent. "Dividend outgo for IT and FMCG companies increased significantly, primarily driven by TCS, HUL and ITC. Demand for FMCG companies has largely remained stable," says Amar Ambani, Sr. President and Head of Research - Institutional Equities at Yes Securities. Software companies have large cash reserves, so a higher payout, especially as they have abstained from acquisitions in these times, makes sense, he added. The ones conserving capital includes crude oil companies, which paid 19.8 per cent less in FY20. "Oil, while a large sector, is cyclical and capital intensive, thus absolute payouts could vary significantly in sync with oil cycle and capex plans," says Sheth.
A company's dividend policy is largely dependent on how it impacts the promoter group. These payouts could continue, though large companies may prefer buybacks. However, compared to FY20, the dividend payout in terms of absolute amount may be lower in FY21 due to slowdown because of coronavirus that may impact profits, says Jasani.