Despite the Covid-19 pandemic sending revenues up in smoke leading to profit warnings by a host of frontline companies, as many as 554 publicly traded firms on both BSE and NSE lined up dividend payouts for shareholders during the first quarter of the financial year 2020-21.
This may be one of the reasons for the surge in retail participation in the stock market in the last few months.
According to data by Geojit Financial Services, while 15 companies announced their plans to consider dividends in April, the managements of another 116 companies were on record in May saying that they would reward their investors with a dividend payout. The board of directors of another 423 listed entities approved dividend payout to their shareholders in June. However, the total amount of dividend paid by these companies to shareholders was not immediately available.
Notably, most of the companies which announced their plans to pay dividend to investors during the first quarter of the financial year 2020-21 were from mid-cap and small-cap spaces.
On a year-on-year basis, there was a slight uptick in the number of companies that announced dividends in the financial year ended March 2020 which stood at 882 - despite the virus singing the fourth quarter revenues -, compared to 878 firms in 2019 and 1687 firms in the 2018 financial year.
"There is opportunity in every crisis. The present crisis triggered by the pandemic Covid-19 is no different. This crisis has improved the business prospects of segments like telecom, pharmaceuticals, IT and many spaces in some niche segments. Companies in segments whose prospects have improved have been emboldened to declare dividends. This is certainly good news for investors who have been impacted by poor returns from fixed income instruments like bank FDs", said V.K. Vijaya Kumar, Chief Investment Strategist at Geojit Financial Services.
"The important factor driving the retail stock rush is the rally in the market which took the Nifty from around 7600 during end March to around 11,300 now. This rally spilled over to mid-small-cap stocks too giving good returns to retail investors who jumped on to the bull bandwagon around April. There has been an explosion in retail demat accounts during the last four months", he added.
This seemingly contrarian move to share a part of their profits during the first quarter of this fiscal with shareholders coincides with the decision of many frontline companies to skip their usual sequential or annual guidance to investors citing growing business uncertainty with the Covid-19 pandemic and the subsequent economic lockdown deepening the haze over their business outlook.
Also, many cash rich companies skipped dividend payouts and even went into a cost cutting mode including mass lay-offs, furloughs and deep salary cuts citing the need to conserve cash.
Ajit Mishra, VP - Research, Religare Broking said, "In the Budget 2020, the Finance Minister had proposed to abolish dividend distribution tax on dividends paid by the corporates and the tax burden would be borne by the receiver (i.e. shareholders). So, it could be one of the reasons for corporates paying higher dividends."
"During economic downturns, high dividend-paying stocks gain momentum as investors feel it to be a safe investment option that could earn steady returns in the form of dividends", he added.
Market experts feel that this may be one reason for the recent surge in retail investors' participation in the equity market. These stocks, they say are appealing to retail investors, who generally like shares of lower denomination. It also goes against the grain of research notes by leading rating agencies which said that first quarter FY'2021 earning numbers of corporate sector would be a washout citing significant pressure on revenues and profits, considering that the major part of the quarter was under lockdown or on graded and guarded unlocking phase.