More, Please

Infosys Generosity Falls Short

The company's pledge to raise dividends doesn't go far enough.
As of 5:53 AM EDT
1190.25 INR

Two takeaways from Infosys Ltd.'s earnings announcement on Thursday are worthy of note.

First, slower growth is here to stay. And second, Infosys has buckets of cash it needs to get rid of.

After average annual revenue growth of 17.6 percent over the past decade, the Indian outsourcing leader grew its top line just 9.7 percent last year in rupee terms, and 7.4 percent in U.S. dollar terms. That's forecast to drop to between 2.5 percent and 4.5 percent in rupees, or 6.1 percent to 8.1 percent in greenbacks, next fiscal year.

Whichever currency you look at -- 62 percent of Infosys's revenue comes from North America -- the outlook is less than analyst estimates compiled by Bloomberg. Two straight years of single-digit growth, and the third in four years, make it clear the heady days are over. Fellow Gadfly Andy Mukherjee has outlined reasons for this, including the industry's inability to embrace social, mobile, analytics and cloud technologies.

Holding On

Infosys still retains more than half its income, paying less than 50 percent of earnings in dividends

Source: Bloomberg, Infosys

Note: Ratio doesn't include dividend tax.

If you take it as a given that Infosys is no longer a growth company, then shareholders need another reason to hold the stock. Management acknowledged as much in its earnings statement by pledging to return 130 billion rupees ($2 billion) to shareholders through dividends and buybacks. Its policy now is to give back up to 70 percent of free cash flow.

That's not enough.

Returning $2 billion is roughly double what Infosys paid last year. It's also equal to about 34 percent of current cash, Chief Financial Officer M.D. Ranganath said. Yet, while 70 percent of free cash flow seems generous, it's actually in line with what Infosys paid out the prior year and doesn't speak to the big pile of money the company is already sitting on.

Cashing In

Infosys plans to maintain a high dividend ratio as a proportion of free cash flow

Source: Bloomberg, Infosys

Infosys is an asset-light company with minimal capital expenditure. According to Ranganath, it has close to $6 billion in the coffers. 1  Yet it's been so stingy over the past decade that it's accumulated more than 650 billion rupees in retained earnings, equal to 4.5 times last year's net income.

Piling Up

Retained earnings have more than tripled over the past six years

Source: Bloomberg, Infosys

Infosys may not be a growth stock any more, but the tech titan needs to be a lot more generous if it's to be considered a dividend play.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Cash and cash equivalents dropped over the past year as Infosys put money into liquid mutual funds.

To contact the author of this story:
Tim Culpan in Taipei at

To contact the editor responsible for this story:
Katrina Nicholas at

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