Corporate dividend payout in India increased 6.5 percent

Despite the underperformance of Indian corporates in the fourth quarter and the financial year ended March 2020, the current season of dividends has been unexpectedly generous to equity participants.

The combined payment of dividends by India's leading listed companies in the BSE 500 index was 6.5 percent higher in FY2020 and thus the fastest in the past three years. Equity investors should be thankful to cash-rich companies such as Tata Consultancy Services, ITC, Hindustan Unilever, Nestle, and Bajaj Auto.

However, excluding defensive sectors such as consumer and software services firms, dividend payout was down 17.6 percent year-on-year to Rs 1,12 lakh crore from Rs 1.36 lakh crore a year ago. In comparison, these firms had increased payments by 5.3 percent in FY19.

Traditionally large dividend-paying companies such as private sector banks, insurance companies, oil and gas majors, and metals and mining companies either cut or postponed dividend payments in FY 2020. Banks and insurance companies deferred the dividend payment as their regulator had given such advice because of the possible increase in debt owing to the Covid-19 epidemic. This is the first season of the dividend after mandating taxation of dividend income from shareholders whereas earlier companies were required to pay 20.56 percent dividend distribution tax on their dividend payment. Experts attributed the high dividend payment to changes in the law and the reduction in company income tax. UR Bhatt, director of Dalton Capital Advisors, said, "Since dividends now have to be paid to shareholders, many companies are paying savings on dividend distribution tax to shareholders through higher dividends per share." G Chokalingam, founder and managing director of Economics Research and Advisory, said the company income tax cuts in September largely benefited cash-rich companies and many of them gave their savings to shareholders through higher dividends.

The analysis is based on the interim or final dividend already proposed or already paid for FY 2020 on behalf of the BSE 500 companies that have declared FY20 results. 456 companies included in this sample have announced their results so far. Of these, 359 companies have paid an interim or final dividend for FY 2020. The number of such companies in FY 2019 was 379. Overall, the BSE 500 companies plan to distribute Rs 1.91 lakh crore among shareholders through dividends, up from Rs 1.8 lakh crore a year ago. Despite the hurdles, companies increased dividend payouts in the last financial year. The combined net profit of BSE 500 companies was down 25.6 percent year-on-year in FY2020, while their revenue declined 1.4 percent. This is the worst performance in the last six years.

As a result, many companies lost their savings or decided to retain a small portion of profits to appease shareholders.