Friday 29 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on July 25 - 31, 2016.

 

IN the current low interest rate environment, investors are increasingly turning to dividend-paying stocks for yields and safety. Despite declining earnings in the past two years, most companies listed on Bursa Malaysia have been able to maintain their dividend payouts at above 3%.

However, some pertinent questions come to mind, especially for income investors: Can the companies maintain dividends amid a slowing economy? What sectors and companies are reducing dividends? And more importantly, are there any sectors or companies that are paying better dividends?

By compiling data from cash flow statements, Chart 1 shows the dividends paid to shareholders in the past five years and the first quarter of 2016. While companies may pay dividends in the next quarter after they have declared the quantum, most of them pay out at a predictable frequency and time every year, making such cash flow data comparable on a year-on-year basis.

That said, it should be noted that the dividend data from cash flow statements is lagging by a quarter and it disregards the sources of the funds, that is, the dividends could come from non-operating activities. For instance, companies could sell their assets and pay dividends with the proceeds.

As shown in Chart 1, dividends paid by Bursa-listed companies dropped 6.3% to RM11.6 billion from a year ago, albeit by a lesser extent compared with an 18.4% fall in aggregate 1Q2016 corporate earnings. Sectors that paid lower dividends in the first quarter — a RM2.3 billion reduction — include plantation, telecommunications, oil and gas and automotive (see Chart 2).

 

Dividend cut by heavyweight sectors

The plantation sector accounted for 28.7% of the RM2.3 billion reduction in dividends, followed by conglomerate (26%), telecommunications (17.3%), oil and gas equipment and services (5.8%) and automotive (3.8%). Together, the five sectors (based on Bloomberg classification) accounted for 82% of the amount.

At the company level, conglomerate Sime Darby Bhd saw the biggest reduction in dividend payout — RM639 million — in the first quarter due to lower earnings from its plantation, industrial and motor segments (see Table 1). Note that the plantation segment was the group’s largest earnings contributor, accounting for a quarter of its revenue and a third of its operating income in FY2015.

Other plantation companies that cut dividend sharply include Kuala Lumpur Kepong Bhd (KLK) and IOI Corp Bhd, which were affected by weak crude palm oil prices last year. While KLK saw its FY2015 earnings fall 12.3% to RM869.9 million from a year ago, IOI Corp’s earnings plunged 95% to 

RM168.1 million from FY2014, mainly due to its large US dollar debt exposure.

As for Kulim Malaysia Bhd, the company paid a special dividend of RM500 million in 1Q2015 instead of an interim dividend like in 2014. This came about after it disposed of New Britain Palm Oil Ltd to Sime Darby. Having completed its capital reduction and repayment exercise on July 5, Kulim is in the process of being taken private by controlling shareholder Johor Corp.

Over at DiGi.Com Bhd, the dividend cut reflects its lower profitability due to intensifying competition and the fact that it has been paying out close to 100% of its profits in the past three years. As Maxis Bhd has so far maintained its profitability relatively well, the dividend cut last year was because it lowered its dividend payout ratio to below 100% and stopped borrowing to pay dividends.

Shares of Maxis and DiGi have been recovering since May, partly due to decent yields — 3.3% for Maxis and 4.3% for DiGi. Nonetheless, with competitive pressures limiting growth opportunities (for example, Telekom Malaysia Bhd’s (TM) new 4G LTE mobile service webe) and the upcoming spectrum reallocation exercise, dividend upside for this sector seems limited and there is a possibility of further dividend cuts due to either spectrum fees or lower profitability.

 

Higher dividends by GLCs

Sectors that paid higher dividends contributed RM1.5 billion more in the first quarter, mostly led by individual companies (see Chart 3 and Table 2). TM, MISC Bhd, Petronas Chemicals Group Bhd, Petronas Gas Bhd — government-linked companies (GLCs) with a dominant industry position or strong parentage backing — accounted for over 60% of the amount.

However, at a closer look, things are not exactly rosy. For TM, the RM455 million paid out in 1Q2016 was due to a change in the timing of dividend payments. The integrated 

telecoms service provider, which is 28.6%-owned by Khazanah Nasional Bhd, changed the dividend type of its second payout for FY2015 from final to second interim dividend, accelerating its dividend payment by two to three months to 1Q2016.

MISC, which is 62.7%-owned by Petroliam Nasional Bhd (Petronas), raised its dividend payout ratio from 10.7% in 2013 to 54.3% last year. The shipping company paid out 

RM401.7 million in 2014 and 50% more last year, although earnings grew only 12% in the same period. In 1H2016, dividends rose to 

RM1 billion, 66.7% higher than that of last year.

The higher dividends could be attributed to the disposal of its international tank terminal business, VTTI BV, for RM3.4 billion in 4Q2015 as part of its initiative to hive off uncompetitive non-core businesses. MISC is currently divesting its logistics arm, MISC Integrated Logistics Sdn Bhd, which is expected to bring about RM358 million in total proceeds.

The stock took a dive in late April from RM8.90 to a one-year low of RM7.25 on May 9, following consensus earnings cut due to the weaker outlook for petroleum and liquefied natural gas shipping rates. Data compiled by Bloomberg shows that the street expects MISC’s operating profit to decline 21% this year, with a lower yield of 2.9%.

Another Petronas subsidiary that paid higher dividends is Petronas Chemicals. It paid 25% or RM160 million more in the first quarter. As the petrochemical company has been paying out about 50% of its profits, the bigger payout was because of improved profitability last year. Despite a 7.3% drop in revenue due to lower crude oil prices, net profit rose 12.9% year on year to RM2.8 billion, thanks to a higher plant utilisation rate of 85% and weaker ringgit.

Supported by its strong cash flow generation, Petronas Chemicals is expanding its capacity over the next few years through the Sabah ammonia urea project and the Refinery and Petrochemical Integrated Development Project in Johor. Taking the multi-year capacity expansion plan into account, analysts are forecasting 10.2% earnings growth for the company next year.

Other non-GLCs that paid higher dividends in 1Q2016 include property investment company Selangor Properties Bhd, brewer Heineken Malaysia Bhd, Hong Leong Bank Bhd and hard disk drive component maker JCY International Bhd. Both Selangor Properties and JCY incurred a loss in the latest quarter, largely due to foreign exchange losses on overseas investments and receivables/hedging instruments.

Mounting dividend risk with declining profits

While companies could liquidate assets or borrow to pay dividends, the ability to sustain and grow dividends is still driven by profitability. As shown in Chart 4, corporate profits in the past five quarters have been particularly impacted by rising operating costs as well as ringgit volatility, which led to foreign exchange losses and higher import costs.

Despite the declining earnings from 1Q2015 to 4Q2015, listed companies have been paying a similar level of dividends throughout the year, resulting in a jump in dividend payout ratio from 53% in 1Q2015 to 72% in 4Q2015. As this practice is not sustainable, 1Q2016 saw a reduction in dividends.

Nevertheless, as some companies may not pay dividends in the first quarter, the 1Q2016 dividend data may not be complete and sufficient enough to identify sectors or firms that have been growing their dividends. Hence, we have also compiled a list of the top 50 companies that have paid higher dividends (in absolute value) in the past five years (see Table 3 on Page 68).

Many of these dividend growers have unique competitive strengths to capture the growth of their respective industry. That said, past performance is by no means indicative of future results and certain companies like DiGi and Sime Darby have reduced their dividends due to new industry developments.

As dividends include proceeds from asset disposals, an increased payout could indicate a business restructuring or change in business model and, thus, may warrant a closer look. For example, both MISC and RCE Capital Bhd paid out much higher dividends last year as a result of initiatives to focus on their core business or to achieve a more efficient capital structure. 

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