Reliance Industries lags peers in rewarding investors with cash pay-outs

Cash pay-outs grew at 6.6% CAGR vs 13.2% for other firms over 10 yrs

Reliance Industries’ (RIL’s) share price has outperformed the broader market over the previous decade despite its recent underperformance and the decline in its financial ratio. The company has, however, lagged behind many of its peers in rewarding shareholders with generous cash pay-outs by way of equity dividend or share buybacks.

RIL’s share price has been flat in the past 12 months, but it has risen 364 per cent since the beginning of 2011, against a 186 per cent rally in the Sensex.

RIL’s shares ended Monday’s trade at Rs 2,111 apiece, compared with Rs 455 a share at the end of January 2011. Over the same period, the Sensex has risen from around 18,300 to 52,483 on Monday. As a result, RIL has delivered annualised capital returns of 16.5 per cent in the last 10 years, against 11 per cent annualised returns delivered by the benchmark index during the period.

The last 12 months, however, have been a little tough for Reliance shareholders. India’s biggest company’s share price has increased just two per cent since the end of July 2020, against a nearly 40 per cent rise in the benchmark index. This makes RIL one of the worst performing index stocks in recent months —only Bharti Airtel has fared worse, with a 5.2 per cent decline in its share price over the period.

Dividend pay-out

RIL was the 15th largest dividend payer (including share buyback) in absolute terms in FY21, despite being the most profitable listed company in India. The company paid a total dividend of Rs 4,512 crore to its shareholders, against its net profit of Rs 49,200 crore last fiscal. This translated to a dividend pay-out ratio of around 9 per cent, less than a quarter of Sensex companies’ ratio of around 40 per cent in FY21.

Many companies with much smaller profits and market capitalisation such as Tata Consultancy Services, Infosys, ITC, Hindustan Unilever, Bharat Petroleum, Wipro, NTPC, Hindustan Zinc, Larsen & Toubro, and Indus Towers paid larger amounts to their shareholders by way of dividend or share buybacks in FY21.

In the last decade, RIL has been tight fisted about paying dividend to shareholders with the exception of two share buybacks in FY13 and FY18, when it cumulatively bought around Rs 7,000 crore worth of shares from the open market.

The dividend pay-out by RIL has grown at a compound annual growth rate (CAGR) of 6.6 per cent since FY11, against 13.2 per cent CAGR in the combined dividend and share buyback by other listed companies in the period.

Many analysts are, however, more than happy with lower dividends as long as the company invests the surplus cash in the fast-growing new businesses such as telecom and e-commerce. 

“The huge cash and capital reserves at RIL’s disposal gives it the ability to become a dominant player in whichever industry it enters and generate superior earnings growth over the long-term,” says Dhananjay Sinha, managing director and chief strategist at JM Financial Institutional Equity.

The company’s promoter Mukesh Ambani has now set sights on big investments in the solar energy value chain.

In the past, however, incremental earnings growth from diversification in new businesses have been less than expected, leading to a steady decline in RIL return on capital employed (RoCE) and return on equity. The company’s RoCE on consolidated basis declined to 7.8 per cent in FY21 — its lowest level in at least three decades. The previous low was 9.5 per cent in FY15. Similarly, the company’s RoNW declined to a low of 8.4 per cent last fiscal, according to data from Capitaline database.