Forget stock gains, you may lose dividends too

DOUBLE WHAMMY

Some small and medium-size companies have already cut or cancelled dividends. This could soon become a trend among bigger cos also

 AFTER job cuts and pay cuts, India Inc is now wielding the axe on dividends. Several companies are expressing inability to pay dividend at the proposed rate, attributing it to factors like liquidity crunch, earnings slowdown and capex plans. They are either reducing the rate of dividend from the proposed level or even deciding not to pay any dividend, causing a double whammy for shareholders who have already suffered a huge capital loss since the start of this year.
    The trend has so far been evident among small and medium-sized companies. However, analysts feel even shareholders of large-sized companies may have to be content with lower payouts, after having been pampered on fat dividend cheques in the last few years. The list of companies slashing dividends includes Atul Auto, Cambridge Technology, OM Metals and FCS Software Solutions. Another company Novopan Industries, in fact, has cancelled the dividend which was earlier recommended by the company's board.
    An increasing number of companies are expected to adopt a conservative dividend policy and plough back profits to maintain healthy cash position. "More and more corporates would now look to conserve cash in the wake of severe liquidity problem. Even shareholders may not be expecting higher dividend payouts, considering that it would be difficult to maintain profitability amid the ongoing economic slowdown," said Karvy Stock Broking vice-president Ambareesh Baliga.
    Novopan Industries, a B-group company, recently informed the Bombay Stock Exchange about the cancellation of 18% dividend recommended by the board for 2007-08 in the meeting held on October 14, 2008. The company said the decision was taken with a view to conserve resources. Novopan posted lower net profit of Rs 5.5 crore on sales of Rs 83 crore in 2007-08, compared with Rs 6 crore and Rs 81 crore, respectively, in the previous year. The company's profitability, in fact, took a hit in the quarter ended September 30, 2008 when it recorded a loss of Rs 5.9 crore on sales of Rs 22 crore. From its peak of Rs 85 on January 10, the stock has slipped 80% to close at Rs 18.6 on Thursday.
    In another example, FCS Software slashed dividend from 25% to 11% for the year ended March 31, 2008. The company attributed the decision to its infrastructure expansion plans. It posted a net profit of Rs 32 crore on sales of Rs 204 crore during the last year, while figures stood at Rs 8.2 crore and Rs 52 crore, respectively, in the second quarter of the current year. The stock has fallen 77% from its high of Rs 145 touched on January 1, 2008.
    Apart from FCS Software, companies like Atul Auto, Cambridge Technology and OM Metals have halved dividend to 5%, 5% and 10%, respectively. Justifying its move, Atul Auto, in the notice to BSE said: "By reducing the dividend outflow, the company will be able to maintain liquidity and will make necessary investment in R&D to give better results in future and, in turn, give better returns to its stakeholders."
    Despite a sharp fall in shares since January this year, many long-term investors are expected to have stayed invested in the market in anticipation of good dividend returns, according to analysts. If companies lower dividend because of earnings growth concerns, that may affect the sentiment, particularly towards such companies which had been offering good dividend yield in the past.
    vijay.gurav@timesgroup.com