On the other hand, there was a 64 per cent YoY jump in share buyback last fiscal year after a sharp decline in FY18. The surge was led by tech majors Tata Consultancy Services (TCS) and HCL Technologies and government-owned energy majors such as Indian Oil Corporation (IOC) and Oil and Natural Gas Corporation (ONGC). In all, BSE500 index firms bought back around Rs 45,000 crore worth of their shares during the 12 months ended FY19 against Rs 27,500 crore a year ago.
The analysis is based on a constant sample of 452 firms that are part of the BSE500 index. The dividend amount is the sum of interim and proposed final dividends for the respective fiscal years; buyback amount is the actual amount spent during the 12 months ending March of every year.
Among individual firms, TCS topped the cash payout charts for the second year, followed by IOC and ONGC. TCS proposes to pay Rs 11,257 crore as equity dividend to its shareholders for FY19 and it spent another Rs 16,000 crore on buying back from shareholders in September 2018, transferring a total of Rs 27,257 crore to its shareholders last fiscal. The amount was equivalent to nearly 87 per cent of the companies’ consolidated net profits during the year.
Infosys paid out equity dividend of Rs 9,366 crore for FY19 and it proposes to return another Rs 8,260 crore in the form of buyback to shareholders later this year. This will translate into pay-out ratio of 115 per cent for the company. HCL Technologies and Tech Mahindra also spent large sums on share buyback last fiscal.
IOC and ONGC have also made big payouts for last year. While the former is paying out a total of Rs 13,143 crore to shareholders in the form of dividend and share buyback, the latter is spending Rs 12,828 crore.
The amount spent on share buyback is, however, very volatile unlike equity dividend that follows a steadier path. For example, the value of share buybacks rocketed in FY17 as the government imposed tax on dividend income and then it halved in the following year. Financial year 2015-16 was the worst for equity dividend when the payout grew just 0.4 per cent that year.
Share buyback became popular when the 2016 Union Budget introduced 10 per cent tax on dividend income of above Rs 10 lakh in the hands of resident shareholders. This made share buyback tax efficient compared to equity dividend.
If the cash spent on share buyback is included, total cash income for shareholders was up 10.8 per cent YoY during FY19 against 9.1 per cent decline in the previous year. In comparison, companies’ net profit was up 5.1 per cent last fiscal, leading to a rise in effective payout ratio and stagnation in retained profits.
The combined retained earnings for the sample companies
were up 1.2 per cent in FY19, growing at the slowest pace in the last three years. On an average, companies paid out 43 per cent of their net profits (for FY19) to shareholders as dividend and share buyback against 40.8 per cent a year ago.
There has been a steady increase in payout ratio in the last 10 years from around 23 per cent in FY10 to 40 per cent plus now. Bulk of the rise in payout ratio in recent years is, however, due to share buyback.
Experts attribute this to a combination of lack of investment opportunities in the economy and benefits that share buyback provides to promoters.
“It doesn’t make sense for companies to sit on earnings and accumulate cash if they can’t deploy it profitably in new projects. There is a lack of aggregate demand in the economy, leading to a drought in corporate capex,” says G Chokkalingam, founder & managing director, Equinomics Research & Advisory Services.
Share buybacks also allow promoters to raise their stake in companies at no extra cost if they choose not to participate in it.
Going forward, experts see a slow growth or even a decline in dividend payout and share buyback by companies, given the poor growth in corporate earnings. Besides, most of the cash rich companies in sectors such as information technology and state-owned commodity producers have exhausted their accumulated cash pile.