Rewarding times for investors?

With many companies sitting on surplus cash, there are hopes of shareholders being rewarded with higher dividends

Hindustan Unilever (HUL)'s plan to reward shareholders by using its surplus balances in general reserves is being looked at with optimism and could be a trendsetter.

In a surprise move, the company announced plans to transfer the entire balance in its general reserves (shareholders' funds) of Rs 2,187 crore to its profit and loss balance, after taking necessary approvals. This will then be given back to shareholders, though HUL has not indicated the instrument, which could be through special dividend, share buyback, bonus debentures. While HUL was a trendsetter when it issued bonus debentures 14 years back that saw companies as NTPC follow suit, the latest move is again a first in India after the new Companies Act came into force.

But, as any coin, there are two sides (implications) to this. One is that, as the money moves out of the company's books (or to the liability side if bonus debentures are issued), it leads to a surge in return ratios. This is assuming that surplus cash typically earns low returns (in fixed deposits or bonds) versus the higher returns of the core business. For instance, shareholders' funds of HUL stood at Rs 5,754.39 crore at the end of September 2015. Once the transfer is done, this balance will theoretically come down to Rs 3,567.39 crore, thereby boosting its return on shareholder funds/equity (RoE), a ratio that markets consider seriously while valuing a company. Such moves improve utilisation of funds at the company level, while rewarding shareholders.

The other side is that adoption of such strategies could be because of the general low growth environment companies foresee, some experts feel. Ravi Shenoy, vice-president, Midcaps, at Motilal Oswal Securities, says the strategy can only be looked by companies who are not finding enough avenues for investing or are looking at outsourcing, and hence do not see the need of buying land banks, machinery, etc. Hence, Shenoy thinks it would be limited to specific companies (that have surplus cash).

  A K Prabhakar, Head of Research at IDBI Capital, also says multinational companies generally want to benefit their parent company too, and, hence, opt for high dividend and special dividends and are also not much interested in building reserves. Also, consumer companies are facing intense competition and this may be a better strategy of rewarding investors. In HUL's case, though, the company does not need huge funds to grow given that its gross block has been rising by Rs 400-600 crore annually in the past three-four years, whereas its average consolidated net profit in the last four years is Rs 3,732 crore (profit has grown at a compound annual growth rate, or CAGR, of 13 per cent in last three years). So, instead of accumulating low-yielding cash, it makes sense to reward shareholders.

Nevertheless, more and more companies are realising the need to effectively utilise cash and have been increasing dividends in recent years. A study by Investor Advisory Services (IiAS) shows that across segments (private, promoter-owned, public sector undertaking, multi-national companies) the aggregate dividends have grown at a much faster rate vis-a-vis net profit between financial years 2010 and 2015.

In fact, it says cash-rich companies have enough bandwidth to increase dividends going ahead. The IiAS study based on FY15 financials shows that at least 73 of the S&P BSE 500 companies can double the amount of dividends. Incremental dividend pay-out from the 73 companies could aggregate Rs 21,300 crore, which is equivalent to the amount these companies actually paid out in FY15. Noteworthy names are ISGEC Heavy Engineering, Bosch and Eicher Motors that can pay dividends of over Rs 100 per share without any liquidity stress. Others such as Bharat Electronics, Force Motors, HCL Technologies, Maruti and Shree Cement can pay dividend between Rs 50-100 per share.

According to data compiled by BS Research there are about 136 companies amongst BSE 500 having more than Rs 100 crore in cash surplus, 47 having more than Rs 1,000 crore. Amongst the top nine companies having more than Rs 10,000 crore cash surplus are Coal India and NMDC, which already have a good dividend history.

Indeed a sharp contrast in the backdrop of debt-heavy companies that are struggling to stay afloat.