It is bumper dividend time for India Inc

Tough times do not last, Tough companies do

India Inc witnessed substantial economic growth, increase in earnings as well as buoyant markets. With limited capex likely with uncertain global markets, India has been paying out dividends like there is no tomorrow. Riding on this optimism, India Inc has recommended a dividend pay-out of Rs3.26 trillion for FY23; a good 26% higher than the previous fiscal year of FY22, when about Rs2.6 trillion was paid out as dividends. 

It is not just the rupee dividends that have gone up, but even there has been a sharp increase in the dividend payout ratio. From a dividend payout ratio of 34.66% in FY22, it has surged to 41.46% in FY23. During the Covid pandemic, corporates were coerced into shortening their dividend payout to conserve cash. However, a bounce in revenues and bottom line since then, combined with some friendly measures like the PLI scheme has helped dividends by India Inc touch record levels in FY23.

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Hey, the chart toppers have some familiar names

Leading the way in the dividend pay-out is Tata Consultancy Services (TCS) with a of Rs42,090 crore (you heard that right) paid out as dividends. That is a good 167% higher than the previous fiscal. The second and third places are occupied by the Anil Agarwal group companies. While Vedanta Ltd is paying out Rs37,758 crore, a 126% rise from last year; Hindustan Zinc Limited (HZL), with a 319% augmentation in pay-out has distributed Rs31,899 crore as dividends.

Even the dividend per share for the top 3 companies has doubled from FY22, with TCS’s recommended dividend at Rs115 per share for FY23 (it was Rs43 per share in FY22). Vedanta’s dividend payout is at Rs101.50 per share, up from Rs45 per share last year, and HZL’s dividend per share standing at Rs75.50, up from Rs 18 in the previous fiscal. 

Other companies in the top 10 dividend providers include Coal India with a pay-out of Rs20,491 crore (a 95.6% rise), ITC with Rs15,846 crore (an 11.8% rise), ONGC at Rs14,153 crore and Infosys at Rs14,069 crore. The increase in dividends, on average, is in line with the estimate of India Inc’s growth in corporate earnings in the region of 14% to 15% for FY23.

Wait, don’t jump on to the dividend bandwagon yet

India Inc must ensure to not get too optimistic about its growth story and end up with a fate akin to that of Pangloss from Voltaire’s Candide. Bad times serve no teleological purpose and being overly optimistic about things is preposterous. The sustenance of future dividends is heavily dependent on the earnings growth of FY24, which most experts expect to be mixed with no clear encouraging signals. This could only worsen if the global recessionary trends worsen and there is visible contraction in global demand.

Corporates are in a mood to heavily invest in capex (with many expecting 14% increase in expenditure), but short-term demand outlook is alleviating. This can, however, be mitigated through stable domestic demands and reduction in operational costs. Shareholders should also be wary of the fact that their investment premise should not be solely based on dividends. Several monopolistic PSUs have significant cash on their balance sheets but have failed to deliver considerable returns owing to inefficient capital allocation. While the present may look buoyant, we cannot lose sight of reinvestment returns.

Finally, there is the valuation tangle. High dividends do not necessarily improve company valuations. On the contrary, high dividend paying companies have low P/E ratios as they are seen as companies with limited growth prospects. After all, who wants to take a long term bet on cash cows?

Content Source: Financial Express