Folks,
Even as Dividend Distribution TAX (DDT) is a drain on the value of a stock, it is plainly ignored. I studied the impact of DDT on valuation and wrote a guest post.
You may find the link here The valuation leak is getting worse. I hope it is of value to fellow members.
Warm regards,
What I am understanding from the conclusion is that slowly over time, due to increase in DDT, companies are more slow to increase their dividend payout ratio as they grow bigger.
Please correct me and add if I am missing something.
Yes. Consequently they retain more capital than they need. This, over time, drags down returns on equity.
Warm regards,
Do you think that due to this, in future, the dividend yield of nifty would fall slightly?
Dividend yield is dependent on the price of nifty and not its earnings. So even if the payout ratio drops ( the proportion of earnings reaching shareholders), the yield will increase if nifty drops in price.
True. You mentioned that in a different thread about the dependency of dividend yield on price. However, dividend yield also depends on the dividend itself which is eps *(1-payout ratio). Now, if we take two situations where eps and price of nifty remains constant, in that case the dividend yield would fall in the lower payout ratio, right?
You mean eps*payout ratio. If eps and price remain constant mathematically the yield ahould fall with lower payout ratio.
But that is more mathemathical than real. In reality eps will go mostly up and price while fickle (or independent) in the short term, is in the long run dependent on eps among other things. It is not dependent on payout ratio, broadly speaking. Payout is determined by management and price by market, they are independent entities.
Thanks for a well laid out analysis.
Some wise man has said that “There is nothing permanent than temporary taxes.”. Dividend Distribution Tax has a living example of this as it has increased from 8% to 17 % in last ten years as mentioned in the article and who’s know what happens, but they are unlikely to go down.
I doubt if the increase in DDT this year will make a bigger impact on companies which are already paying a high dividend for example Nestle, HUL, TCS, HCL Tech. The fact is theses business does not need much capital, and they would rather return it to their shareholders and preserve their high returns ratios. Higher payout generally tends to provider higher PE to the stocks.
However, it will resonate well with companies who are reluctant to give a dividend. For them, high DDT is another reason to delay the payout. This additional cash will entice promoters into risky/ different ventures.
I think, this will also make buybacks more promising as a company doing it, will not have to fork our DDT.
Nice wise quip that! I think and that was my main argument,that valuation of firms need to be adjusted to reflect increasing take of DDT. No one seems to be doing that.
Buybacks at the exchanges should go up, and that may be a better route to give shareholders back their earnings. That is, as long as the taxes on long term gains remain as is today.
In Livemint today, Rajeev Thakkar (PPFAS) expresses his view on unintended consequences of taxing dividends. Good read.
Awesome read. Thanks a lot. This should be read by everyone out here.
Could be the reason why SEBI coming up with a policy on dividends distribution☺
Top 500 listed cos to have dividend distribution policy: http://www.thehindubusinessline.com/news/top-500-listed-cos-to-have-dividend-distribution-policy/article8621541.ece
