Dividends: India Inc can be more benevolent

KS Badri Narayanan Chennai | Updated on February 26, 2021

Hindalco, Share India Securities spell out their payout plans

Recently, when MRF announced an interim dividend of ₹3 a share (when the share price was quoting at ₹97,000), some aggrieved investors took to Twitter to vent their unhappiness.

Though the company did receive some appreciation for paying quarterly dividends regularly, some are of the opinion that the company can stop this routine exercise, given the big rise in the share price over the period. Instead of a paltry amount every quarter, MRF can consider annual payments so that investors have a decent amount in hand, though dividend yield will continue to be low.

However, in what could be soothing news for some traditional investors who invest in companies that pay relatively high and regular dividends, a few have made clear their intentions to pay more.

Hindalco shows the way

Hindalco Industries has decided to pay 8-10 per cent dividend from the consolidated free cash flow. Till now, the Aditya Birla group company was paying dividends on the standalone net profit.

The shift is significant, as the new policy will lead to higher payout as it will now consider the free cash flow of its US subsidiary Novelis while distributing dividend to investors.

Hindalco further clarified that the dividend will be declared from the profits of that financial year or previous financial years after providing for past depreciation. This is a clear shift from the current policy, which provides for paying dividend only from the existing year’s standalone net profit while the retained earnings were to be utilised only in exceptional circumstances.

But brokerage firm Prabhudas Lilladher looks to increase dividends sharply by 1.8x-2.5x to ₹3-4 per share, assuming FCF of $1.2 billion.

However, dividend yield would remain unattractive at 1.0-1.2 per cent, given the low payout even after increase. Similarly, Share India Securities Ltd, a tech-based financial company that specialises in latency-based trading, has approved a dividend distribution policy that will make a regular payment of at least 12 per cent of lower of standalone/consolidated profit after tax (PAT).

SEBI mandate

Though several listed companies had on their own formulated dividend distribution policies, in a move to standardise the procedure, the Securities and Exchange Board of India, in 2016, made it mandatory for the top 500 companies to have a written policy. As per SEBI’s mandate, companies should clearly state the circumstances under which their shareholders can or cannot expect dividend; the financial parameters that will be considered while declaring dividends; internal and external factors that would be considered for declaration of dividend; a policy on how the retained earnings will be utilised; and provisions with regard to various classes of shares.

However, when it comes to dividend distribution, India Inc is still conservative. A study based on FY19 financials by IiAS, a proxy advisory firm, had revealed that 60 of the S&P BSE 500 companies can conservatively return ₹88,600 crore of surplus cash to their shareholders. The excess cash, if distributed by these 60 companies, translates into a median dividend yield of 3.8 per cent, significantly higher than the current 1.1 per cent.

At a time when interest rates are low, paying a good dividend will not only boost shareholders income, but also enhance investors’ confidence in the overall equity culture. Will India Inc show a large heart?

Published on February 26, 2021

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