Dividend yield hits 10-year low of 1.1%; equity payouts down 3% in 2017-18

Equity dividend declines 3% in FY18, while m-cap rises 26%

Dividends of listed companies which have announced their results are lagging behind the rally in their stock prices in the last one year. As a result, the dividend yield has now hit a 10-year low of 1.1 per cent against 1.44 per cent at the end of 2016-17 and 1.5 per cent two years ago.

This is the first time in the past three years when the dividend payout of listed companies has failed to keep pace with the movement in their share prices (see adjoining chart).

Companies have declared dividend worth Rs 930.6 billion so far with their full-year 2017-18 results, down from Rs 959.4 billion paid by them in 2016-17. Some large dividend payers such as Tata Consultancy Services (TCS) pay interim dividends more than once a year. Our figures include all dividends paid by companies for 2017-18.  

The combined dividend payout by 538 listed companies across sectors was down 3 per cent on a year-on-year (YoY) basis in 2017-18, against 19 per cent growth in the previous financial year. 

In comparison, these companies’ combined market capitalisation (m-cap) is up 26 per cent since the end of March 2017 to Rs 83.65 trillion at the end of trading in May 17, 2018.

Analysts say that this has created a wedge between the rally in stock prices and shareholders’ dividend income. The dividend payout had broadly kept pace with the movement in companies’ stock prices during 2014-15 to 2016-17 period, leading to stable dividend yields during the period.

For example, dividend payout was up 19 per cent in 2016-17, against 23 per cent rise in companies’ m-cap during the year. The year before, dividend and m-cap were down 3 per cent each on a YoY basis.

In all, shareholders’ dividend income has grown at a compounded annual growth of 3.7 per cent in the last three years, against 14.5 per cent annualised rise in company’s m-cap during the period. At this rate, it will take 60 years for shareholders to recover their investment through dividend income at current market prices.

Analysts attribute the decline in dividend payout to the poor financial performance of public sector banks (PSBs), with most of them reporting large losses (at net level) due to bad loans in FY18. “PSBs have historically been large dividend payers among listed companies and most of them have skipped dividend in 2017-18 due to large losses,” says G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

Three of Corporate India’s 10 biggest dividend payers (in rupee terms) cut their payout in 2017-18. Hindustan Zinc’s payout reduced by 73 per cent YoY, given that the company had paid a large special dividend in 2016-17, which was absent in FY18. It was followed by Bharti Infratel, which cut its payout by 12.5 per cent in 2017-18.

Infosys was the most generous company in 2017-18, with 60.6 per cent YoY growth in dividend payout, followed by Hindustan Unilever (up 17.4 per cent), and Housing Development Finance Corporation (17.2 per cent).

Dividend outgo has also been impacted by large share buybacks by cash-rich information technology services companies such as TCS, Infosys, and Wipro.

“Share buyback is more tax efficient than equity dividend. As such, many companies now adopt the buyback route to reward shareholders than dividends that are taxable,” adds Chokkalingam.

This, he says, may keep dividends payout in the slow lane as more companies opt for share buyback to help their large institutional and individual shareholders save dividend distribution tax. 

Equity dividends, however, suit retail shareholders as it is a recurring income stream. Share buybacks, on the other hand, requires the effort of going through the process of tendering shares.