Kumarumt: Can you spare a dividend cheque?

WHAT is it about dividends that Indian companies don’t get? The times are bad. Prospects for economic growth are dim. Credit is hard to come by. Investors are shunning equity risk. Yet, company managers are reluctant to distribute that one thing that every one of their shareholders wants: cash.

    This may not be a repeat of the Great Depression. But it does look like that the anthem of the early 1930s — Bing Crosby’s classic, “Brother, can you spare a dime?” — is an apt description of what present-day investors might want to say to the chairmen of Indian companies. At least six stocks on the S&P CNX Nifty list are expected to return a dividend yield of less than 1% in the next 12 months, according to Bloomberg data. Corporate India is worse than Uncle Scrooge McDuck.
    On a CLSA list of 122 Indian stocks, only 10 are expected to offer a dividend payout in this calendar year that exceeds the current 10-year government bond yield of about 6%. This is in sharp contrast to Hong Kong, Singapore, Taiwan and Thailand, where between 92% and 77% of the stocks covered by CLSA are forecast to give cash returns in excess of the local, risk-free rate.
    When it comes to distributing their profits, even Chinese companies, which aren’t exactly paragons of corporate governance, are doing a lot better than their Indian counterparts. There are some important lessons here.
    Consider a stock that has a future dividend yield — expected annual payout divided by the share price — of 5%. If there was no secondary market in this stock, one would need to hold the shares for 20 years just to get back one’s investment.
    A 20-year equity ‘payback’ period is no big deal in a bull market. In a report last year, Citigroup Inc equity strategist Markus Rosgen calculated the payback period for someone investing in the MSCI India Index in January 2008 as 113 years.
    No one back then bothered to stop and think what they’ll do — if their bet on price appreciation soured — with securities that would take four or five generations just to recoup the original investment. However, in a bear market, such as the one we now have, investors are fearful of losing their capital. So they demand a higher dividend yield to cover the risk of price erosion.
    It would be perfectly fine if companies were conserving cash to pursue some breathtaking, new growth opportunity, which will reward their shareholders over a reasonable period of time. Since such opportunities are extremely rare in a world that’s just scrambling to stay afloat, what’s the point of being tight-fisted with dividends?
    To be sure, investors don’t jump into a stock merely because it has a high current dividend ratio. That’s especially true of companies where operating profits are collapsing and there’s a lot of debt to service. At slightly under 11%, Tata Motors has the highest dividend yield of all Nifty 50 stocks. Yet, at least 13 analysts have rated the stock a “sell” in the past month. As Benjamin Graham, the founding father of modern investment theory, noted in Security Analysis, “an extra-liberal dividend policy cannot compensate for inadequate earnings, since with such a showing the dividend rate must necessarily be undependable.”
    IN THE absence of a culture of shareholder activism, there’s unlikely to be much pressure on managements to return more cash to investors. Equity analysts can go on issuing strongly worded reports, but as long as domestic financial institutions remain reluctant to bat for the small shareholder, there’s no reason why we should be surprised to see construction-engineering companies spending their cash to take over fraud-ridden software firms with unknown liabilities and dubious future prospects.
    If the dividend return improves, our market may actually become more robust, and less prone to frequent booms and busts. British economist John Maynard Keynes made the point succinctly in his
General Theory of Employment, Interest and Money by taking a swipe at Americans.
    “It is rare, one is told, for an American to invest, as many Englishmen still do, ‘for income’; and he will not readily purchase an investment except in the hope of capital appreciation,” Keynes wrote. “When he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favourable change in the conventional basis of valuation, i.e., he is in the above sense a speculator.”
    The next couple of sentences are as relevant today as they were in 1936, when the General Theory was first published: “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation.”
    Keynes went on to confess that his exasperation with “the spectacle of modern investment markets,” had often pushed him to the conclusion that making the purchase of any investment “permanent and indissoluble, like marriage, except by reason of death or other grave cause might be a useful remedy for our contemporary evils.”
    We don’t want to go that far (on closer inspection, neither did Keynes). Such drastic steps aren’t even necessary.
    Taiwan offers an interesting illustration. The big Taiwanese chipmakers and other electronics companies used to be quite bad at paying cash dividends to investors, routinely spending a significant chunk of their profits on stock awards to their engineers and managers. The tide began turning when investors complained. The dividend yield in Taiwan has improved from less than 3% in early 2004 to more than 10% now. By comparison, at less than 2%, the payout by sensex stocks is more or less unchanged from five years ago.
    This is unacceptable. Corporate India can — and must — do better. Brother, you had better spare that dividend cheque.