In the current fiscal year, India’s major publicly traded corporations returned the most surplus earnings to shareholders in four years, signalling a scarcity of investment opportunities and low-capacity utilization at factories due to the pandemic’s interruptions.
Experts indicated that the enterprises were encouraged by an improvement in earnings during the year ended March 31, despite suffering losses in the first two quarters due to the statewide lockdown that froze economic activity. Firms, particularly large ones were able to record stronger profitability, thanks to strict cost control.
A change in dividend taxation policy also played a significant impact on firms delivering bigger payouts. The dividend payment ratio or dividends as a % of earnings, of 46 businesses in the Nifty 50 benchmark index increased to 38.1% in FY21 from 37.3% in FY20. According to data gathered by the corporate database Capitaline, the ratio was 30.7%, 33.7%, and 49.4% in FY19, FY18 and FY17 respectively.
According to Amit Shah, head of India stock research at BNP Paribas, a high ratio does not always imply larger dividends for shareholders, it could also signal that some companies simply prefer to keep their dividends at the same level. “This was notably true in FY21 when fresh investment plans were put on hold due to concerns about the spread of covid. Because of the uncertain market picture and the availability of spare capacity, additional expenditures and investments were put on hold in FY21, which was one of the reasons for the increased dividend. “However, the change in dividend treatment from a tax standpoint also played a huge effect,” Shah said.
Last fiscal year, India Inc. had two difficult quarters from a revenue standpoint, but even within that scope, some industries thrived, particularly consumer staples and pharmaceuticals. The second half of FY21 saw a faster-than-expected recovery, owing to significant pent-up demand and the fact that enterprises had already implemented material cost-cutting activities in response to covid”, Said Amit Shah, Researcher at BNP Paribas. This resulted in high profitability, allowing dividends to be paid out. PSU enterprises paid larger dividends to ensure good returns to the government, which increased dividends.
In FY21, the collective net profit of the Nifty companies under scrutiny increased 33.3%, while dividend distributions increased 36%. However, aggregate net profit fell 3.54% in FY20, while dividend distribution increased 17.25%. However, the dividend payout ratio of 398 BSE500 businesses declined to 36.2% in FY21 from 38.4% the previous year, indicating that smaller companies were hit the worst by the covid crisis. Larger dividends are also seen by investors as a sign of a company’s success and management’s optimistic outlook for future earnings. Dividends are a type of capital return to investors. “With surplus cash on the balance sheet, more enterprises are becoming capital conscious (return on equity and return on capital employed concentration) and, as a result, they find it more acceptable to deliver bigger dividends to shareholders”, said Pankaj Pandey, Head, Research at ICICI Direct.
