Dividends funded by debt to reduce in FY18: Ind-Ra

Firms with higher free cash flows than dividends have shifted focus from growth to higher payouts

Ratings agency India Ratings and Research or Ind-Ra has analysed the trend of companies funding dividend payouts via debt in detail and has some interesting findings. The agency expects the debt-funded dividends (DFDs) to decline going forward, after rising in recent times. “The top dividend paying corporates would pay a dividend worth Rs 90,000 crore in FY17-FY18, of which around Rs 5,800 crore will be funded by debt each year -- much lower than the average Rs 9,000 crore DFDs between FY14-FY16. The improvement is attributed to the improved profitability witnessed in FY16, which Ind-Ra expects to continue during FY17-FY18," wrote the agency in a recent report. 

The quantum of debt-funded dividends as a proportion of the total dividends paid between FY17-FY18 will reduce to 13 per cent from the average of 22 per cent between FY10-FY16, it added.

Capital intensive sectors, such as infrastructure, real estate, telecom and power, have historically accounted for a lion's share of DFDs (about 73 per cent) and Ind-Ra expects the trend to continue in FY18 as well. Improving profitability of companies in the metals and mining sector could lead to lower DFDs from them to 1.4 per cent in FY18 from 44 per cent in FY16. 

 

Ind-Ra also observed that companies having free cash flows higher than dividends have shifted focus from growth to higher payouts. These include companies in the technology sector. On the flip side, there are companies wherein dividends have been fully funded by debt (defined as category C). This could be a rescue act by the companies to salvage the market cap – which has increased two per cent, despite free cash flows consistently being in the red since 2012. Likewise, for category B companies (where dividends are partly funded by debt), despite a negative 21 per cent compounded annual growth rate (CAGR) in free cash flow during FY10-FY16, the absolute dividends increased at a CAGR of five per cent, helping the market cap to increase by four per cent.

Another interesting point is that the quantum of the dividends paid in FY16 for each of the 65 dividend-paying companies (account for 89% of total dividend) increased with an increase in promoter shareholding, indicating promoter intention. The increase in dividend paid for such corporates was despite a fall in their profitability.