BAT shareholders cheer as ITC’S policy tweak increases dividend

A change in ITC’S dividend policy has resulted in a bonanza for its single largest shareholder, British American Tobacco (BAT). BAT’S annual report for 2020 shows that the dividend from ITC was at 386 million pounds compared to 231 million pounds in 2019, an increase of 67 per cent.

This is the first time that the revised dividend policy of ITC reflected in the annual report of BAT, which follows a financial year ending December 31.

ITC moved to a higher dividend payout as most of its largescale capital expenditure had been undertaken in hotels and building the integrated consumer goods manufacturing and logistics facilities.

In FY20, ITC’S dividend payout stood at ~12,476.63 crore compared to ~7,048.71 crore in FY19; in FY21, the total cash outflow on account of dividends will be ~13,230.27 crore, including an interim dividend of ~6,152.68 crore.

BAT, which has a 29.42 per cent stake in the Indian conglomerate, said ITC’S dividend income reflects a change in dividend policy from April 1, 2020.

An ITC spokesperson said that the company articulated a sharper and transparent capital allocation policy over the last two years.

“The company amended its dividend distribution policy in March 2020. Under this effective financial year 2019-20, in the medium term, the company expects to pay out around 80-85 per cent of annual profit after tax as dividends,” the spokesperson added.

“The increase in the payout ratio (from approximately 68 per cent each in FY17, FY18 and FY19 to approximately 82 per cent in FY20) together with higher profits in FY20 (profit after tax was up 21.4 per cent compared to FY19) resulted in higher dividend payouts in FY20 against FY19,” the spokesperson further said.

BAT’S stake had been coming down, albeit marginally, over the years as ITC rewarded eligible employees with stock options. In 2018, the British tobacco major turned down a fresh proposal from ITC to continue with an equity-based employee stock option scheme that would have further diluted BAT’S share. BAT’S annual report mentioned that in 2020, the group’s interest in ITC decreased from 29.46 per cent to 29.42 per cent (2019: from 29.57 per cent to 29.46 per cent; 2018: from 29.71 per cent to 29.57 per cent). This was because of ITC issuing ordinary shares under the ITC Employee Share Option Scheme.

The issue of these shares and change in the group’s share of ITC resulted in a gain of 17 million pounds (2019: 25 million pounds; 2018: 22 million pounds). This has been treated as a deemed partial disposal and included in the income statement, the company mentioned in the annual report.