Nepal Telecom’s Income Is Falling, But It Continues to Distribute Attractive Dividends. What Are the Risks?

Kathmandu: Nepal Telecom, which has been reluctant to move forward with a 5G rollout citing the need for heavy investment, continues to distribute billions of rupees in attractive cash dividends every year. Like last year, the company has decided to distribute 30 percent of last year’s profit to shareholders this year as well, amounting to more than Rs 7 billion including tax.

Despite a continuous decline in income and profit, Nepal Telecom has not stopped distributing large dividends. The company had distributed a cash dividend of up to 51 percent in fiscal year 2072/73. Even as income and profit have declined over the years, the practice of paying dividends has continued.

Nepal Telecom’s net profit has declined by more than Rs 3.5 billion. Even so, the company has decided to distribute a 30 percent cash dividend from the profit of fiscal year 2081/82. The same rate of dividend was distributed in fiscal year 2080/81. The decision to distribute the dividend was taken at a meeting of the board of directors held on 9 Poush.

As a result, Nepal Telecom will distribute around Rs 7.2 billion, including tax, to shareholders. While doing so, the company has repeatedly expressed concerns about the return on investment and the lack of sufficient resources for the rollout of 5G services.

As a government-owned company operating in the telecommunications sector, Nepal Telecom argues that it is compelled to expand services even in remote and difficult areas where costs are high and returns are low. The company says continued investment is necessary to maintain and improve service quality in such regions.

Distributing cash dividends means distributing the cash a company holds. This has raised questions about whether Nepal Telecom is actually in a position to continue paying such attractive cash dividends.

In recent years, both Nepal Telecom’s income and profit margins have been declining. Over the past seven years, the company’s income has dropped by more than 28 percent. Along with falling income, profits have also continued to decline. Nepal Telecom has cited increased liabilities, the impact of OTT services, and renewal fees as major reasons for the decline in revenue.

While managing resources to pay the Rs 20 billion third renewal fee for its GSM license, the company was unable to invest from Poush 2080. The decision to pay the renewal fee was made in Baisakh 2081. To arrange the funds, Nepal Telecom prematurely broke fixed deposits held in several banks. The impact of this decision is still reflected in the company’s profit figures.

Former Managing Director and Chartered Accountant Buddhi Acharya has expressed dissatisfaction over the practice of distributing dividends using profits earned in previous years. He said dividend distribution should be based on the profit earned in the concerned fiscal year. However, even when business performance deteriorates, profits accumulated in previous years are still being distributed as dividends.

“To appease shareholders, there is a trend of distributing profits earned in previous years during years when business performance is weak,” Acharya said. “To maintain dividend trends in the market and protect the company’s image, profits from previous years are mixed with current earnings. In reality, the company should clearly inform shareholders when it is not earning well.”

He added that Nepal Telecom has not been able to generate sufficient profit from its main source of income, namely operational business. “Profits earned in previous years should be kept in reserve for future investment. This would help strengthen the company and allow dividends to be paid from sustainable earnings in the future,” he said.

According to Acharya, there is no justification for distributing dividends if even a strong company is making losses. He said dividends can be distributed confidently only when a company is consistently earning from operating profits as well as other sources. Distributing dividends by showing interest income from bank deposits as profit, he argued, is fundamentally flawed.

“Distributing dividends from such income and profit is not a rational decision under any circumstances,” Acharya said. “Non-operating income, including interest earned from bank deposits, has also declined significantly. The company should not follow a ‘do whatever we can today and worry about tomorrow later’ approach. It must invest based on its strengths.”

Nepal Telecom is also under constant pressure from the government and other stakeholders to invest in 5G and improve service quality. However, the company has repeatedly stated that it cannot prioritize the 5G rollout without adequate preparation and investment, citing uncertainty around profitability.

The company has emphasized that rolling out 5G requires deep study, large capital investment, spectrum availability, and sufficient market demand. It has also stressed that it has a responsibility to invest heavily not only in 5G but also in improving and expanding its existing 4G services.

“Telecom should not distribute its cash balance as dividends,” Acharya said. “It should invest that cash to strengthen its business. Dividends should be distributed from the income generated through such investments. Distributing dividends today from money earned in the past, when the company is no longer earning at the same level, can be dangerous for Telecom.”

Meanwhile, Nepal Telecom’s Company Secretary Dwarika Prasad Poudel said the proposal to distribute a 30 percent cash dividend, approved by the board of directors, has been sent to the Ministry of Finance for approval.

“The authority to propose dividends lies with the board of directors,” Poudel said. “The board determines the rate by evaluating the overall condition and interests of the organization.”

After approval from the Ministry of Finance, the proposal will be presented at Nepal Telecom’s 18th annual general meeting scheduled for 30 Poush. Once endorsed, the dividend will be distributed to shareholders. The Telecom board includes a Joint Secretary from the Ministry of Finance as a member. Since the proposal was passed by the board and forwarded for approval, the possibility of rejection is considered low.

“There is a provision for a Joint Secretary from the Ministry of Finance to sit on the Telecom board,” an official from the ministry said. “Decisions taken by the board are generally not altered later. Such decisions are usually made after informing the Finance Minister. If the company did not have the capacity to distribute dividends, the proposal would not have been approved in the first place.”

 

पछिल्लो अध्यावधिक: पुस १४, २०८२ ९:५९

टिप्पणीहरू