Limited investment options trigger a dividend bonanza for shareholders

MUMBAI: Publicly traded firms in India handed out the biggest dividends in at least 10 years during 2017-18 as investment opportunities to expand and grow dried up, a Mint analysis showed.

Dividend payout ratio—dividends as a share of earnings—of 457 companies on the BSE 500 index hit 39.6% in 2017-18, more than double the previous year’s 16.6%, according to data compiled by Capitaline. The ratio was the highest since 23.19% in 2008-09, the earliest year for which data is available. A higher dividend payout ratio typically signals inability to find suitable investment options to expand, increase capacity or make acquisitions, prompting firms to hand out surplus cash to shareholders.

According to Vinod Karki, vice-president, strategy, at ICICI Securities Ltd, dividend payouts typically rise when cash piles up without corresponding investment opportunities. “Since capex recovery has not picked up in India, companies are piling on cash. Capacity utilisation is still low. Return on capital is still not good for companies to generate spreads over their cost of capital. Both return on capital and return on equity of India Inc. have bottomed out in the past two-three years, but it is not yet that good for companies to get attracted to invest.” A July 3 ICICI Securities report by Karki and Siddharth Gupta said 3,500 listed non-financial Indian firms saw a rise in cash and cash equivalents to ₹15.1 lakh crore in FY18 from ₹14.7 lakh crore in FY17.

Investors also see bigger dividends as indicating a firm’s strength and the management’s positive expectations for future earnings.