Clear dividend policies in vogue


  • Business
  • Thursday, 13 Jan 2005

BY KATHY FONG

THERE is a promising trend in initial public offerings (IPOs) for companies to distinctly state their dividend policies as investors have become more demanding in respect of visibility of financial returns.  

Bursa Malaysia-listed companies are not required to disclose their dividend policy but companies are starting to do so in their IPO prospectuses. Basically, this involves explaining how much of earnings will be issued as dividends each year. This is known as the payout ratio.  

Companies that are already listed have also become conscious of the need for a clear dividend policy as fund managers almost always ask about this. In such cases, the dividend policy is not published but is made known at meetings with analysts and fund managers.  

In IPOs, merchant bankers noted that the offered shares tend to be priced more closely to their forecast market value, and as such, the capital gain would be smaller than when IPO shares were priced at a larger discount to market valuation. 

Hence, they said, dividend policy is becoming an important criterion in stock-picking. 

Merchant bankers have taken the initiative to educate their clients on the importance of having a clear dividend policy as investors tend to have more confidence in managements that are willing to commit to clear dividend policies. 

“Going forward, in most of the IPO exercises handled by CIMB Bhd, you will see the issuers clearly stating their dividend policy, such as in Ornasteel Holdings Bhd's IPO and two upcoming ones,'' said head of equity markets and derivatives, K.C Kok.  

K.C. Kok

Ornasteel, which floated its shares on the main board about two weeks ago, stated in its prospectus that the board would expect to pay an annual dividend of not less than 50% of the annual profit after tax.  

Plastic component and casing manufacturer LCTH Corp Bhd had also in its prospectus stated its intention to pursue a dividend policy that is in line with its profitability by declaring at least 20% of its group net profit as dividend.  

Kok stressed that it is critical to have a clear-cut dividend policy as it would help give guidance on a company's capital management strategy.  

Such a disclosure is even more critical for companies that have large cash hoards and minimum capital expenditure (capex) requirements. Examples are the gaming companies and independent power producers.  

TA Asset Management Sdn Bhd chief investment officer Ang Kok Heng said shareholders would want the idle cash to be distributed if a company's management is not utilising it to generate earnings. 

Managers of fixed income funds such as the Employees Provident Fund and Lembaga Tabung Haji as well as insurance funds would definitely welcome such a trend.  

It is learnt that certain government-linked funds have also started pressuring companies in which they hold a stake for guidance on their dividend payout ratio. 

“It would be much easier for the fixed income fund managers to manage the portfolios when they know the dividend policy of each company they invest in because these funds are also committed to declare a certain amount of dividend for their subscribers,'' Ang said.  

Nonetheless, not all companies can adopt a consistent dividend policy.  

Alliance Merchant Bank associate director Mooi Fi Phang agrees that a dividend policy does provide a certain degree of transparency. “It is a step forward in terms of corporate governance.'' 

He pointed out, however, that it would be difficult for capital-intensive companies to formulate a dividend policy as they need the cash for capex as well as expansion. 

“Mesdaq companies or even the telcos will need funds for investment in fast changing technology in order to cope with competition,'' said Mooi, who added that having a rigid dividend policy could constrain the management's efforts to grow the business. 

He said investors who were looking for strong earnings growth would prefer the management to put money in new capital investments instead of using the money for dividend.  

After all, a company's dividend payment is very much dependent on its earnings and the policy spelt out by the board is not binding, he added. 

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