ITC, HUL and TCS vs Reliance and Banks: Why Mature Indian Companies Pay More Dividends

Dividend announcements often grab headlines, especially when large, established companies like ITC, TCS, or Hindustan Unilever declare substantial pay-outs. But why do mature companies tend to pay higher dividends while fast-growing firms hold back?

Let’s break it down through logic, numbers, and India-focused insights.

1. Limited Growth Opportunities

Mature companies usually operate in well-established markets where they have already captured a large share. Their revenues grow steadily but not rapidly. Because of this, they have fewer high-return reinvestment opportunities compared to younger, fast-growing firms.

Young companies prefer to reinvest their earnings in marketing, R&D, or capacity expansion to drive future growth. Mature companies, with limited reinvestment needs, often return excess profits to shareholders through dividends.

For example, FMCG and IT companies such as HUL, ITC, Infosys, and TCS operate in stable industries with strong cash flows but relatively lower expansion requirements. This allows them to distribute a larger portion of their profits as dividends.

2. Stable and Predictable Cash Flows

Mature firms typically have steady and predictable earnings. Their businesses are less cyclical, and they generate strong free cash flows regularly. This financial stability allows them to commit to consistent or rising dividend payouts without putting operational needs at risk.

For instance, TCS and Infosys have stable service revenues from global clients, enabling them to pay out 50 to 100 percent of their profits as dividends in most years.

3. Attracting Income-Seeking Investors

As companies mature, their investor base often shifts from growth-focused investors to those seeking regular income, such as retirees, conservative investors, or institutional funds. By offering regular dividends, companies increase their appeal to long-term holders, reduce share price volatility, and build a reputation for reliability.

4. Dividends as a Signal of Confidence

Dividends also act as a signaling tool. A healthy and consistent dividend tells the market that the company is financially strong, confident about future earnings, and has no urgent capital demands.

Conversely, cutting dividends often makes markets nervous, as it can signal weak cash flows or trouble ahead.

5. Tax Efficiency: Indian Investor’s Perspective

In India, tax treatment plays an important role in how investors view dividends compared to capital gains.

Then vs Now

Before April 2020
Companies paid Dividend Distribution Tax (DDT), and dividends were largely tax-free in the hands of investors. This made them very attractive.

After April 2020
DDT was abolished. Dividends are now taxed at the investor’s income tax slab rate.

• High-income investors may pay up to 30 percent or more on dividends.
• Long-term capital gains (LTCG) on equities are taxed at 10 percent above Rs 1 lakh.

For high-net-worth investors, dividends are now less tax-efficient than capital gains. For small investors in lower tax brackets, dividend income can still be attractive, especially from stable businesses.

This is why some companies, particularly in IT, increasingly use share buybacks as an alternative. Buybacks can be more tax-efficient for certain investor categories.

6. Efficient Utilisation of Capital

Before deciding on dividends, companies ask a simple but crucial question:

“Is this cash better used inside the business or outside?”

If the company can reinvest retained earnings at a high return, it is smarter to retain. But if there are limited attractive opportunities, returning cash to shareholders creates more value.

For example, if a company can reinvest cash to earn 12 percent but investors could earn 14 to 15 percent elsewhere, retaining would destroy value. It should instead pay dividends or conduct buybacks.

7. Sustainable Growth Rate (SGR): A Key Decision Tool

Many companies use the Sustainable Growth Rate (SGR) to decide how much profit to retain versus distribute.

SGR = ROE × (1 - Dividend Payout Ratio)

• ROE = Return on Equity
• Payout Ratio = Dividend ÷ Net Income

SGR tells a company the maximum growth rate it can achieve without raising new capital.

Example
If a company has an ROE of 20 percent and pays out 50 percent of its profits,
SGR = 20 × (1 - 0.5) = 10 percent

If actual growth required is lower than 10 percent, there is excess cash that can be distributed as dividends. If growth needed is higher than 10 percent, the company should retain more earnings.

This simple formula helps mature companies balance growth and shareholder returns.

SGR Is a Tool, Not a Rule

SGR is useful to understand the maximum internally funded growth a company can support given its current profitability and dividend policy. But:

• If ROE is strong: SGR becomes a meaningful guide for balancing retention vs distribution.
  If ROE is weak: SGR itself will be low, and the company should first focus on improving ROE rather than deciding payout based on SGR alone.

8. Dividend Pay-out Trends of India’s Top 15 Companies

Here is a snapshot of the dividend pay-out ratios of the top 15 companies by market capitalization from FY21 to FY25:

Source: Screener.in

What the Numbers Indicate

• FMCG and IT firms (HUL, ITC, Infosys, TCS) consistently have high payout ratios. This reflects limited capital needs and strong cash flows.
• Banks and financials (HDFC, ICICI, Kotak) keep payouts low to fund growth and regulatory capital requirements.
• Capital-intensive firms like Reliance and L&T retain more for expansion.
• Transitional firms such as Airtel and LIC show fluctuating ratios reflecting strategic adjustments.

Conclusion

Mature companies pay higher dividends because they do not need to retain all their profits. Their stable earnings, limited reinvestment opportunities, and focus on rewarding shareholders drive these payouts.

For Indian investors, the key is to understand the company’s maturity and sector, factor in tax implications, check dividend consistency and payout trends, and align choices with personal investment goals.

High-dividend stocks such as ITC or HUL suit income-focused investors. Growth-focused investors may prefer low-payout firms like banks or Reliance, where returns mainly come through capital appreciation.

Dividend policy is not just about generosity. It reflects how a company thinks about capital efficiency, growth, and shareholder value.

Disclaimer

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities are quoted as an example and not as a recommendation.This is nowhere to be considered as an advice, recommendation or solicitation of offer to buy or sell or subscribe for securities. INDStocks SIP / Mini Save is a SIP feature that enables Customer(s) to save a fixed amount on a daily basis to invest in Indian Stock. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948 BSE RA Enlistment No. 6428. Refer https://indstocks.com/pricing?type=indian-stocks; https://www.indstocks.com/page/indian-stocks-sip-terms-and-condition for further details.