Despite poor show in Q4, India Inc's combined dividend payout rises 6.5%

Equity investors should thank cash-rich biggies such as TCS, ITC, HUL, Nestlé, and Bajaj Auto for this.

The current dividend season has turned out to be unexpectedly generous for equity players despite a poor showing by India Inc in the fourth quarter and financial year ended March 2020.

The combined dividend payout by India’s top listed companies, which are part of the BSE500 Index, for FY20 was up 6.5 per cent, the fastest growth in the past three years.

And, equity investors should thank cash-rich biggies such as Tata Consultancy Services (TCS), ITC, Hindustan Unilever, Nestlé, and Bajaj Auto for this.

However, excluding firms in defensive sectors such as consumer and software services, dividend payout is down 17.6 per cent year-on-year (YoY) to Rs 1.12 trillion in FY20, from Rs 1.36 trillion a year ago.

In contrast, these firms had raised payout by 5.3 per cent in FY19.

In contrast, traditional large dividend payers such as private sector banks, insurers, oil & gas majors, and metal & mining companies either cut dividend payout in FY20 or skipped it altogether.

Banks and insurers skipped dividend as advised by their regulator in view of the potential spike in bad loans due to the Covid-19 pandemic.

This is the first dividend season since shareholders have been mandated to pay tax on their dividend income against the earlier rule of companies paying 20.56 per cent dividend distribution tax (DDT) on their payout.

Experts attribute the higher payout to the change in dividend law and cut in corporate income tax.

“Now that dividend is taxed in the hands of shareholders, many companies pass on the savings on DDT to shareholders in the form of higher dividends per share,” said U R Bhat, director Dalton Capital Advisors.

“The cut in corporate income tax in September largely benefitted cash rich firms and many of them passed on the savings to shareholders in form of higher dividends,” said G Chokkalingam, founder & MD Equinomics Research & Advisory Services.

The analysis is based on the proposed or already paid interim and final dividend for FY20 by BSE500 companies that have declared their results and dividends for FY20 so far.

The sample has 456 companies that have declared their results so far.

Of this, 359 companies paid interim or final dividend in FY20, down from 379 in FY19.

In all, BSE500 companies plan to distribute around Rs 1.91 trillion among their shareholders as equity dividend, up from Rs 1.8 trillion a year ago.

The companies stepped up dividend payout last financial year despite growth headwinds.

The combined net profit of BSE500 companies was down 25.6 per cent YoY in FY20, while their revenues were down 1.4 per cent.

This is the worst showing in at least six years.

As a result, many companies dipped into their savings or decided to retain a smaller portion of profits in order to delight their shareholders.

On an average, BSE500 companies distributed 50.4 per cent of their net profits in FY20 as equity dividend.

The corresponding ratio was 35.3 per cent last financial year.

The dividend payout ratio in FY20 was the highest in at least six years.

Historically, India Inc distributed around a third of its profits as dividend, while the rest is retained to fund new projects.

Top companies in defensive sectors - IT services, FMCG, and pharmaceuticals - led the growth in equity dividend for FY20.

Together, companies in these three industries account for a record 41.3 per cent of all dividends announced or paid for FY20, up from 24.1 per cent share in FY19.

In all, these firms are paying around Rs 79,000 crore to their shareholders, up from Rs 43,250 crore in FY19.

Excluding defensives, dividend payout by BSE500 index companies was down 17.6 per cent YoY in FY20 to Rs 1.12 trillion, from Rs 1.36 trillion a year ago.

In contrast, these companies had raised payout by 5.3 per cent in FY19.

In comparison, dividend payout by banks was down 76 per cent YoY to around Rs 1,500 crore in FY20 - largely interim dividend paid in the first three quarters of FY20 - from Rs 6,250 crore a year ago.

Payout by insurance companies was down 47 per cent YoY.

However, payout by the unregulated non-banking finance space was up by 16 per cent YoY last financial year.

It was led by Bajaj Finance, Muthoot Finance, HDFC AMC, and Bajaj Holdings, among others.

Among individual firms, TCS topped the charts with payout of Rs 27,375 crore, up nearly 4x from the last financial year.

It was followed by ITC, which plans to pay a record Rs 12,476 crore to its shareholders in FY20, up 77 per cent over the previous year.

However, gains for investors could be optical as dividend income is now taxed at around 35 per cent for taxpayers in the highest bracket, which includes promoter shareholders and high networth individuals.

The changes in dividend tax law also saw many companies advancing dividend payout for FY20 to February and March to avoid higher taxes that came into effect from April 1.

All this could translate into significantly lower dividend income for shareholders in FY21.