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Institutional EYE

Commentary on Corporate Governance Issues

Dividends: 88 companies can pay over Rs.250 bn more in dividends

Companies clearly continue to hold cash stockpiles and must consider paying higher dividends. IiAS’ study, based on FY16 financials identifies 88 companies that can pay, conservatively, Rs.276 bn in dividends. This is higher than the amount of Rs.213 bn IiAS identified in its 2016 study (based on FY15 financials). We believe SEBI’s requirement of an articulated dividend policy will force companies to think more deeply about dividend payouts.

Evidence shows that Indian companies have realized the importance of dividends to shareholders: 79% of the S&P BSE 500 companies paid out dividends in FY16. While median dividend payouts have dropped marginally to 23.3% in FY16 from 24.5% in FY15, the aggregate dividend as a proportion of cash and equivalents has consistently increased in each of the past five years. Further, dividend growth has outpaced growth in net profits over the past five years. Dividends, in absolute amounts, have grown at a CAGR of 12.7%, while profits have grown at a more modest 2.8% CAGR between FY11 and FY16.

Notwithstanding, companies continue to maintain large cash balances. IiAS’ study based on FY16 financials shows that there are at least 88 companies that can potentially return cash to its shareholders in the form of dividends or buybacks.

The key conclusions of the study are:

  • These 88 companies paid Rs.278 bn as aggregate dividend in FY16 and can additionally pay Rs.276 bn.

  • Seven companies – MRF Ltd, Eicher Motors Ltd, 3M India Ltd, Bosch Ltd, Maruti Suzuki India Ltd, ISGEC Heavy Engineering Ltd and Honeywell Automation India Ltd - can pay dividends of over Rs.100 per share.

  • Ten companies can pay dividend between Rs.50 and Rs.100 per share.

  • Of the 88 companies identified, the top seven companies aggregate 50% of the total incremental dividend of Rs.276 bn.

  • Of the companies identified, 42 companies appeared in our 2016 study. While 20 of these have increased dividend payouts since FY15, they can still pay out more.

  • Despite being profitable, Whirlpool of India Limited (Whirlpool) has not paid dividend in the past four years. IiAS estimates that Whirlpool has Rs.2.4 bn in excess distributable cash.

Our methodology gives an extremely conservative estimate of the potential dividend payout. The aggregate cash and cash equivalents of these identified 88 companies was Rs. 1.9 trillion as on 31 March 2016.

Regulatory and tax-related changes have also pushed companies to pay more dividends. In the annual budget announced on 29 February 2016, an additional 10% tax was levied on individual investors and partnerships with aggregate dividend income over Rs.1 mn per annum, effective 1 April 2016. Before the new tax structure could kick in, several companies rushed to pay interim/special dividends. Our study of the S&P BSE 500 companies indicates that 107 companies announced and paid interim/special dividends aggregating to Rs.148.1 bn in March 2016. In contrast, a mere six companies paid Rs.11.7 bn in March 2015. In the 2017 budget, the additional tax was extended to private trusts.

Public Sector Enterprises (PSEs) are now being required to pay higher dividends. In May 2016, the Department of Investment and Public Asset Management released guidelines on Capital Restructuring of Central Public Sector Enterprises which requires every PSE to pay the higher of 30% of profit after tax or 5% of networth, as dividend to shareholders. PSEs are required to justify their dividend payout if it is lower than the prescribed limit. Earlier, profit-making PSEs were required to pay a minimum dividend of 20% of equity or 20% of post-tax profits, whichever was higher. A dividend of at least 30% of post-tax profits was mandated only for companies in the Oil, Petroleum, Chemical and other infrastructure sectors.

Following our continued push on dividend payouts, in July 2016, SEBI made it mandatory for the top 500 listed companies to formulate and disclose a ‘dividend distribution policy’. The policy requires companies to disclose, among other points, the circumstances under which the shareholders may or may not expect a dividend and a policy outlining how the retained earnings will be utilized. While IiAS had advocated a ‘retention policy’ in its previous dividend report, SEBI’s dividend policy defines a similar framework. The regulation stops short of mandating a target payout ratio, however, we believe it strikes the right balance between ensuring predictability of returns for shareholders and allowing flexibility of investment plans for companies.

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