Top multi-national companies are likely to pay higher dividends from FY21 onwards, due to abolition of dividend distribution tax, according to a study by an proxy advisory firm IiAS.

The abolition of DDT augurs well for MNCs, as the foreign parent entity can claim credit for the corporate taxes paid in India on dividends in their home jurisdictions, Institutional Investor Advisory Services, (IiAS), said on Thursday. On the other hand, family-owned companies may accelerate dividends before the next fiscal, to escape paying dividend taxes in personal capacities, it further said.

The MNCs are: GlaxoSmithKline Consumer Healthcare (₹486.80 a share), Oracle Financial Services Software (₹196.70), Pfizer (₹329.10), Hindustan Unilever (₹5.10), ACC (₹55), Abbott India (₹466.10), Ambuja Cements (₹4.9), Honeywell Automation India (₹985.30) and Bata India (₹50.70).

In its fifth annual study on companies that can pay more, IiAS estimates, based on FY19 financials, that 60 of the S&P BSE 500 companies can, conservatively, return ₹88,600 crore of surplus cash to their shareholders; which is just about one-third of their aggregate on-balance-sheet cash on March 31, 2019, it further said.

Of the 60, five companies (price in per share) — Infosys (₹36.6), ITC (₹11.2), Wipro (₹14.7), TCS (₹13) and SBI Life Insurance Company (₹37.3) — aggregate over 50 per cent of total incremental distributable cash of ₹88,600 crore, IiAS said.

To increase dividend yield

The excess cash, if distributed by these 60 companies, translates to a median dividend yield of 3.8 per cent, significantly higher than the current 1.1 per cent. There are six companies — SBI Life Insurance, MOIL, Engineers India, Persistent Systems, RITES and CARE Ratings — where the excess cash translates into an additional dividend yield of more than 15 per cent, it further said.

The consolidated PAT of these 60 firms increased 13.4 per cent over FY18, while the profit after tax for the BSE 500 companies in aggregate terms increased by 0.3 per cent. While the 60 have outperformed the index (based on profitability), almost half of these companies reported a decline in FY19 return on equity (ROE), compared to the previous year: this should compel their boards to review capital allocation and return some of the excess cash to shareholders.

Advantage, buyback?

The Finance Bill 2020 proposes to remove the dividend distribution tax (DDT) and dividends henceforth will be taxable in the hands of shareholders. While the proposed amendment may work out beneficial for certain retail shareholder in the lower tax brackets, the effective tax rate can be as high as 42.7 per cent for individuals with income of over ₹5 crore.

On the other hand, companies will bear buyback tax of 20 per cent (effective rate of 23.3 per cent), which was introduced in the Finance Act 2019, if they decide to return surplus cash through the buyback route, the proxy advisory firm said. 

Return excess cash

IiAS believes companies’ dividend policy must not be driven by personal taxation requirements of controlling shareholders. Instead, it must be driven by thoughtful capital allocation policies that result in predictability of corporate behaviour, says IiAS.