If rise in dividend payment does not correspond to rising profit, the dividend payout ratio may affect future growth
03-Dec-2013 •Vikas Vardhan
Most of the times, dividend payment is considered an important yardstick to check the health of a company. It shows that the company is making enough profits to pay cash to the shareholders. But a rise in dividend payment should always correspond to rising profit, for it to be considered healthy and sustainable. An important parameter to check this is dividend payout ratio, which shows how much dividend a company is paying out from its profits. Whenever dividend growth rises and profits remain static then this ratio jumps. A mature company may have a high dividend payout ratio as it does not need much funds for expansion but even then dividend growth outpacing the profit growth can be dangerous. This is what happened in the overall market in FY13.
We checked BSE-500 companies separating the PSUs and non PSUs and analysed their dividend pattern. In both cases dividend payout ratio has gone up sharply. In case of PSUs it is partially because of the change in policy last year wherein the government raised the lower limit of dividend payout for some companies. On the other hand, private sector companies witnessed highest payout in the last 6 years, due to lack of growth opportunities as perceived by them.