Friday, 2 January 2009

Lower Dividends on the Cards as Earnings Wither

But blue chip companies likely to maintain payout ratios

1 comment:

Guanyu said...

Lower Dividends on the Cards as Earnings Wither

But blue chip companies likely to maintain payout ratios

By LYNETTE KHOO
2 January 2009

Investors could receive lower dividend payouts in absolute dollar terms this year as corporate earnings wither under the heat of the recession.

Still, investors can take heart that yields will still remain at attractively high levels, given the low valuations and the fact that most companies are not planning to cut their dividend payout ratios yet.

Not all companies have fixed their dividend policies but the blue chip firms that BT spoke to say they are likely to maintain the status quo.

‘We will continue to reward our shareholders with dividends as long as free cashflow is not required for acquisitions and strategic investments,’ said a ST Engineering spokesperson. The group paid out 100 per cent of its net earnings as dividends for the fifth year during fiscal 2007.

Keppel Corp spokesperson told BT that the group aims to distribute around 50-60 per cent of its full year Patmi (profit after tax and minority interest) annually as dividends to shareholders.

Agricultural commodities supplier Olam International has a dividend payout policy of 25 per cent of NPAT (net profit after tax) and says it does not expect any significant changes to its policy as it expects to meet its earnings target for fiscal 2009.

‘Given that our business fundamentals are quite strong and our belief that agricultural commodity sector remains attractive due to structural reasons, we expect to deliver long-term shareholder value,’ said an Olam spokesperson.

Analysts note that thanks to their strong cash positions, most blue chips still have the staying power to stick to their dividend payout policies.

‘The good dividend-paying sectors have always been the banks, the offshore marine sector and the telcos and in these sectors, I think the ability to pay is still there,’ CIMB-GK research head Kenneth Ng said.

He noted that earnings of banks may fall this year, but not to the extent that it would jeopardise dividend payouts. In fact, during the Asian financial crisis, the banks maintained their dividends, he recalled.

OCBC head of corporate communications Koh Ching Ching told BT that the bank maintains a minimum dividend payout of 45 per cent of its core earnings. For fiscal 2007, OCBC paid out 28 cents per share or 46 per cent of its core earnings as dividends.

While companies that will maintain their payout ratios stand to earn kudos, the harsh operating climate has prompted the market to already price in the prospect of lower dividends on the back of weaker earnings expectations.

JPMorgan analyst Christopher Gee noted that valuation models imply that Singapore stock dividends will drop 20 per cent in the next year or fall by 2.2 per cent per annum over the next 10 years.

He believes stocks in the financial sector - both banks and real estate stocks and notably the S-Reits - are the most likely to lower their dividend ratios due to weaker earnings or equity dilution from refinancing exercises.

‘Stocks in cyclical sectors with fixed payout ratios are also likely to see reduced dividends, with SIA and the commodity-related names the most likely to reduce dividend payouts in our view,’ Mr. Gee said in a recent report.

Some companies may choose to reduce their dividend payouts to conserve cash in a difficult year or seek M&A opportunities, Mr. Ng of CIMB-GK added. This is especially so given that many companies’ share prices are beaten down, and can still offer a high yield despite a lower dividend payout.

While recent concerns about debt refinancing and recapitalisation needs have sent prices of S-Reits south, some S-Reit managers told BT they are keeping to a 100 per cent distribution payout, above the 90 per cent minimum required under regulatory guidelines. Some Reits have also secured their refinancing needs for this year.

‘For 2009, Parkway Life Reit intends to continue to maintain its distribution payout at 100 per cent,’ said Yong Yean Chau, acting CEO and CFO of Parkway Life Reit.

He added that Parkway Life Reit has secured all its financing needs by replacing short-term credit facilities with longer-term facilities and has locked in long-term master leases for its properties.

Suntec Reit chief executive Yeo See Kiat said the Reit’s next refinancing will not be due before December 2009 and he does not expect to see a major fluctuation in distribution payout.

Analysts suggest that some companies may vary their payout ratios to maintain their absolute dividend sums.

JPMorgan’s Mr. Gee is expecting payout ratios of Singapore companies to rise to 58 per cent in fiscal 2009, up from an average payout ratio of 53 per cent between 2000 and 2007. This will translate to a yield of 6.59 per cent.

For fiscal 2008, which has just ended, StarHub has committed to paying an absolute dividend sum of 18 cents per share, up from 16 cents in fiscal 2007, while SingTel and Mobile- One said they might review their payout ratios.

‘Unlike other companies, we do not have a payout ratio for our dividend - it has always been on absolute level,’ a StarHub spokeswoman told BT. ‘We are a free cashflow-focused company. We don’t believe in paying dividends based out of our earnings.’

A Singapore Exchange (SGX) spokesperson said the company aims to pay dividends no less than either 80 per cent of the annual NPAT or 14 cents per share, whichever is higher. It paid total dividends of 38 cents per share for the fiscal year ended June 30.

Investors may also find some comfort in the projections by Morgan Stanley analysts - that dividend cuts will be much smaller than earnings declines. This was what happened during the Asian financial crisis of 1997/98, when Asia-Pacific (ex-Japan) EPS fell 73 per cent peak-to-trough, but dividends per share declined by just 20 per cent.

The concerns notwithstanding, these analysts suggest that for long term investors, a wide gap between dividend yields and bond yields should serve as a ‘strong buy’ signal for dividend-yielding stocks.