India Inc pays out record dividends in FY23; up 26% YOY

You could almost say it is raining dividends this year. It is not just the PSU companies but even private sector companies where promoters hold a substantial stake have been generously paying dividends. Limited capex needs and a surge in cash flows have resulted in a situation where companies are flush with distributable surplus. According to the estimate of companies that have already announced annual results as of date, the total dividends paid  out by Indian companies are a good 26% higher yoy in rupee terms. That is a huge jump. Let us see what triggered this surge in dividend pay outs and which companies dominated the dividend paying sweepstakes.

A 26% surge in dividend paid in FY23

A lot of things appear to have fallen in place in the fourth quarter of FY23. Rural demand picked up, input costs have come down substantially, supply chain constraints are waning and the RBI has given a hint that it is done with rate hikes for now. That is; assuming that there is not runaway rise in inflation warranting a spike in interest rates. To add to the comfort level, even the Fed is expected to call for a pause in June and that is giving a lot of enthusiasm to corporates and to global investors. Corporate India is trying to make the best of the situation by paying out generous dividends in FY23. In fact, the rupee dividends distributed by the companies in FY23 stood at a whopping Rs3.26 trillion; a good 26% higher compared to the previous financial year.

Here is the big dividend roster

The table below captures the Indian companies that paid out the highest dividends for FY23 compared with FY22.

A couple of interesting inferences emerge from the above which can be summarized as under.

• The top 10 companies by absolute dividend payout are dominated by 3 PSUs viz. Coal India, ONGC and Power Grid Corporation. There are 2 companies owned by the Anil Agarwal group viz. Vedanta Ltd and Hindustan Zinc Ltd.
   
• While the dividends of India Inc overall are up by 26% yoy in FY23 over FY22, this growth is much higher for the top 10 dividend payers at 73%. Clearly, the big 10 profit distributors have a much bigger growth in dividends in FY23.
   
• The top 10 dividend paying companies in the above list dominate the overall dividend payout by India Inc. In FY22, these top 10 companies accounted for just about 46.8% of the total dividends paid. In FY23, the top 10 companies accounted for 64.5% of the total dividends paid out.

However, it is not just the absolute dividend payments that are elevated. Even the dividend payout ratio is at elevated levels. Let us now turn to that.

How the dividend payout ratio for FY23 looks like

The dividend payout ratio is the ratio of the dividend paid as a percentage of the EPS or earnings per share. It shows what amount of net earnings is being paid to the shareholders. Here are some key takeaways.

• Companies generally keep a stable dividend payout ratio to make shareholder expectations more rational and dividend policy more predictable. For instance, companies like Infosys and HCL Tech have maintained their dividend ratio even in a bumper year. For instance, Infosys dividend payout ratio is flat at 58.39% while for HCL Tech it is flat at 84.75%.
   
• Others like HDFC Bank have also maintained their dividend payout ratio stable at around 23.05%. The only one among the top 10 companies to see a fall in the dividend payout ratio was ITC which saw its dividend payout ratio reduce from 92.97% to 82.57%.
   
• The PSU names saw a spike in dividend payout ratio, although the growth was calibrated. That is in sync with the targets that the government sets for these PSU. For instance, in the case of ONGC, the dividend payout ratio is up from 29.02% to 39.93%. In the case of Coal India, the dividend payout is up from 60.36% to 72.75% while Power Grid had a higher dividend payout ratio of 66.74% in FY23 compared to 61.16% in FY22.
   
• The big dividend surge was seen in the high promoter stake stocks. Hindustan Zinc and Vedanta Ltd saw their dividend payout ratio go up 4-fold in FY23 over FY22. Even TCS saw its dividend payout ratio surge sharply from 41.06% to 99.86%. The surge is just too big to miss out.

Of course, these huge dividends would mean incredible, and even unsustainable dividend yields on stocks like HZL and Vedanta Ltd. Investors need to be wary of such dividend yields as it is very hard to sustain.

What is driving such amazing dividend payout in FY23?

Clearly, FY23 marks the first year of big recovery in profits after the pandemic. For instance, with India corporate earnings growth in the range of 12% to 14%, surge in dividends of 26% was almost expected. Also, dividends have been generous as capital cycle revival may take some time if the global headwinds and recession fears continue. Companies are making hay while the romance lasts. You have a combination of strong earnings growth, abundant cash flows and limited capex needs. The answer is higher dividends.

However, there are also words of caution from the street. Sky high dividend yields are not sustainable and hence they should be treated as such. These are windfall gains being distributed. Investors must remember that for valuation, it is important to maintain a balance between dividends and retained earnings. The word of caution on the street is that the dividends of 2023 may not sustain in 2024, so investors must digest this information with a pinch of salt.