Possible Reasons for Dividend Income Cut-

VRK100-29Sep2020
RamaKrishna Vadlamudi / 26 September 2020 / Blog

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

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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)

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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.

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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.

---

References:

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:

http://ramakrishnavadlamudi.blogspot.in/

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