Why should a bank pay dividends (when it can afford to)? For various reasons.
Other than the positive signals it sends out, one technical reason is that it attracts a whole new class of investors. The ones which like to earn a dividend.
Generally speaking, let’s take pension funds. Often pensions like to have a portion of their portfolio to yield annual income so that they can meet their annual commitments (and not wholly rely on debt). And not surprisingly, in the US (where some of the large pensions reside), from what we hear and see, dividend policies are very clearly articulated. Many companies even pay quarterly dividends. Cutting back or cancelling a dividend is a super big deal.
(Before it’s pointed out that big tech does not pay dividends…They buy back stock, which has the effect of giving back some money to shareholders. Kinda).
This is not to say that this idea is necessarily true in India too. But then we attract foreign monies. Some of it from pensions and other (partially) income seeking funds.
I would offer that a dividend paying stock has a potentially broader investor base that is interested in the stock.
Whether IDFC First can afford to pay or not is something that will need to be worked out (my gut feel is that it can, starting FY25).
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