If information technology (IT) major Infosys been more generous in distributing its surplus cash over the years to its shareholders, would its promoters have had less incentive to sell their holdings to raise cash to fund their post-retirement pursuit?
Two days earlier, four of the founders sold around 18 million shares collectively, leading to a sharp fall in its share price. The founders together raised around Rs 6,500 crore from their sales.
Infosys had cash & equivalent worth Rs 28,144 crore at the end of March, 62.6 per cent of the company’s assets at the end of that financial year, the highest among the top five IT majors. Had Infosys distributed the cash pile through special dividends, the promoters would have had more cash to play with. In the five years ending March, Infosys distributed nearly a third of its net profit as equity dividend. The corresponding ratio for Tata Consultancy Services was 40 per cent and would rise further if its payout in the first quarter of the current financial year was taken into account. The company has distributed nearly all of its profits in the first half as a mix of regular and special dividend.
Elsewhere in India Inc, the link between profits and dividend payout has weakened in recent years. In the past five years, the dividend payout by BSE 200 companies, excluding bank & financial ones, grew at a compounded annual rate (CAGR) of 20.5 per cent, much faster than the 12.1 per cent compounded growth in net profit.
This disconnect between profits and dividends could have prompted the Securities and Exchange Board of India to propose a dividend policy for listed companies. Having one should discourage both cash hoarders and those which borrow to maintain a payout ratio.
Companies in general stepped-up their payout ratio (proportion of current year net profit distributed as equity dividend) in response to a decline in growth and profitability. In FY14, companies paid out about a third of their net profit (34.2 per cent) as dividends against 23.8 per cent in FY09 and 22.7 per cent in FY11. During the same period, return on equity for the sample declined to 13.8 per cent in FY14 from 15.7 per cent in FY09 and a high of 17.8 per cent in FY11 (see chart).
Companies in cash-rich sectors such as consumer goods, IT services and pharmaceuticals have been accumulating cash. Those struggling with slow growth and poor profitability such as construction & infrastructure, capital goods and power companies have stepped up pay out to maintain some parity with past dividends.
In all, 158 non-bank & financials companies cumulatively distributed Rs 101,767 crore as equity dividend in 2013-14, up by 24 per cent, much faster than the 9.4 per cent year-on-year growth in net profit. The mis-match was highlighted by India Ratings, local arm of Fitch Ratings. It suggested 57 companies borrowed as much as $3.5 billion (Rs 21,000 crore) in 2012-13 to pay dividends. The report did not name the companies. As Infosys suggests, the reverse is also true. Some of India’s most cash-rich and profitable companies are accumulating cash at a faster clip. For 18 out of 158 non-financial BSE 200 companies, cash & equivalents on their books accounted for more than half of their assets. Seven companies reported a cash to asset ratio of 75 per cent or higher in 2013-14.
“The difference in companies’ dividend payout strategy is natural, as they operate in different environments,” says Amit Tandon, co-founder of proxy advisory firm Institutional Investor Advisory Services. “This is why we believe that companies should be upfront about their strategy, as shareholders need to know this.”
For the entire sample, cash represented 14.5 per cent of a company’s assets on average at the end of FY14.
At the end of March this year, the companies in our sample were sitting on cash & equivalents worth Rs 6.6 lakh crore or $107 billion. The cash pile was up 17 per cent in FY14 over the previous year and has expanded at a CAGR of 13.4 per cent, beating net profit growth of 12.1 per cent during the period.
Two days earlier, four of the founders sold around 18 million shares collectively, leading to a sharp fall in its share price. The founders together raised around Rs 6,500 crore from their sales.
Infosys had cash & equivalent worth Rs 28,144 crore at the end of March, 62.6 per cent of the company’s assets at the end of that financial year, the highest among the top five IT majors. Had Infosys distributed the cash pile through special dividends, the promoters would have had more cash to play with. In the five years ending March, Infosys distributed nearly a third of its net profit as equity dividend. The corresponding ratio for Tata Consultancy Services was 40 per cent and would rise further if its payout in the first quarter of the current financial year was taken into account. The company has distributed nearly all of its profits in the first half as a mix of regular and special dividend.
Elsewhere in India Inc, the link between profits and dividend payout has weakened in recent years. In the past five years, the dividend payout by BSE 200 companies, excluding bank & financial ones, grew at a compounded annual rate (CAGR) of 20.5 per cent, much faster than the 12.1 per cent compounded growth in net profit.
This disconnect between profits and dividends could have prompted the Securities and Exchange Board of India to propose a dividend policy for listed companies. Having one should discourage both cash hoarders and those which borrow to maintain a payout ratio.
“The difference in companies’ dividend payout strategy is natural, as they operate in different environments,” says Amit Tandon, co-founder of proxy advisory firm Institutional Investor Advisory Services. “This is why we believe that companies should be upfront about their strategy, as shareholders need to know this.”
For the entire sample, cash represented 14.5 per cent of a company’s assets on average at the end of FY14.
At the end of March this year, the companies in our sample were sitting on cash & equivalents worth Rs 6.6 lakh crore or $107 billion. The cash pile was up 17 per cent in FY14 over the previous year and has expanded at a CAGR of 13.4 per cent, beating net profit growth of 12.1 per cent during the period.