Hero, Wipro gift promoters undeserved dividend hikes

“Money, money, money, must be funny in a rich man’s world,” goes the Abba number. This could well be the anthem for rich promoters of businesses in India.

Come hell or high water, our promoters believe in rewarding themselves well with dividends. Since dividends are tax-free in the hands of investors (companies pay the dividend tax), dividends are doubly beneficial to promoters.

Firstpost studied the dividend payouts of 69 private sector companies from the BSE 100 to analyse what promoters were paying themselves as dividend. Public sector and non-dividend paying companies were excluded from the study - which is is why we have 69 companies in our list.

This is what we found: The total dividend outgo of companies in our sample rose by 18.3 percent to Rs 37,899 crore vis-a-vis net profit growth of 16 percent in 2010-11. Of this, our promoters added Rs14,351 crore, or 38 percent of the total dividend paid out last year, to their personal kitty. In fact, this has always been the trend - as we can see from the chart.

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The figure was skewed in part by Hero Motocorp’s decision to pay very high dividends by dipping into reserves in order to part-finance the buyout of Honda’s stake in the company. In general, promoters exhibited wide diversity in how they rewarded shareholders - and themselves. The payout ratios (dividend as a percentage of net profits) ranged from as low as 5.2 percent to as high as 132 percent.

This suggests that payouts do not often correlate to performance - and are driven partly by promoter whims.

[caption id=“attachment_79128” align=“alignleft” width=“380” caption=“Since dividends are tax-free in the hands of investors, dividends are doubly beneficial to promoters. Photo: JMRosenfeld/Flickr”]  [/caption]

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Many companies in our sample have reported a sharp increase in the dividend outgo over the last financial year. Generally, companies pay dividend out of profits. A good indicator of how much profit is paid can be seen from the dividend payout ratio. We have listed (see table) some details about the top 5 companies in our list.

• Tata Sons-owned TCS features as No 1 on our list of companies whose promoters took home the maximum amount in terms of dividends. Out of a total dividend outgo of Rs 2,740 crore paid out for the financial year ended March 2011, the promoters earned Rs 2,029.86 crore. However, the company’s total dividend payment had fallen by 30 percent over last year. Its dividend payout ratio stood at 31.42 percent.

• Bangalore based Wipro reported a sharp 67 percent increase in its dividend outgo (Rs 1,472 crore) for the year ended March 2011. The biggest beneficiary of this would be the promoters who have a 79 percent stake in the company and earned a total of Rs 1,166.74 crore of tax-free income. Its dividend payout ratio increased to 29.19 percent for 2010-11 compared to 19.73 earlier.

• Hero Motocorp is one of those few companies whose dividend payouts exceeded the profits earned for the financial year. In the year ended March 2011, the company shelled out a total of Rs 2,096 crore as dividends to shareholders despite lower profits (Rs 1,927.9 crore). Of this, the promoters took home Rs 1,094.7 crore as dividends. Such an amount would have certainly helped the promoters buy out the 26 percent Honda stake in the company.

• Reliance Industries came fourth in our list of companies whose promoters took home a substantial chunk of tax-free income. While its total dividend increased by 14 percent to Rs 2,384 crore, the promoters took Rs 1,066 crore for the year ended March 2011. Reliance’s dividend payout ratio was only 12.6 percent. It had reported a 21.09 percent fall in net profit while sales had risen by 30.47 percent during the year.

• Hindustan Unilever is one of the top dividend-paying companies in our sample. The dividend payout ratio stood at 67.97 percent. However, its total dividend outgo for the year was almost flat at Rs1,410 crore for fiscal 2011 compared to the previous year. Promoters of the company earned a dividend income of Rs 740.8 crore.