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Institutional EYE

Commentary on Corporate Governance Issues

75 companies can distribute almost Rs.1.1 trillion more

Based on FY18 financial statements of the BSE 500 constituents, IiAS’ study this year identifies 75 that can return cash of up to Rs. 1.1 trillion to shareholders. These companies have large cash holdings and can distribute about half of their on-balance-sheet cash (including cash equivalents) to shareholders, as dividends or buybacks. The cash available for distribution approximates one year’s profit after tax for these companies.

IiAS study of the BSE 500 companies FY18 financials, highlights 75 companies that can pay Rs. 1.1 trillion immediately (see Annexure A). This Rs. 1.1 trillion equals the aggregate post-tax profits reported by the 75 companies and is in addition to the Rs. 621 bn paid out as FY18 dividend by these companies last year.

Key conclusions of the study are:

  • The excess cash, if distributed by these 75 companies, translates to a median dividend yield to 5.2%, significantly higher than the current 1.4%. There are five companies where the excess cash translates into an additional dividend yield of more than 15%: Indian Energy Exchange Limited, MOIL Limited, Multi Commodity Exchange of India Limited, Bharat Heavy Electricals Limited and Godfrey Philips India Limited.

  • The 75 companies can return a median of 49% of their total cash and cash equivalents to their shareholders. There are nine companies that can distribute over 75% of their 31 March 2018 on-balance-sheet cash: Abbott India Limited, Symphony Limited, Dr. Lal Pathlabs Limited, Bajaj Consumer Care Limited, Godfrey Phillips India Limited, Honeywell Automation India Limited, Bata India Limited, Pfizer Limited, Hindustan Zinc Limited.

  • Of the 75 companies, just five companies aggregate over 50% of the total incremental distributable cash of Rs.1.1 trillion, these are Hindustan Zinc Limited, ITC Limited, Wipro Limited, TCS Limited, Bajaj Auto Limited.

  • Public Sector Undertakings continue to pay consistent dividends on account of regulations requiring them to pay at least 30% of their profits as dividends. The median payout ratio for them at 28% is the highest, ahead of all other ownership groups: promoter-owned (18%), institutionally-owned (25%) and multi-national corporations (21%).

Impact of IiAS’ 2018 study (based on FY17 financials)

IiAS publishes an analysis annually. In its 2018 study (based on FY17 financials), IiAS had identified 92 companies that could pay incremental dividends of Rs.340 bn. Following this study:

  • Including buybacks, these 92 companies distributed Rs. 812 bn, representing an increase of 74% over the Rs. 466 bn distributed in FY17. In contrast, the aggregate net profit of these companies increased by 10% to Rs. 1,073 bn in FY18 from Rs.975 bn in FY17.

  • 32 of these 92 companies not only increased dividends (in absolute amount) but also increased their dividend payout ratio.

  • 20 companies increased dividends in absolute amounts but not commensurate to the growth in their profits. As a result, dividend payout ratios declined between FY17 and FY18 for these companies.

  • Of these 92 companies, 15 companies returned cash of Rs. 372 bn via buybacks in FY18, in stark contrast with the Rs. 58 bn distributed via buybacks in FY17. Tata Consultancy Services Limited and Infosys Limited alone contributed 78% of the total quantum of buybacks in FY18.

For the full report and additional analysis, click here

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