India Inc holds back on dividends

Dividend by early birds up 1% in FY17, cash-rich firms prefer stock buyback to reward shareholders

The 2016-17 dividend season has started on a poor note for shareholders, with payout to them growing at the slowest pace in three years.

The combined dividend payout by 250 early-bird companies was up only one per cent for 2016-17, down from 2.8 per cent growth in FY16 and a five-year compound annual growth rate (CAGR) of 19.8 per cent.

Among the companies on this list are some of corporate India’s biggest dividend payers. They're either paying less dividend for FY17 or have decided to keep it at the same levels as a year before (see chart).

For example, information technology (IT) major Wipro’s dividend payout is down two-thirds to Rs 486 crore for FY17, from Rs 1,482 crore a year before. ICICI Bank is paying 50 per cent less dividend for FY17 as it battles rising non-performing loans and stagnant profits. Other big dividend payers such as Indiabulls Housing Finance and Marico also cut payout for FY17, while cement major ACC did not announce any dividend at all for calendar year 2016.

The analysis is based on the 250 companies which have announced or paid interim and final dividend for 2016-17. The figures exclude dividend distribution tax paid on the amount by the company.

Among top dividend payers (in absolute terms), Hindustan Zinc, Axis Bank, and Dabur India are not raising their dividends.

At Tata Consultancy Services (TCS), Reliance Industries and Infosys, it’s up in low single digits.

Poorer dividend payout is, however, not due to profitability concerns. The combined net profit of the sample was up 10.8 per cent for FY17, marginally down from the 11.1 per cent year-on-year growth reported for FY16. On average, companies are distributing 28.5 per cent of their net profit as equity dividend for FY17, down from 31.3 per cent the previous year and 34 per cent for FY15. 

As a result, retained profits grew 15 per cent for FY17 in the sample, the fastest pace in five years. Top companies in cash-rich sectors such as IT services cut back as they plan to return a large part of their surplus cash to shareholders in the form of share buyback, which doesn’t attract dividend distribution tax and additional dividend tax, which is a 10 per cent tax on dividend income over Rs 10 lakh a year for shareholders. 

In FY17, listed companies cumulatively announced buybacks worth around Rs 60,000 crore equivalent, to around 40 per cent of all dividend paid by listed companies in FY16. 

"Equity dividend attracts dividend distribution tax first in the hands of companies and then the additional dividend tax in the hands of shareholders if their annual dividend income exceeds the threshold. This is pinching promoters and high net worth individuals, who are pushing their companies to use the buyback rather than dividend route to reward shareholders,” says G Chokkalingam, chief executive at Equinomics Research & Advisory.

Early this year, TCS announced a share buyback worth Rs 16,000 crore. It was followed by Wipro and HCL Technologies, which planned to return Rs 2,500 crore and Rs 3,500 crore, respectively, to shareholders via this route.

* Equity dividend as percentage of reported net profit for the respective fiscal year; Sample of 250 companies that have declared final dividend for CY16 or FY17. Source: Capitaline/Compiled by BS Research Bureau

In aggregate amount, central public sector companies (Coal India, NMDC, Bharat Electronics, Oil India, MOIL, NLC India) have the biggest share buyback programme, which largely benefits their promoter shareholder – the Government of India. Analysts the buyback goes against the interest of retail (meaning, individual and non-wealthy) investors (annual dividend income of less than Rs 10 lakh). “Many retail investors buy and hold shares of cash-rich companies to earn a steady stream of dividends. Share buyback hurts them, as they would now have to first surrender their shares and then buy these again. Many will not like this constant churn,” adds Chokkalingam.

Among early birds, Hindustan Zinc is the largest dividend payer, with total payout of Rs 11,620 crore to its shareholders for  2016-17. Followed by TCS (Rs  9,261 crore) Infosys (Rs 5,892 crore) and Reliance Industries (3,255 crore). Maruti Suzuki was among the few companies to buck the trend. It more than doubled the FY17 payout to Rs 2,265 crore, from Rs 1,057 crore a year before. Other companies to announce double-digit hikes included HDFC Bank, Nestle India, Castrol, Siemens, Ambuja Cement, YES Bank and UPL. In all, the companies in our sample cumulatively plan to pay Rs 51,018 crore worth of dividend for FY17, against Rs 50,535 crore a year before.

In comparison, all listed companies together paid around Rs 1.56 lakh crore worth of equity dividend in FY16. Some of the big dividend payers missing in the early-bird sample include Coal India (FY16 topper), Oil and Natural Gas Corporation, ITC, NMDC, Hindustan Unilever and Indian Oil.