Possible Reasons for Dividend Income Cut-VRK100-29Sep2020
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)
- - -
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/
https://www.scribd.com/vrk100
Twitter @vrk100
