Ever since the Finance Ministry announced Taxation of Dividends Received (Above INR 10 lakh) in the Budget 2016, companies have been lining up furiously to reward their share-holders before April 01. This is the date from which any Individual or HUF receiving dividends greater than INR 10 lakh, would have to pay 10% Dividend Distribution Tax. Read our short post on the Introduction of Dividend Distribution Tax.
As a result, there has been a slew of corporate board meetings as companies scramble to figure out how much they should distribute to share-holders, while keeping in mind, the deadline of March 31. Keep in mind, this is mainly for the benefit of Promoters and Big Individuals, likely to receive more than INR 10 lakh on account of their ownership positions, who would want to take the cash now rather than after April. These investors are the ones generally who take home a lion’s share of the dividend and they do not like to share this extra topping with the government.
We have created a Dividend Tracker, which we update at the end of every day so as to capture two sets of information:
You can visit this Dividend Tracker page to keep a lookout for your invested companies declaring dividends.
Here are the list of posts where in we tracked the dividends for the previous weeks(Links open in new tabs):
Now, onto the Dividends announced so far (21st March 2016, EoD).
307 companies have announced their Dividends so far. These include some of the biggest blue-chip companies such as Reliance Industries, Coal India, ONGC, Bajaj Auto and many more.
(Our alert reader AJ mentioned in our Dividend Tracker for March 11th, that the 2 biggest dividend-yield providers ‘Remi Elektrotechnik’ and ‘Remi Process Plant’ (both above 30% Div-yields), were thinly traded stocks that hadn’t seen any trading activity for more than 6 months now! Hence, we have gone ahead and removed them from the list).
The Top 10 based on Dividend Yield (above Rs. 1,000 cr. Market Cap) are:
What are the repercussions on the financials of the company that has announced dividends because of this March effect? Consider this: Company ‘A’ makes INR 1,000 as Net Profits for the year. It decides to give out INR 800 to shareholder’s and retain the INR 200. Intuitively, this makes sense. I pay out from what I receive.
Coal India, for example, had an EPS of INR 5.89. But Dividends of INR 27.4 per share? (We had analyzed the Balance Sheet effects ofCoal India’s Dividend Announcement in a previous post.) Where would these additional funds come from?
From their Reserves.
What this means, is that in order to distribute cash to their share-holders, companies will have to draw down their Equity Reserves. This could have some major ramifications on the capital structure of the company. For instance, let’s consider a hypothetical company ‘Jaitley Needs More Cash Inc (JNMC)’. JNMC has equity of INR 100, which includes Share Capital of INR 25 and Reserves of INR 75. It also carries debt of INR 50, bringing the D/E ratio to a healthy 0.5.
What if, because of the new taxation rule, JNMC decides to issue dividends of INR 25? This will have to come from the Reserves, thus bringing Equity to INR 75. The new D/E is now 0.67 – a 34% increase! Unless JNMC earns INR 25 during the year, its Reserves would be lesser than what they were at the beginning of the year.
Of course, this is a massive simplification of the real facts, as the reality includes Dividend Distribution Taxes, and all sorts of reserves to which a company sets aside its cash.
We will publish a post regularly with some insights on what Dividend Announcements means for the companies as we go along. For a short summary, do have a look at the Dividend Tracker which we have created, and which we update daily. You can visit the Dividend Tracker page to keep a lookout for those of your investments declaring dividends. Hope you find this tracker useful. Do share your comments and views. If you also like us to track any additional details, do let us know and we will make our best effort to incorporate them.
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.