Dividend plays pay?

Dividend-paying: PetChem and PetGas have increased their dividend per share by two sen and five sen, respectively to 18 sen and 60 sen.

Shareholders still get returns, albeit at a slower pace, in the face current challenging times

Dividend-paying stocks are appealing in times of uncertainties.

But returns are not always guaranteed: companies must first be able to generate sufficient cashflow to be able to make dividend payments and support their future growth; and when they can no longer do that, they will have no choice but to cut or suspend dividends to shareholders.

Such is the trend of late in many markets, as corporate earnings come under pressure amid the global oil rout and an increasingly challenging economic environment.

Unsurprisingly, dividend cuts have been most prevalent among international oil and gas giants such as BHP Billiton Ltd, Exxon Mobil Corp, Chevron Corp, BP Plc and Royal Dutch Shell Plc that have always been known for their attractive dividends to shareholders. So, their move have grabbed international headlines in recent weeks.

“Corporate earnings have slowed; so it is a normal phenomenon that companies are slashing dividends,” Areca Capital Sdn Bhd CEO Danny Wong says.

The fund manager points out that dividend cuts are less of a concern to him than slowing corporate earnings at this point as returns can always recover when corporate earnings rebound.

Data showed that the 30 largest public-listed companies that make up the FBM KLCI on average offer a dividend yield of 3% last year, compared with 3.2% in 2014, while its payout ratio on average remain relatively stable at 54.5%.

At the height of the Global Financial Crisis in 2009, dividend yields by these 30 companies averaged at 2.8%, while payout ratio stood at 49%.

Meanwhile, dividend yield by the mid-sized 70 public listed companies in Malaysia averaged at 3.3% last year, compared with 3.7% in 2014, while average payout ratio increased to 44.8% from 44.2%.

Crude reward

In Malaysia, few oil and gas companies are known for giving good dividends to their shareholders.

Those that do have either reduced their payouts or stop giving altogether in the recent reporting season, as earnings have come under tremendous pressure and as companies are understandably gearing up for a prolonged period of low oil prices.

The only company that has bugged the trend is Petra Energy Bhd (PEnergy).

The company has in total declared a dividend of 10 sen per share, including a special dividend of six sen per share, for the financial year (FY) ended Dec 31, 2015. This compared with a total dividend of only two sen per share in the preceding year.

The increase in PEnergy’s dividend payout is in line with the company’s earnings, which grew 47% year-on-year (y-o-y), and cash position, which swelled five times to RM165mil, in FY2015.

It appears that PEnergy’s RM2.5bil Pan-Malaysia contract, which it won in 2013, will be able to tide the group through 2018 amid the current slump in the oil and gas industry, with an estimated RM1.6bil worth of works yet to be done.

Most other oil and gas services providers in Malaysia, meanwhile, could not afford to be so generous to their shareholders. For instance, Uzma Bhd is one of those that have suspended their dividend payments in the recent reporting.

SapuraKencana Petroleum Bhd (SapKen), on the other hand, has cut its dividend down by 69% to 1.35 sen per share for the nine months to October 2015 from 4.35 sen per share in the previous corresponding period after reporting a 62% decline in net profit.

Despite its contract-winning streak in recent months, SapKen – which is one of the 30 component companies of the FTSE Bursa Malaysia KLCI – has adopted a more cautious policy to conserve cash in the face of challenging times.

Deleum Bhd – arguably one of the top dividend-paying oil and gas companies in the country – has also reduced its dividend per share to 5.5 sen for the financial year ended Dec 31, 2015, from 7.5 sen in the preceding year.

This followed the 23% y-o-y decline in the group’s earnings, even as its cash position has improved by 53% y-o-y last year.

Meanwhile, Petroliam Nasional Bhd’s (Petronas) listed units, namely Petronas Dagangan Bhd (PetDag), Petronas Chemical Group Bhd (PetChem) and Petronas Gas Bhd (PetGas), have all done well last year and have rewarded their shareholders handsomely.

PetChem and PetGas have increased their dividend per share by two sen and five sen, respectively, to 18 sen and 60 sen in 2015 from the preceding year, while PetDag maintained its dividend at 60 sen per share.

Lower yields

As in the case of oil and gas players, plantation companies have also been hit by weak commodity prices in the last two years, which resulted in many slashing dividends to shareholders in recent times.

Safe for Sime Darby Bhd, which has maintained its interim dividend at six sen per share despite registering a 36% drop in earnings for the first half of its financial year ending June 30, plantation majors such as Batu Kawan Bhd, IOI Corp Bhd and Felda Global Ventures Holdings Bhd (FGV) have announced lower dividends for their shareholders.

Batu Kawan, whose net profit fell 7% in the financial year ended Sept 30, 2015, cut its dividend per share by 17% to 50 sen from 60 sen in the preceding year.

IOI, on the other hand, has proposed a lower interim dividend per share of 3.5 sen for the six months to December 2015, compared with 4.5 sen in the previous corresponding period after reporting a 90% decline in net profit for the period in review.

Similarly, FGV, which has yet to release its final-quarter results, has so far already slashed its dividend per share to two sen from six sen in the previous corresponding period after seeing its net profit fall 94% y-o-y for the three quarters to September 2015.

When it comes to the banking industry, Public Bank Bhd certainly stands out.

The third-largest lender in Malaysia has declared a slightly higher dividend per share of 56 sen for FY2015, compared with 54 sen in FY2014.

RHB Capital Bhd, on the other hand, doubled its dividend per share to 12 sen for FY2015 from six sen in FY2014 despite registering lower earnings, while Hong Leong Bank Bhd and Hong Leong Financial Group Bhd has so far maintained their dividend to shareholders at 15 sen per share and 13 sen per share, respectively, despite reporting lower net profit for their first half to December 2015.

Malayan Banking Bhd has cut its total dividend per share to 54 sen for FY2015 from 57 sen previously in tandem with lower earnings, while CIMB Group Holdings Bhd lowered its dividend per share marginally to 14 sen from 15 sen previously after seeing a strong turnaround in the final quarter of FY2015.

Other financial institutions that have similarly lowered their dividend per share in line with decline in earnings so far are Alliance Financial Group Bhd and Affin Holdings Bhd.

Consistent reward

The prevailing uncertainties aside, consumer goods companies have thus far been able to maintain their reputation as resilient, high-yield dividend stocks.

British American Tobacco (M) Bhd (BAT), Nestle (M) Bhd and PPB Group Bhd have all declared increase in dividend per share in tandem with their earnings growth for FY2015, while Dutch Lady Milk Industries Bhd has kept its payout unchanged at an already-high level of RM2.20 per share.

In the case of BAT, payout per share has increased by a marginal 1% to RM3.12, while that of Nestle has increased 10.6% to RM2.60 and PPB has increased 14% to eight sen.

For the brewery industry, Carlsberg Brewery (M) Bhd has kept its dividend per share unchanged so far at five sen despite seeing a drop in earnings, while Guinness Anchor Bhd declared a total payout per share of 50 sen (including a special dividend of 30 sen in conjunction with its 50th anniversary) for FY15, compared with 20 sen in the preceding year.

As for major gaming companies Genting Bhd and Genting Malaysia Bhd (GenM), dividend payments have been a reflection of their earnings.

Genting, whose annual earnings fell last year, has cut its total dividend per share to 3.5 sen in FY15 from four sen previously, while GenM, which reported annual earnings growth, has raised its total dividend per share to 7.10 sen from 6.50 sen previously.

Dialling it right

As for telecommunication services providers (telcos), cut in dividend per share happens across the board. But to be fair, they have all kept their commitment of a payout ratio of at least 70% to 100% of earnings.

Telcos’ financial performances for FY2015 have been mixed, with Axiata Group Bhd and Maxis Bhd reporting earnings growth, while Telekom Malaysia Bhd (TM) and DiGi.com Bhd saw their earnings shrink.

Even so, Axiata has reduced its total dividend per share to 20 sen from 22 sen previously, while Maxis cut it by half to 20 sen from 40 sen in the preceding year. TM cut its total payout per share for FY15 to 21.40 sen from 22.90 sen previously, while DiGi.com slashed it down to 22 sen from 26 sen previously.

Observers note that telcos are conserving cash in preparation for growth opportunities, including new acquisitions as well as the bidding of telecommunication spectrum, which will be opened up for auction by the Government that is seeking to boost its revenue amid the oil price slump.

All in, when it comes to dividend-paying stocks, there are still many gems to be discovered on the Malaysian stock exchange. Even though good and generous returns are not always guaranteed, at least, they still offer investors some semblance of stability in times of market volatility.