BAT's 2020 dividend from ITC increases 67% as Indian firm revises policy

In 2018, the British company turned down ITC's proposal to continue with an equity-based employee stock option.

A change in diversified conglomerate ITC’s dividend policy has fetched a bonanza for its single largest shareholder, British American Tobacco (BAT).

BAT’s annual report for 2020 shows that dividend from ITC was at 386 million pounds compared to 231 million pounds in 2019: an increase of 67 per cent. This is the first time ITC’s revised dividend policy reflected in BAT’s annual report, which follows a financial year ending December 31.

ITC moved to a higher dividend payout as most of its large-scale capital expenditure was in hotels and building the integrated consumer goods manufacturing and logistics facilities.

ITC’s dividend payout in FY20 stood at Rs 12,476.63 crore compared to Rs 7,048.71 crore in FY19. In FY21, the total cash outflow on account of dividends will be Rs 13,230.27 crore, including an interim dividend of Rs 6,152.68 crore.

BAT, which has a 29.42 per cent stake in the Indian conglomerate, said that the ITC dividend income reflects the change in dividend policy from April 1, 2020.

An ITC spokesperson said the company articulated a sharper and transparent capital allocation policy over the last two years.

“The company amended its dividend distribution policy in March 2020 under which effective from the financial year 2019-20, in the medium term, the company expects to payout around 80-85 per cent of annual profit after tax as dividends,” the spokesperson said.

“The increase in the payout ratio (approximately 68 per cent each in FY17, FY18, FY19 to approximately 82 per cent in FY20) together with higher profits in FY20 (PAT was up 21.4 per cent versus FY19) resulted in  higher dividend payouts in FY20 versus FY19.”

BAT’s stake had been coming down, albeit marginally, over the years as ITC rewarded eligible employees with stock options. In 2018, the British tobacco major turned down ITC’s proposal to continue with an equity-based employee stock option scheme that would have further diluted BAT’s share.

BAT’s annual report mentioned that in 2020, the group’s interest in ITC decreased from 29.46 per cent to 29.42 per cent (2019: 29.57 per cent to 29.46 per cent; 2018: 29.71 per cent to 29.57 per cent) as a result of ITC issuing ordinary shares under the ITC Employee Share Option Scheme.

The issue of these shares and change in the group’s share of ITC resulted in a gain of 17 million pounds (2019: 25 million pounds; 2018: 22 million pounds), which is treated as a deemed partial disposal and included in the income statement, the company mentioned in the annual report.

However, as BAT declined to support ITC’s proposal to continue with the scheme, the company moved to change its pay structure. Historically, the equity-linked ESOP was an important tool for ITC to attract and retain talent.