THERE really is no need for companies to announce special dividend payouts ahead of time. When the board decides to give a special dividend, they just have to announce after the meeting has ended. It’s as simple as that.
In relation to this, it begs the question whether Top Glove Corp Bhd needed to make an announcement of a special dividend way ahead of time?
Top Glove, which is already paying out 50% of its profit, announced an additional 20% payout for the next three quarters starting from the second quarter. This means the company is giving out 70% of profit as dividends to shareholders.
Investors like pleasant surprises when the chips are down. Announcements such as special dividends are some of the positive surprises that shareholders can do with in the current pandemic.
However, there is no need for an over-kill.
If Top Glove wants to pay-out special dividend, it can simply declare a special dividend when the time comes. There really is no need to make a special announcement unless shareholders are pressing for the company to commit to a higher dividend pay-out.
In the case of Top Glove, the company declaring a higher dividend is only to be expected, considering the great lengths it has gone to shore up sentiment on the stock.
Top Glove’s declaration of a higher payout comes at a time when the company has embarked on an aggressive share buy back exercise. It is not wrong for companies to undertake share buy backs. Buy backs are a signal a company sends to the market that its shares are under-valued.
But when the company spends more than RM1.2bil on buying back its shares at a time when sentiment is against it, the exercise seems more like a sign of desperation to support the price. And when the company announces a special dividend ahead of time, the view that management is doing more than usual to shore up the share price seem compelling.
Top Glove and its executive chairman Tan Sri Lim Wee Chai are not the only ones who tend to talk about their company’s prospects when the chips are down.
Air Asia Groups’ Tan Sri Tony Fernandes also tends to talk about the bright prospects of his company when the sector is not doing well. In Air Asia’s case, Fernandes says Air Asia is more than just a low cost carrier. He says that it is a digital and lifestyle company offering customers a slew of products outside the realm of air travel.
While it is not wrong for Fernandes to promote Air Asia’s as a digital and lifestyle company, investors buy the stock for its position as the best low cost carrier offering cheap air tickets.
In 2015 when Air Asia’s share price came under selling pressure, Fernandes and his partner Datuk Kamarudin Meranun were speculated to be considering taking the company private. The speculation continued for several months until a reply from the company in 2016. In the reply, Air Asia said that its major shareholders were not considering any privatisation for the moment.
The answer was not a definite ‘No’ to any privatisation proposal, which gave rise to continued speculation on Air Asia.
One of the most ‘notorious’ talking the stock-up statements came from Tesla’s chief executive and founder, Elon Musk, in August 2018. After the share price came under heavy selling for not meeting production and sales targets, Musk tweeted that he had secured funding to take the company private.
Tesla was not privatised. But the US Securities and Exchange Commission (SEC) did not let Musk, who is the richest man on paper today, get off lightly. The following month, the SEC filed a complaint against Musk for feeding misleading and confusing information to investors and causing disruption to Tesla’s share price.
Top Glove’s Lim, Fernandes and Musk are among the elite group of entreprenuers who have built up their company and command a dominating personality among investors. They are the face and voice of the company.
They are not any ordinary shareholder. They cannot deal with their shares or make statements without taking into account the impact on the share price.
For instance as major shareholders, they cannot dispose their shares in the market because it would be viewed as a signal that the earnings are not good. At the same time, they cannot keep on buying the shares without the possibility of them having breached the take-over code.
If one takes into account what a major shareholder can and cannot do, it is easy to fathom why Top Glove and Lim has to keep buying shares of the company and making extraordinary announcements to keep the sentiment alive for the stock.
The major shareholders of Supermax Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd all face similar predicament as Lim. They cannot sell their shares to enjoy the upside and have to be careful in how much they are buying in the market.
However, what the major shareholders of glove companies can do when sentiments and earnings are on the uptrend is to embark on placements of their shares to institutions. This is what companies such as Gamuda Bhd do to institutionalise the shareholding gradually.
If the pricing is right, funds would take up the placements by glove companies. But the problem with most of the major shareholders is they want a maximum price for the shares, hence not leaving much upside for potential institutional investors.
Another option for companies is to monetise their forward earnings and declare hefty dividends to shareholders. The glove companies can issue convertible debt papers to raise money or take up bank borrowings and the proceeds can be used to reward shareholders.
With all glove companies sitting on a huge pile of cash, why restrict the dividends on the basis of earnings only? Why not monetise the forward earnings?
Aggressive share buybacks and declaring special dividends ahead of time can easily be construed as signs that the major shareholders are doing to support the share price.
It is not healthy. Major shareholders who are also managing the company should focus on the business and let the market decide on the value of the shares. The major shareholders should let the ‘numbers’ do the talking.
M. Shanmugam is a former specialist editor of The Star. Views expressed here are his own.