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Institutional EYE

Commentary on Corporate Governance Issues

73 companies can pay over Rs.200 bn more in dividends

India Inc can pay more dividends: IiAS’ study (based on FY15 financials) shows that at least 73 of the S&P BSE 500 companies can double the amount of dividends. This is despite the fact that companies increased dividend payouts following IiAS’ 2014 study (based on FY13 financials): IiAS had identified at least 77 of the S&P BSE 500 companies that could pay more, of which 64 companies did increase dividends in FY15. Nevertheless, India Inc. is stockpiling cash and must return it to shareholders if it does not have productive use for it. IiAS recommends companies disclose a retention policy – how much money they want to retain and why, rather than a dividend policy to provide investors clarity on the planned use of cash generated.

While regulations in India do not require companies to declare a dividend policy, Indian companies are increasingly realizing the importance of dividends to their shareholders. This is borne out by the fact that dividend payouts have steadily increased over the last few years – for S&P BSE 500 companies, dividend has outpaced growth in net profits over the past five years. Median dividend payout ratios increased to 24% in FY15 from 21% in FY10. Dividends, in absolute amounts, have grown at a CAGR of 14%, while profits have grown at a more modest 7% CAGR between FY10 and FY15.

Notwithstanding, dividend payout ratios have been relatively low, as companies have chosen to maintain large cash balances. IiAS’ study based on FY15 financial statements shows that there are at least 73 companies that can potentially return cash to its shareholders in the form of dividends or buybacks. Key conclusions of the study are:

  • Incremental dividend payout from the 73 companies could aggregate Rs.213 bn, equivalent to the amount these 73 companies actually paid out in FY15 (Rs.213 bn).

  • Three companies - ISGEC Heavy Engineering Ltd, Bosch Ltd and Eicher Motors Ltd - can pay dividends of over Rs.100 per share without any liquidity stress.

  • Five companies – Bharat Electronics Ltd, Force Motors Ltd, HCL Technologies Ltd, Maruti Suzuki India Ltd and Shree Cement Ltd - can pay dividend between Rs.50 and Rs.100 per share

  • Of the 73 companies identified, 39 companies appeared in our 2014 study. While 27 of these have increased dividend payouts since FY13, they can still pay out more.

  • Despite being profitable, Whirlpool of India Limited (Whirlpool) has not paid dividend in the past three years. IiAS estimates that Whirlpool has Rs.2.0 bn in excess distributable cash. Whirlpool’s cash accumulation must be seen in light of the fact that it pays out royalty to its parent Whirlpool Corp, USA and that the parent company does pay dividend to its own shareholders. Whirlpool’s shareholders must raise this differential treatment with the company.

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