Date: February 28, 2011
There are good reasons why listed companies should give importance to payment of the dividends to their shareholders.
When investing in companies, investors tend to look at dividends, net book value etc. But the fact that dividends provide a mode of transferring informational content to shareholders is what makes it popular among investors when evaluating companies. This is because dividend payouts usually depend on a companyﾒs stability of earnings as well as possible outlook for the company and industry.
Dividend increases usually gives the impression of better prospects while a cut in dividend may give off a negative view. This may be why companies have a tendency to maintain dividend payouts to shareholders despite suffering losses in their financial year.
Take KODA limited for example; though they incurred a loss of -0.0022 earnings per share within their 09 financial period, they did not completely stop paying out dividends, as some companies do but rather, reduced their dividend payout instead. CapitaMall Trust, FJ Benjamin and SINGAP Shipping are few of the companies following such an example. In fact, they were even paying a substantially larger sum of dividend in the later year of 2010 when they recovered from the financial meltdown in 09.
Not only does the dividend provide a form a current income, it indicates a companyﾒs strength as well. But more importantly, dividend payouts reduce uncertainty for the investor. These reasons again lead to why companies always try to pay out dividends to their full capability. As such, there are companies like Azeus Systems who pay a constant dividend throughout their financial period of 2007-2010. SGX and SIA engineering also try to maintain their dividend payout ratio within the range of 60-90%.
The dividend payout ratio can also indicate a certain level of corporate governance a company reflects with respect to “dividend slack”. “Dividend slack” generally refers to the amount of retained earnings left after paying out dividends. A high dividend payout ratio would mean that much of the companyﾒs retained earnings are being paid back to investors. This results in a lesser balance in the retained earnings of the company. Subsequently when the company wants to raise funds for new capital, they would either take up a loan or issue shares. When taking up a loan, the banks naturally require certain criteria to be met and would in a way, serve as a ﾑcheck and balanceﾒ with regards to the looking at the companyﾒs accounts, thus prompting disclosure by the company. For this reason, investors are usually not in favour of rights issues which tend to dilute their shares.
However, a company which does not pay constant dividend does not necessarily mean that the company is doing badly. Certain companies, particularly growth companies usually try to pay little or close to no dividends as they believe that their own growth opportunities are better than that of other available opportunities to the investors. That being said, dividends are as a starting premise to a companyﾒs earnings and standings but investors should also take into account for other factors such as net book value, besides dividends when looking to invest in a company.
What is disturbing is the fact that some companies believe that they need not communicate their reasons for not paying dividends. When a company is profitable and has no borrowings or expansion plans, there must be very good reasons why it is not willing to distribute profits. To sustain confidence in the company, it should strive hard to distribute some of the profits at least. If not, explain to the shareholders its reasons for not doing so. Companies must, as a matter of policy and good governance, adopt a dividend policy for investorsﾒ comfort.
SIAS has been receiving information from shareholders that some companies are not willing to communicate or provide good reasons for not distributing profits. Cash rich companies have no reason to deny dividend payment to their shareholders. China Flex is one such company is being pressed by its shareholders for not paying dividends although it has the means to do so. If a company is in a position to distribute profit and does not want to do so nor explain why it is not doing so, then investors should move away from the company, it is not worth their while to remain as shareholders. Shareholders must query such companies for their reasons and ask for satisfactory explanation for not paying dividends.
Securities Investors Association (Singapore)