Do dividends really matter? :: ::Business Line,

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Cash-rich companies have not raised their payout ratios.

Why are stock market investors in India not very excited about companies holding a lot of cash? Could it be because companies don't easily distribute cash to their shareholders?

If companies don't need the cash they are accumulating, they could pay it out as a dividend or buy back shares. An analysis over the past five years shows that the BSE 500 pack of companies has paid out anywhere between 20 and 22 per cent of after-tax profits as dividends to shareholders. This number has shown little variation in the last five years.

Cash-rich companies have not raised their payout ratios. On the contrary, companies holding the most cash in March 2006 paid out 31 per cent of their post-tax profits five years ago, but this fell to 25.5 per cent of their post-tax earnings by March 2011.

Nor do dividend payouts add all that much to the returns of investors in Indian companies. At 1.4 per cent, India is one of the lowest dividend yield markets in the world. This is lower than global indices such as the Shanghai Composite Index, Singapore Straits, American Dow Jones and the European FTSE 100 which offer 2-4.5 per cent as dividend yield.

SOME MORE GENEROUS

However, some sectors seem to be more generous in rewarding shareholders through dividends than others.

Commodity companies have, in general, been stingy. Coal India pays out just over a fifth of its after-tax earnings as dividends.

The same policy is followed by NMDC, MOIL and Hindustan Zinc (which pays out a fourth). Given that these companies have failed to line up investments that either fall within their core business or justify their cash holdings, investors would not be amiss to expect higher payouts.

Despite having onerous acquisitions that have weighed on profits on their books, metal majors Tata Steel and Hindalco have maintained their dividend payouts admirably.

Cash-rich FMCG firms have been quite generous in rewarding shareholders over the last three years. ITC, Colgate Palmolive and HUL have paid out 70-90 per cent of their annual post-tax earnings as dividends.

Divi's Laboratories is another example of a pharma company that has seen a sharp jump in the percentage of profits paid out as dividends from 7 per cent to 31 per cent over three years.

United Phosphorus, Aurobindo Pharma, Akzo Nobel and Crisil are a few cash-rich firms that have seen a sharp increase in the percentage of profits paid out as dividends.