Possible Reasons for Dividend Income Cut-VRK100-29Sep2020
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During this financial year 2020-21, Indian listed companies have declared lower dividends as compared to the same period last year. Actually, companies should have distributed more of their profits to investors this year, after corporate tax rate were cut in September 2019 and dividend distribution tax (DDT) was abolished in February of this year.
But it is not so. Some possible reasons why dividend income from listed companies in India has come down substantially during the half-year ending 30 September 2020:
Post the outbreak of Corona Virus, Indian companies like their global peers want to conserve capital in order to face the turbulent times ahead. Due to severe lockdowns imposed by the central and state governments, economic growth has slumped impacting the revenues and profits of companies and incomes of households severely.
With a view to conserving their capital, corporates have been giving lower dividends this year. This is a big blow to investors in a situation when their incomes are already down due to job losses and wage cuts.
Reserve Bank of India (RBI) has barred banks from declaring any dividends for the financial year 2019-20, which they would have declared after 01 April 2020 had the RBI not barred them from dividend declaration. As a result, no bank has declared any dividend in this financial year so far.
In April of this year, RBI barred banks from declaring dividends due to uncertainty after Corona Virus outbreak, so that banks would conserve their capital. RBI will assess this ban after the declaration of second quarter (Jul-Sep2020) results.
In February of 2020, Government of India abolished dividend distribution tax (DDT) and made dividends distributed by companies taxable in the hands of investors from 01 April 2020.
Due to abolition of DDT, many companies declared interim dividends between 01Feb2020 and 31Mar2020, so that promoters and minority shareholders in higher tax brackets could avoid paying tax on dividend for the year 2019-20.
Tax laws change behaviour of companies and individual tax payers. India is notorious for its capricious laws, leaving investors panting for breath all the time.
As many companies declared interim dividends liberally between the start of February and end of March 2020, they have chosen not to pay any final dividend after 01 April 2020.
Anecdotal evidence suggests that almost fifty percent of listed Indian companies that ordinarily pay dividend during April and September of every year have not paid any dividend during April-September 2020 period.
Due to the Corona Virus outbreak, even traditionally well-paying firms have not declared any dividends in order to conserve cash for tough times ahead.
It may be noted several companies that ordinarily not borrow money or companies with low debt are forced to borrow money for working capital and other needs, as their sales have suffered drastically post-COVID-19.
Many companies complete paying dividends before the end of September every year. Software (Information Technology) companies and some other companies traditionally pay dividends three or four times in a year.
Even some mid-tier IT companies too have not paid any dividend after April 1st of this year.
It would not be incorrect to say that companies should have paid 15 to 20 per cent more dividend than previous year as DDT stood abolished since 01 April 2020 and corporate tax rates were cut by Government of India in September 2019; but strangely nearly half of companies have not bothered to declare any dividend after 01 April 2020 for the reasons suggested above.
Top 500 companies are supposed to have a dividend distribution policy as per law. Even though they have a policy, companies have not considered it appropriate to explain why they have not declared dividends in the first half of this year.
Instead of getting more dividend, investors are left with dividend income getting slashed by 20 to 35 per cent during the first half of 2020-21 depending on the mix of listed companies they hold.
It is hoped this nasty surprise, though not wholly unexpected, slapped on investors should get corrected during the next one or two years depending on the speed of upturn in the economy.
Many big companies have not announced any buybacks in recent quarters after the abolition of DDT and introduction of buyback tax. Share buybacks / repurchases are one form companies choose to return their excess cash to investors.
Companies now have to deduct tax at source (TDS) on dividend income, before distributing them to investors. The TDS rate is 10 per cent, but cut to 7.5 per cent till March 31, 2021 due to the pandemic.
If total dividend for a single investor exceeds Rs 5,000 in a financial year, a company has to do TDS on the total dividend at rates mentioned above. A company will apply dividends declared in the preceding financial year, while determining the limit of Rs 5,000 for TDS on dividends.
A few companies declared higher dividend this year. One such example is Lupin Limited. With a view to compensating shareholders due to dividend becoming taxable in investors' hands effective 01 April 2020, the company recommended higher dividend of Rs 6 per equity share as against Rs 5 of the previous year.
Across the globe, stock investment strategies based on dividend yield are out of favour. Discount cash flow (DCF) methods based solely on dividend have stopped working. The current trend is that more of total gains for investors come from share price increases rather than dividends.
(Please see comments below)
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Update on 08 October 2020: The article is updated with the following table giving details of dividends declared by select companies:
References:
My Tweet thread dated 17Apr2020 on RBI banning bank dividends
Tweet thread06Feb2020 on behaviour of promoters
Connected Tweet threadof 07Feb2020 on dividends
Connected Tweet threadof 04Feb2020 on 10% dividend tax on dividends above Rs 10 lakh
IiAS Advisory Dividend & Buyback Report 05Feb2020
IiAS Advisory Dividend & Buyback Report 11Apr2019
Disclosure: I've vested interested in Indian stocks. It's safe to assume I've interest in the stocks discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
In a meeting on 07Oct2020, TCS Ltd's Board of Directors announced a buyback proposal. Buyback size is Rs 16,000 crore; buyback price is Rs 3,000 per equity shre; buyback will be through 'tender offer' route via stock exchange mechanism--so the TCS promoters will have the option of participating in the buyback proposal.
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