Every bull market needs a trigger. According to conventional wisdom, the current bull run was triggered by a battery of economic reforms that is expected to juice up India Inc's earnings, going forward. Or, is it that the euphoria about the reforms is just a cover and investors are buying more equity because it earns them more dividend income than any time in the recent past?
This seems to be the case if one compares the trend growth in the dividend pay-out by the 50 companies that comprise the NSE Nifty index and with the index value during the period. In the last three years, the point-to-point growth in dividend yield on Nifty index has been nearly 60 per cent against 13 per cent appreciation in the benchmark index during the period.
In comparison, India Inc's earnings growth continues to be tepid and the gap between the Nifty and the underlying earnings per share continues to widen. And it will require a sharp spike in earnings growth in the next few quarters to restore the parity between the two.
The link is best illustrated in the chart which plots the trend growth in dividend per unit of Nifty and the Nifty daily closing value. The dividend value has been derived by inverting the index dividend yield calculated by the National Stock Exchange every day. To make the two numbers comparable, they have been indexed to a base of 100 at the beginning of the period. Further, to iron out the daily volatility, the 66-day moving averages (equivalent to three months) for the variables have been taken.
The trend is seconded by looking at the year-on-year growth in actual dividend pay-out by the Nifty companies. In FY12, Nifty companies together distributed Rs 61,050 crore -15 per cent higher than previous year and cumulative growth of 72 per cent over FY09. Interestingly, 24 Nifty constituents either bettererd Nifty in dividend growth and only 23 per cent underperformed the index. As every stock trades at a typical dividend yield, (a ratio of dividend per share to its stock price) rise in dividends translates into higher share prices.
Experts agree. "Trends in dividend growth do influence the share price, especially if it is consistent and the company shows the ability to maintain it through its superior earnings growth and strong balance sheet," says Dhananjay Sinha, co-head, institutional research at Emkay Global. And this is exactly what has happened in the last three years. The dividend bonanza has been led by strong companies, such as Tata Consultancy Services, ITC, Ultratech Cement, HDFC Bank, Housing Development Finance Corp, Coal India, Bajaj Auto, Tata Motors, Mahindra and Mahindra and Asian Paints, among others. And given their financial position, there is a strong possibility of these companies maintaining their trend in the foreseeable future as well.
The view is seconded by Devang Mehta, vice-president and head-equity sales at Anand Rathi Financial Services. "A consistent stream of dividend, along with strong fundamentals, provides stickiness to long-term investors and could be a trigger for them to buy more if they see the trend to continue." He expects the dividend bonanza to continue in the near-term as it has been led by companies with strong earnings visibility.
Others, however, say markets ultimately discount earnings and dividend is only a side play. "Earnings growth is expected to pick up pace in the next two quarters," says Anand Kuchelan, vice-president, research at Padmakshi Financial Services. "Too much dividend pay-out may, in fact, indicate slower capex growth, which is a bad thing for long-term earnings growth."