Why does IOCL pay high dividends?

IOCL is one of the three major OMC (Oil Marketing Companies) that is linked to the value chain.

IOCL, HPCL & BPCL: Major Oil Marketing Companies of India

It is located downstream(facing the end-user) as compared to the companies like ONGC and OIL India that are located upstream.

Petroleum Supply Chain in India

IOCL is involved in different activities linked to the crude oil value chain which includes – R&D, Pipeline laying, Exploration and Production (E&P), Petrochemicals, etc.

IOCL: Diversified Business Verticals

As the business within the behemoth is diverse, the revenues will also be outstanding. The company despite lockdowns & subdued demand is on the Fortune 500 list of companies.

IOC with a revenue of $50 billion ranked 212 for the fiscal year ended on March 31, 2021.

Now, coming to the question: Why does IOCL pay high dividends?

To answer this, we need to look into the shareholding pattern:

IOCL: Shareholding Pattern

IOCL(Indian Oil Corporation Ltd) is a Public Sector Undertaking of the Government of India ie. The Government is the biggest shareholder of the company and decides the direction in which the company needs to go. From the chart above, we can see that the shareholding pattern for FIIs & DIIs is below 10% each and the major shareholder after the Government of India is the – Public.

With the government in overdrive to meet the fiscal targets through dividends & privatization, PSU’s are asked to pay out dividends for meeting the government target that is necessary to meet expenditures especially during the Covid-19 era where normal sources of income have been dented.

Fiscal Math: Government of India

Accordingly, in the financial year 2021-22 (April-March) so far Rs 20,222.40 crore has been received as dividends from central public sector enterprises. The Government received Rs 2,424 crore from Indian Oil Corporation Ltd as a dividend.

Dividend by IOCL to Government of India

Also, with the stock market rising and interest rates falling, OMC’s seem to be a way to go as they provide capital security and provide dividends that exceed returns from debt instruments. This trend has been visible with an increase in Public holding as of Sept 2021

IOCL Shareholding: Increase in Public Share

Hope this helps to answer the query

Happy Investing!

References:

  1. Supply chain and logistics issues of crude oil in India
  2. Indian Oil Corporation Ltd.: IndianOil – The Energy of India
  3. Seven Indian Companies feature on Fortune 2021 Global 500 List, Reliance Slips 59 places, stood 155th – Prag News
  4. IOC Share Price, IOC Stock Price, Indian Oil Corporation Ltd. Stock Price, Share Price, Live BSE/NSE, Indian Oil Corporation Ltd. Bids Offers. Buy/Sell Indian Oil Corporation Ltd. news & tips, & F&O Quotes, NSE/BSE Forecast News, and Live Quotes
  5. Indian Oil Corporation pays Rs 2,424 crore as dividend tranche to govt

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