A free lunch is no way to reward shareholders


MY commentary last Friday, Investors should pay more attention to dividends, struck a chord of discontent among some readers who rang up or wrote in to express their unhappiness that Malaysian companies are too stingy when paying dividends. 

Bulbir Singh from Seremban lamented that he owned 1,000 shares in a company that paid him a mere 37 sen in dividend last year. He also expressed a sense of helplessness on how a small investor like him could succeed in getting company directors to pay higher dividends. 

All I can say to his first complaint is if that's all the company can afford to pay out, then shareholders have got to live with it. 

It would have cost the company more to send out such a dividend cheque, and for Bulbir Singh to bank in the cheque and the bank to process it! It would appear that this company had seen better times and is paying out a token dividend to maintain its dividend record. (In some Western countries companies have to maintain an unbroken dividend record to qualify for investment grade status.) 

On Bulbir Singh's second point: I can assure him that small investors, particularly if they band together into an association or even at an AGM, can prove to be quite effective in getting a board to pay attention to their views. A responsible board welcomes feedback from shareholders and will act if the suggestions are reasonable. 

Of course, if small shareholders band together at AGMs to demand a free lunch or other goodies, then these shareholders are not serious investors. 

Unscrupulous directors and controlling shareholders used to give short shrift to the interests of minority shareholders and the authorities did not seem to be particularly vigilant to such abuses. 

But things are changing, particularly after the KLSE meltdown following the Asian currency crisis of 1997–98. 

Directors have been made aware of their fiduciary duties, which are onerous. The authorities are also actively promoting minority shareholders' rights. As part of the KLSE's demutalisation plan, 30% of the RM1.35bil cash pile will go to the proposed Capital Market Development Fund. This is a lot of money and hopefully, the fund will live up to its name, which includes the promotion and protection of minority rights. 

Overall, the various participants in the market have become more aware of the importance of corporate governance. Nevertheless, there are still a lot of corporate crooks around. 

The best protection for a small investor is for him/her to do the necessary homework before buying shares. And there are plenty of corporate information and advice these days to help the small investor along. 

But if an investor treats the stock market as a casino and punts on speculative shares based on rumours, hoping to make a quick buck, then he/she is asking for trouble. How many gamblers make money in a casino? 

The biggest power an investor has over a company is his/her right to refuse to buy shares in a company. By doing so, investors are sending a serious message to the company's board and management; namely, shape up or your company will be a pariah on the exchange. That's corporate democracy at work. 

I also argued in my previous commentary that if a company has no better use for its cash pile other than to keep it in the bank year after year, it should return most of it to shareholders through higher dividends or a capital repayment. 

Another way of rewarding shareholders is through share buybacks. This is a very effective way of increasing shareholders' value in the West. A company with cash reserves well above its requirements will buy back its own shares from the market and cancel them. This way, the number of shares is reduced, thereby increasing earnings yield and the share price. It is also effective management of capital. 

There are many Malaysian companies that are empowered to undertake share buybacks. Unfortunately, in the current depressed stock market conditions, most of the local share buybacks are undertaken to support falling share prices; although in a sense it can be argued that such operations are also price enhancing and therefore beneficial to shareholders. 

Another popular way of rewarding shareholders adopted by Western companies is the dividend reinvestment scheme. 

Say a company declares a 20 sen dividend. A shareholder with 1,000 shares will be entitled to a dividend of RM200. But instead of giving out the dividend in cash, the company will allow him to receive shares in lieu at a 5% discount to the prevailing market price. In this way, the company can conserve cash for its expansion while the shareholder gets to increase his stake in the company at a good discount. It's a win-win situation. 

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