Losing Sheen

A new trend is emerging. Hefty dividend payments by companies seem to be becoming unpopular. As per the data collated by Ace Equity for 382 companies whose details were available, 2016/17 saw the steepest decline - of 16 per cent compared to 2015/16 - in dividend payouts over the past decade. Around 45 per cent of these companies saw a decline in dividend payouts over the period - this despite over 20 per cent growth in their net profit and 6.4 per cent growth in the top line.

Back in 2016, it was a different story. India Inc. (a bunch of BSE 500 companies) saw 7.4 per cent growth in dividend payments despite witnessing a 10.2 per cent reduction in profits. Dividend growth has outpaced growth in net profits over the past five years. "Dividends, in absolute amounts, have grown at a compounded annual growth rate (CAGR) of 12.7 per cent, while profits have grown at a more modest 2.8 per cent CAGR between FY11 and FY16," states a research note from Institutional Investor Advisory Services India Limited (IiAS), a proxy advisory firm. So what's preventing firms this time?

Companies are undoubtedly cautious about new investments; the continuous fall in new investment proposals is proof. As per data from the Centre for Monitoring Indian Economy, in the past two years, year-on-year growth in the cost of new investment projects declined by 19.9 per cent in 2015/16. In 2016/17, it grew just 0.4 per cent.

Interestingly, the companies in the sample, excluding banking and financial institutions (BFSI), registered the sharpest decline of around 30 per cent in their cash and bank balances, since 2008. Clearly, corporates are deploying their money elsewhere.

When it comes to rewarding shareholders, buyback of shares is an effective practice. According to Prime Database, buybacks gathered steam in 2013/14 with 32 companies coming out with buybacks amounting to Rs 11,380. These declined in the following two years and rose significantly to Rs 34,468 crore (by 49 companies) in FY17. In the current fiscal, eight companies have already proposed buybacks to the tune of Rs 22,721 crore (till June). Incidentally, 12 companies of in the sample (ex-BFSI) have come out with buyback offers amounting to Rs 6,753 crore. "This is primarily on account of tax advantage of buybacks against dividends," says Amit Tandon, Founder & MD, IiAS.

Share buybacks are a more tax efficient way of distributing earnings of the company as companies are required to pay a dividend distribution tax of 15 per cent.

Of the 12 companies, four belonged to the IT sector - contributing close to 40 per cent of the total buybacks of the sample. For instance, Wipro's payment towards dividends (including dividend distribution tax) and buyback of shares for 2016/17 amounted to around Rs 3,373.4 crore. The company's dividends declined to Rs 729 crore from Rs 2,963 crore in 2015/16.

"IT companies, until recently, chose to reward investors through the buyback route rather than dividends. Sluggishness, Visa issues and lack of demand led big IT companies to take this decision to cheer investors. This is about one sector, but it varies from sector to sector," says Abnish Kumar Sudhanshu, Director & Research Head, Amrapali Aadya Trading & Investment.

On close examination, the cash flow statements reveal more interesting details. For example, Everest Industries' board recommended a dividend of 10 per cent in 2016/17 - the total outgo of dividend (including tax on dividend) would be Rs 185.6 lakh against Rs 931.5 lakh for the previous financial year. Further, the company's long-term borrowings fell to Rs 91.7 crore from Rs 118.2 in 2015/16. Its cash outflow for repayment of long-term borrowings increased to Rs 47.41 crore in 2016/17 from Rs 20.60 crore in 2015/16.

On an aggregate level, the total cash outflows (of the sample) towards repayment of long-term borrowings were significantly higher at Rs 56,245 crore, compared to Rs 41,154 crore in 2015/16. This amount, however, stood at Rs 43,033 crore in 2014/15. Simultaneously, total cash outflows for interest paid saw a jump of 19.8 per cent in 2016/17 compared to a 5.4 per cent growth in 2015/16. Roughly half the companies have seen an improvement in their interest coverage ratio in 2017 compared to the previous year. There has also been an increase in instances of companies servicing or retiring their debts.

"If we talk about the ideal scenario where stock appreciation is already happening on the back of a surge in the overall market, repaying loans is a better option. It's a better sign of improvement where the cash generated is being used smartly for loan prepayment," says Sudhanshu.

The regular and top dividend-paying corporates, meanwhile, bucked the trend and continued to pay dividends. The top ten companies that contributed over 60 per cent of the total dividends paid in 2016/17 saw an increase in payouts in 2017. Their absolute growth was, however, outweighed by the significant fall in payouts by the rest of companies in the sample, translating into an overall decline in dividend payments.

According to a recent report by India Ratings, companies whose free cash flow is positive and greater than the dividend paid are adopting a higher dividend payout strategy. Their absolute dividends grew at a CAGR of 21 per cent during FY10-16 compard to the 6 per cent CAGR in free cash flow. It expects the pace of dividend payout to pick up in FY18 for such companies. This study was restricted to the top 65 corporates which accounted for around 85-88 per cent of the total dividends paid each year since FY10. ~

@niti_kiran