The Street was hoping that investors will lap up shares of high-dividend companies on optimism that their payouts will increase further, thanks to the 20 per cent tax saving.
However, the trade failed to materialise as wealthy investors stayed away fearing high tax outgo, and experts raised doubts on whether companies would actually increase cash dole outs.
Stocks that offer high dividend yields or with high cash levels failed to make positive strides despite the government abolishing 20 per cent dividend distribution tax (DDT).
Business Standard analysed companies with high dividend yields, dividend payouts, and cash levels (of those which could be potential dividend payers).
About 60 per cent of these stocks closed the day with losses on Monday, even as the benchmark indices ended in the green.
The average fall in the 30 stocks (excluding ITC) was 1.2 per cent, as against a 0.34 per cent gain in the Sensex.
The Street was hoping that investors will lap up shares of high-dividend companies on optimism that their payouts will increase further, thanks to the 20 per cent tax saving.
However, the trade failed to materialise as wealthy investors stayed away fearing high tax outgo, and experts raised doubts on whether companies would actually increase cash dole outs.
Foreign institutional investors (FIIs) sold shares worth over Rs 1,200 crore, provisional data provided to the stock exchanges shows.
The selling was offset by domestic institutional investors (DIIs) who bought shares worth nearly Rs 1,300 crore.
The high-dividend yield stocks list is dominated by public sector undertakings (PSUs).
Majority of them ended with losses.
Even stocks, such as REC, NLC India and PTC India, which offer more than 5 per cent dividend yield, were in the red.
“PSU stocks despite being high dividend payers underperformed because of the stiff divestment target set by the government,” said Deepak Jasani, head of retail research, HDFC Securities.
The Centre has set an ambitious disinvestment target of Rs 2.1 trillion for 2020-21.
Also, analysts said most PSUs have managed to pay high dividends by increasing their payouts, even as their profitability eroded.
While the Centre abolished DDT, dividends will now be taxed in the hands of recipients at their applicable rate - which can be as high as 43 per cent for the ultra-rich.
This, market players said, discouraged wealthy investors from taking a position in high-dividend stocks.
U R Bhat, director, Dalton Capital India, said under the DDT regime, the tax was collected by companies and now the burden has shifted to investors.
“In that case, there’s really no significant change,” he said.
Also, the cut in tax comes at a time when earnings growth for most companies has taken a hit because of the economic slowdown.
“We think most companies will not raise dividends proportionate to the tax reduction and can save the bulk of the tax break.
A lot of high dividend-paying companies may not have growth in earnings to accommodate higher dividends,” Ridham Desai, head of India equity research, Morgan Stanley, wrote in a note.
Some said instead of increasing dividend payouts, companies may opt for share buybacks.
As a result, there was no immediate trigger to buy these stocks.
“Most promoters and high net-worth investors come under the highest tax bracket.
"And there is a genuine fear among market participants that they will still end up paying more by way of income tax after the removal of DDT.
"As a result, there is a scope for more buyback than a higher dividend payout,” said G Chokkalingam, founder, Equinomics.
Analysts said investors may eye multinational companies (MNCs) with high cash levels.
“MNCs usually pay tax on dividends received by them according to the direct tax agreement (DTA) with their respective country, and for them, there is no change in the dividend tax.
"MNCs typically distribute anything above 70 per cent of post-tax income as dividends.
"Local shareholders can also hope to receive higher dividends from such companies,” said Jasani.
Shares of some MNCs, including Hindustan Unilever, Maruti Suzuki and Nestlé, rallied on Monday.
