Investors should pay more attention to dividends

ON Wednesday, merchant banking group CIMB Bhd sprang a pleasant surprise on its shareholders and the market by announcing a hefty special dividend a mere four months after its listing on the KLSE. 

The payout, amounting to 21.29 sen (gross) per share, will come up to RM181mil, which is equivalent to the company's entire profit for 2002. 

After the payout, the company's pro forma risk-weighted capital ratio as at December 2002, will be 20%, still well above the statutory requirement of 8%. 

CIMB joins a select but growing group of listed companies that are giving higher dividends to shareholders, among them BAT, Carlsberg, Maybank, Star Publications, Guinness and Tanjong. 

In our coverage, StarBiz and BizWeek have been highlighting companies with high dividend yields in the hope that Malaysian investors will pay more attention to this very important aspect of investing. 

There is only one reason why anyone should invest in shares, namely to get a better return compared with other forms of investment like property, bank deposits, bonds, gold, works of art and other collectibles. 

A share investor gets his/her return in two ways: through capital appreciation (i.e. a rise in the share price) and dividends. 

In mature equity markets like those in the US, Britain and Japan, dividend payouts play a very important role in investment decisions.  

In those countries, the huge pension funds and institutional in- vestors, and even retail investors, look out for companies that give good dividends. These funds need to pay their members a regular income and dividends form steady income streams for the funds. 

In Malaysia, investors often ignore dividends and focus on the share price. 

This is because many Malaysian investors have a gambling instinct and get a thrill from punting based on market rumours rather than any serious research. Also, most Malaysian companies do not have a progressive dividend policy. Even hugely profitable companies are stingy when it comes to paying dividends. 

But things are changing. Investors and corporations are starting to recognise the importance of dividends. 

In these uncertain times when the economy is sputtering along, it's probably unwise to adopt an aggressive approach to investment in shares. 

Most research houses are recommending a defensive approach to investing, and stocks that have high dividend yields are favoured in the current environment. An investor who puts his money in a company with a high dividend yield will at least get a reasonable return even if the share price is lacklustre. 

There are quite a number of companies on the KLSE that are well managed and have good dividend yields, some as high as 8%. This is better than putting money in a fixed deposit at the bank. 

But of course, don't look at dividend yields for only a year. A company’s track record and potential future earnings have to be taken into consideration, too. 

Few Malaysian companies, unless they are foreign-owned, are known to be generous when it comes to rewarding their shareholders with good dividends. 

This is wrong and shareholders, particularly minority shareholders, should press the board of directors to explain why they are not declaring higher dividends if the company is in a position to do so. 

Some companies may want to keep a healthy level of retained profits and reserves for expansion or acquisitions. 

But there are many which have simply parked their cash reserves in the banks for years without doing anything about them. 

If a company can find no better use for its cash than to keep it in the bank, then it should return most of this cash pile to shareholders through dividends or capital repayment.  

After all, surely the owners (stakeholders) of a company do not employ a board and management merely to keep their money in the bank. 

In the current low interest rate environment, well-managed companies need not maintain huge cash reserves as they should have no problem raising capital for expansion or acquisitions. 

A company with a huge and idle cash pile will attract thieves as a lump of sugar attracts ants. 

In Malaysia, we have seen quite a few cases of late where unscrupulous company directors squander or plunder their company's cash hoard by acquiring wildly-inflated or worthless assets, often owned by their families or friends.  

Or they sell off their cash-rich companies to corporate buccaneers who strip them of their cash. 

Hence, we find some previously healthy and cash-rich companies now under the KLSE PN4 list (meaning financially distressed). 

Capital is an important resource and maximising value from capital is now a very important aspect of modern management. 

Many western companies pay quarterly dividends, a practice that should also be encouraged in Malaysia. 

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