Are Indian Cos Generous Dividend Payers? - Chart Of The Day 27 October 2015 - Equitymaster

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Are Indian Cos Generous Dividend Payers?
Oct 27, 2015

As you all would be aware, there was a good amount of controversy surrounding the ongoing Indigo IPO. After all, the negative networth of the company just ahead of the IPO did not go down well with the investing community. This matter seems to have got the market watchdog SEBI to mull over the idea of putting in place a new set of guidelines that will make it mandatory for companies hitting the market to disclose their dividend policies upfront.

But then... it gets one thinking...why limit this only to companies taking the IPO route? What about the already existing companies? An article in the Hindu Business Line touched upon this matter. While the business daily discussed its own set of data, we curated a list of our own. The following chart gives an indication about the varied dividend payout ratios of all the listed companies on the NSE.

Turns out that nearly half of the listed companies did not pay out any dividend in the latest year. Companies paying dividends up to a fourth of their profits formed about 25% of this pie. About 15% of the companies paid dividends between 25 to 50% of their profits. And only 7% of the companies paid out dividends of more than half their profits.

As per the data curated by the business daily, the average payout of the companies that paid dividend stood at 36%. But this seems low considering that a third of the assets of the total NSE listed companies was parked either in investments or was held in the form of cash balances. The business daily further goes on to share that the dividend yield of the Sensex stands at 1.4%. This seems quite low when compared to the 3 to 5% figures offered in markets such as China, Malaysia, Singapore and Thailand.

There are two broad aspects to ponder over...

First being the need for high payout. would agree that it would make sense for a company to do so only if it is unable to generate good return on its invested capital. After all, if the company's core business is unable to meet the minimum rate of return required by an equity investor, it would only make sense to pay out the excess capital; rather than invest it back in the business, which would only destroy value in the long run. If a company is able to earn above average return on capital, retaining of profits should not really be a cause of concern for an investor as high growth would only add to the value.

The second point to consider is that of dividend payment not being the most shareholder friendly way of distributing profits. This we say because a fifth of the proposed dividend amount is paid in the form of taxes. Having said that, other forms of wealth sharing have their limitations as well.

Data source: ACE Equity; Equitymaster Research

This Chart Of The Day was published in The 5 Minute WrapUp - Don't Listen to 'Market Experts'

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1 Responses to "Are Indian Cos Generous Dividend Payers?"


Oct 28, 2015

An interesting chart - especially to see that there are companies with a payout ratio of less than Zero. Is this a data glitch, if not would be interested in understanding under what circumstances do shareholders actually pay the company funds - while at the same time it gets considered a dividend from the company's point of view

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