Highlights

Sslee blog

Author: Sslee   |   Latest post: Sat, 15 Jun 2019, 11:40 PM

 

Is paying dividend important?

Author:   |    Publish date:


Dear all,

Is paying dividend important?

I am amazed on the argument between Philip and Kcchongnz on the topic: Value of dividend payout against share buyback on below kcchongnz blog comment:

https://klse.i3investor.com/blogs/kcchongnz/207121.jsp

Dayang, how will its share price move next week? kcchongnz
Author: kcchongnz   |    Publish date: Sat, 18 May 2019, 7:23 PM

Posted by (US/CHN trade war doesn't matter) Philip > May 18, 2019 7:50 PM | Report Abuse
Malaysian investors are weird. They look down on companies that do buybacks and overly value dividend payout. They should understand context, buybacks when the intrinsic share value is low and debt paring vs dividend payout (or even borrowing money to pay a dividend) is key in raising long term value

Posted by (US/CHN trade war doesn't matter) Philip > May 19, 2019 5:15 PM | Report Abuse
I see. I own 2 shares of class A brk. It has never given me a dividend. Does that mean it is a negative signal, the management is unwilling to share the profits of the company? I hope not.

Posted by (US/CHN trade war doesn't matter) Philip > May 19, 2019 6:01 PM | Report Abuse
Your implied it that way. I may have received the info wrongly then. Apologies. I believe a company should only give out a dividend if it is under to use the money more efficiently than the shareholders. If the interest rates are high, using capital on debt reduction is far better than dividends. If the share price is far far lower than book value or peer value, buybacks are worth much more than dividends.

Posted by kcchongnz > May 19, 2019 11:33 AM | Report Abuse

In investing, there is no one size fits all.
Buyback shares when the share price is undervalued is definitely good for the company and the shareholders. However, not all managers buy back shares because they are undervalued, but rather for their interest such as jacking up share price because they own a lot of shares or share options. I prefer management buys more shares with their own money.
The very basic of the capital market is investors provide capital for company to do business, and the investors got return in term of regular dividends, from the free cash flows of the company, not from borrowings.
Dividend is never a bad thing in investing. It is a testimonial that the company is doing well, that the management is willing to share the profits of the company, a positive signal. Dividend is hard cash which investors can use it as they like; to buy more shares of the company, or other more promising companies, or spend it to enjoy their fruits.

My opinion: I do not think Malaysian Investors look down on companies that do buyback but they value more companies that pay a consistence dividend.

And by the way Company Act 2016

https://www.ssm.com.my/Pages/Legal_Framework/Companies%20-Act%20-1965-(Repealed)/aktabi_20160915_companiesact2016act777_0.pdf

Subdivision 6: Dividends

131. Distribution out of profit

131. (1) Subject to section 132, a company may only make a distribution to the shareholders out of profits of the company available if the company is solvent.

(2) The company, every officer and any other person or individual who contravene this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both

132. Distribution only if company is solvent

133. Recovery of distribution

 

I refer to below link and let (CSRC) chairman to explain the important of paying dividend.

China Securities Regulatory Commission (CSRC), Chairman Liu Shiyu's Speech at the 2nd Assembly of CAPCO Members' Representatives

http://www.csrc.gov.cn/pub/csrc_en/Informations/phgall/201706/t20170608_318016.html

Thirdly, commitment to cash dividends. Paying cash dividends is the primary way to return wealth to investors, the underlying duty of a joint-stock corporation, and the source of a stock's intrinsic value. Investing in stocks is said to have eyes on the future. As long as a company has growth potentials, its stock price will rise and bring returns to its shareholders, regardless of paying dividends or not. This notion is only partially right. But the returns here are not profits generated by the issuing companies but gains from trading at premium. If a listed company never offers cash dividends, trading of its stocks is nothing but a speculative rolling game, the one like passing flowers until the drum beat stops, not to mention the uncertainties in a company's growth. A company who chooses not to pay dividends but to expand blindly by taking on new project may fail to pay in the future when these projects go south.


Listed companies are allowed to withhold dividend payments if it is for long-term considerations and with approval by the shareholders' meeting. However, indefinite and unjustified withholding is not acceptable. In international practices, steady and stable cash dividend payout often signals financial health and operational soundness of a listed company. In other words, sustained failure to pay dividends for no reason could be signals of accounting fraud or internal mismanagement. There are listed companies who generously pay out dividends. We commend the practice.  However, there are also "iron roosters" who haven't plucked a single feature for many years. The CSRC has been noted of this problem. We won't fail to ensure accountability and will respond with firm measures as warranted.

Capital markets operate by rules. There are regulatory red line and bottom line. The CSRC will steadfastly carry the sacred responsibility of investor protection, especially to small and medium investors. Tough measures will be taken to correct market aberrations, punishing the culpables, delisting the failing companies, and cleaning out the riffraff. Whoever breaks the rules will pay a heavy price.

 

Thank you

P/S: How much Warren Buffett pay himself compare to Bursa Listed Companies CEO pay them-selves? I wish one day SC Malaysia will steadfastly carry the sacred responsibility of investor protection. Meanwhile what you can do is attend AGM and ask the fact finding questions and demand your fair share of dividend.

 

Share this

  2 people like this.
 
kcchongnz it is a matter of dividend policy and capital allocation. If a company gets a lot of free cash flows from its ordinary business, management can do a few things with it,

1) Gives out as dividends
2) buy back shares
3) invest in new ventures
4) Pay down debts

Management should only buy back shares if they are selling very cheap. If the share is fairly valued or overvalued, why buy back? What is the point of public listing then?

Most of the time, as shown in research, company doing merger and acquisition destroy value. So no. 3 not necessary great, in fact often it is bad.

If company has a capital structure of 10% debt and 90% equity, or even 40% debt, and company produces a lot of free cash flows, why want to pay down debts? Cost of debt is cheaper and it is tax deductible, or there is a tax shield. As long as the debt is not too much, it is better to use it. It is also much cheap than cost of equity.

In fact, if a company produces a lot of FCF, it may be better to do recapitalization, get more debts and distribute cash as special dividends to shareholder. Again no one-size fits all. Some managers, especially owner shareholders, they are conservative, which is also not a bad thing.

Distribute that excess cash to shareholders if company has no good use for it.

See candies distribute almost all FCF to shareholders every year. Buffett use this cash to invest in other things.

I like to do my own things with that cash dividends, whether to reinvet in the company, or look for better opportunities, or simply enjoy it. How long more can we live?
19/05/2019 7:14 PM
kcchongnz After dividend is paid out, share price will normally adjusted downwards as the value of the company has dropped by the amount of dividend payout, of course. But investors pocket the dividend, don't they?

The total return investing in stock is made up of capital gain plus dividend. Depending on holding period, for holding period of 20 years and more, dividend has been shown in numerous research that it made up of 60% of total return.

So how can one conclude that dividend destroy the value of the company?

Unless if the company has no free cash flows and resort to issuing more shares or borrow money (already in high debt) to pay dividends which it can't afford to.
19/05/2019 7:55 PM
Mr Jho Sailang Petron & GCB Unker, but ah most biotech companies like to keep their debt level zero, why ah? I always wonder why also... And when they need to raise funds, they tend to do private placements or right issues (which is oftentimes seen as bad). You are right about the tax shield part...
19/05/2019 7:56 PM
kcchongnz Posted by Heavenly PUNTER Research IB > May 19, 2019 7:56 PM | Report Abuse
Unker, but ah most biotech companies like to keep their debt level zero, why ah? I always wonder why also... And when they need to raise funds, they tend to do private placements or right issues (which is oftentimes seen as bad). You are right about the tax shield part...

They are new and have uncertain cash flows. If financial crisis come, how to pay interest? Can go bankrupt. That is why they use equity only.
19/05/2019 8:09 PM
kcchongnz If you don't have income and you go to the bank for a loan for a house, do they lend you?

And when the company has no stable earnings and cash flows, which bank wants to lend you money?
19/05/2019 8:15 PM
Mr Jho Sailang Petron & GCB Makes sense... But many O&G companies manage to take on huge debts even their earnings are so inconsistent... So many examples out there...
19/05/2019 8:17 PM
qqq3 this sslee a lot of theory one.....can make money or not?
19/05/2019 8:22 PM
3iii https://myinvestingnotes.blogspot.com/2012/02/divine-dividends.html?m=1

Divine Dividends
19/05/2019 9:07 PM
3iii https://myinvestingnotes.blogspot.com/2009/05/sources-of-shareholder-value.html

Sources of Shareholder Value
19/05/2019 9:34 PM
qqq3 why so many theory one?...if next year can make more money than this year and this year more than last year, than no reason for price to drop especially if PE is within reasonable range....lower the better.
19/05/2019 9:59 PM
enigmatic [Breaker of Speculative Investing] Paying dividends is important.
1. Investor's return.
2. As good record for future investors.
3. As a symbol of quality. Many Bursa stocks don't even pay half sen.
4. Show that free cashflow is real.
20/05/2019 2:36 AM
popo92 i say as either way is not wrong as long as they create value within. but most business out there are mediocre business with not that capable management, still it doesn't mean you don't look at them at all. it depends.
20/05/2019 9:38 AM
popo92 from what i had observed, philip have his method worked very well because he is only picking the best quality out of so many counters. He is looking at moat, consistent match of his expectation from the management. That makes a big differences from sslee whom if i am not mistaken picked INSAS for etc. There are many ways to make money in the market but you can't apply every method together. some business have the right business, right timing and the right people, it makes them even without dividend you could still know its very attractive business to invest in. But to find out whether which company fits, it bring another topic then.
20/05/2019 9:47 AM
i3gambler 1) Cash flowing out from the company.
Both dividend payment and share buy back will cause a certain amount of cash flowing out.


2) Let say you own 1% of that company, your ownership will become 1.11% after a 10% share buy back. You can sell that extra 0.11% ownership in open market.

Company Share Buy Back + Sell part of your share = Company pay dividend


3) Let say the company pay dividend, and you use that amount of money to buy more share.

Company pay dividend + You buy more share = Company Share Buy Back.
20/05/2019 9:59 AM
3iii Sources of Shareholder Value

For the equity holder, the source of future cash flows is the earnings of firms.

Earnings create value for shareholders by the :
- Payment of cash dividends
- Repurchase of shares
- Retirement of debt
- Investment in securities, capital projects, or other firms.

If a firm repurchases its shares, it reduces the number of shares outstanding and thus increases future per-share earnings.

If a firm retires its debt, it reduces its interest expense and therefore increases the cash flow available to the shareholders.

Finally, earnings that are not used for dividends, share repurchases, or debt retirement are retained earnings. These may increase future cash flows to shareholders if they are invested productively in securities, capital projects, or other firms.

Which creates more value?
20/05/2019 12:26 PM
kcchongnz First, all the actions above consume cash of the company, and hopefully this cash is from the free cash flows of the business, meaning all cash left after all expenses, tax, interest charges, and also capital expenses required to sustain and grow its core business.

Share repurchases by the company reduces the number of shares outstanding, and if cancelled, increases the EPS. But note cash has been consume for the repurchase, it only adds value if repurchase is carried out when the share price is undervalued, preferably way undervalued. But does the management always purchase shares when they are undervalued? Research has shown otherwise.

Share repurchase has an advantage in US as dividend is taxed twice and at a high rate in the hand of shareholders. But this is not true in Malaysia as tax on dividend is single tier, it is taxed only at source.
So is it better to have cash in your pocket to do what you like, rather than letting company doing share repurchase, hopefully when shares are undervalued, and that you can eventually share the increase in EPS, and when?

If debt is high and financial position of the company is weak, it is good to use FCF to reduce debts, and strengthens its balance sheet. But if the financial position is strong with little gearing, it is a non-productive action. In fact, it is a poor use of FCF, for debt is cheap and interest payment is tax- deductible. Companies with good cash flows use considerably high amount of debts because of this reason.
20/05/2019 2:19 PM
SarifahSelinder Sslee

U spent ur time writing ni not questions to ALP...

Jawapan to u punya question kat sini is simple je management should patut bear in mind and be guided by MAXIMIZATION OF SHAREHOLDER VALUE in segala yg they do besides profit maximization
20/05/2019 2:26 PM
(US/CHN trade war doesn't matter) Philip Hi SSLee, I am amazed that you are amazed. I would have thought it is basic economics. and it is not an argument, merely a discussion and sharing of pertinent information/concepts.

In essence sarifahselinder and KCchongz is very much correct.

Every economic activity has a cost.

When you IPO a company, you have a listing costs (1+% or more to the bank, underwriters can buy shares cheaper than retailers etc)

When you give out dividends there is a cost (transactional costs, processing costs etc).

Private placements usually have a certain discount to entice investors.

Imagine you are the CEO of INSAS for example (with no strings or conflicts of interest in play, only working for the benefit of the investors).

When you look at maximizing shareholder value, multiple issues come into play.

A) Do I sell inari shares to buyback more shares of insas (which is very very undervalued).
B) Do I sell inari shares to give out a dividend to insas investors (to improve confidence).
C) Do I sell insas shares via private placement/convertible bonds/ICULS and use it to buy more inari (if the growth prospect of inari subsidiary is much bigger long term than insas).
D) Do I keep collecting inari dividend and use it on adding position in loss making subsidiaries? (vigtech, vigcash, melium, tribecar, omesti berhad, dgsb)

It is the same here between dividend payout, share buyback, etc.

For me, I prefer QL with low dividend payouts and spend more money on growing the business. Delayed gratification.

I prefer BRK with zero dividend payouts and spend money in building the business. Very delayed gratification.

for companies like maybank and public bank, I prefer less money lending out on taking risks, buying huge unnecessary assets, and giving out bigger dividends (its not like they have capability to manage a maybank in Taiwan, japan or korea anyway). I can invest better than maybank because I have different priorities, cost structures, risk appetites. PCHEM will never open a KFC franchise for example, whereas I could (with my dividends for example as KCChongz has said)

For coca cola, visa, mastercard etc, dividends make perfect sense.

For amazon, take my money and grow the business, build that moat, and only later give me a dividend when its less efficient to throw money to grow anymore.

For INSAS? Yes, if me I would prefer them stop trying difficult things like starting new fintech companies, new biotech companies, new car rental companies. Sell it all off. concentrate on growing inari shareholdings, or growing m&a business, or investing in companies with a competitive advantage. There is already a grab/uber monstrocity, why try to compete with tribecar? Why not just put money into

But usually for me these are my priorities:

1) business expansion, increase revenue and earnings
2) reduce debt, increase book value
3) share buyback, if book value is below intrinsic value
4) dividends, if the first 3 returns are below my dividend yield.

in that order.
20/05/2019 3:12 PM
Sslee Dear Philip,
I am amazed with your concepts that “Malaysian investors are weird. They look down on companies that do buybacks and overly value dividend payout. They should understand context, buybacks when the intrinsic share value is low and debt paring vs dividend payout (or even borrowing money to pay a dividend) is key in raising long term value”

Knowing that Company Act 2016 only allow company make a distribution/dividend to the shareholders out of profits of the company available and the company is solvent in the next 12 months after dividend distribution. And every officer and any other person or individual who contravene this section commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or to both. Hence borrowing money to pay a dividend is out of question.

As of INSAS the company is in such cash rich position that they do not know what to do with their cash. They cannot do share buyback because any share buyback will trigger Dato’ Sri Thong and PAC cross over the threshold of 33% and the requirement of conditional MGO.

On the other hand Dato’ Sri Thong hold majority of INSAS-WB thus he is reluctant to give dividend as dividend is taking out cash from INSAS and has negative effect on the value of warrant.

So INSAS currently besides putting their cash in fixed deposit: Deposits with licensed banks and financial institutions RM 569,258,000. Cash and bank balances RM 120,517,000
1. Invest in quoted share that give value appreciation and continues stream of dividend income. As of 31th Dec 2018 Financial assets at fair value through profit or loss. RM 232,734,000
2. INSAS Credit and Leasing (License money lender) lending out more money even to INSAS own associate company Ho Hup at interest rate charged by ICL is in accordance with the Money lending Act, which is not more than 12% p.a.for secured loans and not more than 18% p.a.for unsecured loans.
http://www.bursamalaysia.com/market/listed-companies/company-announcements/6120973
Money-lending subsidiary company: Insas Credit & Leasing Sdn Bhd Paragraph 8.23(2)(e) Appendix 8D(1) - Aggregate amount of outstanding loans as at 31 March 2019. Total: RM 266,282,000
3. Properties for rental income. As of 31th Dec 2018. Investment properties RM 185,420,000
4. Invest in associate company: as of 31th Dec 2018 Associate companies at cost plus goodwill: RM 416,435,000
5. Invest some capital and burn-rate in new start up mainly Fintech, Biotech, IT and F&B hoping to find another jewel and grow it into the like of INARI.

With newly appointed CEO Dato Wong hopefully we can see some change in rewarding INSAS shareholder.

Thank you.
P/S: https://klse.i3investor.com/blogs/Sslee_blog/198128.jsp
How Value can be Unlocked in Deep Value Stock? INSAS
NSAS-WB (3379WB); Maturity Date: Feb 25, 2020. Exercise Price: MYR 1.00. If Dato’ Sri Thong convert the INSAS-WB, he will need to make conditional MGO at price of RM 1.00 + INSAS-WB price on FEB 25 2020. If Dato’ Sri Thong do not convert INSAS-WB then it is free for all to gather 50% + 1 share and take over control of INSAS.
20/05/2019 6:02 PM
i3gambler In general,

Company Share Buy back = Company Pay Out Dividend,

Both will reduce cash in the company.

Just ignore those minor differences.

One minor difference is Company Share Buy Back will make the EPS Growth look better, when compare to Company Pay Out Cash Dividend.
20/05/2019 6:13 PM
3iii Dividends historically have served the function of showing investor that the firms' earnings were indeed real.

Recent concerns about aggressive accounting policies and the integrity of earnings following the Enron debacle may bring back this once-favoured way of delivering investor value.

Comments:
For those less knowledgeable, risk averse or requiring income, choosing a stock that pays consistent growing dividends make a lot of sense. It also provides an added layer of margin of safety.

Dr Neoh of Dynaquest suggests they choose companies paying at least 30% of their earnings as dividends. Also buy when their dividend yields are between a certain range, not too low (indicating overvaluation of stock price) and not too high (the high yield may often signify the price of the stock may not be sustained, more often corrects.) Dividends distributed generated are fairly stable and predictable in most companies. DY is most affected by share prices.
21/05/2019 6:42 AM
3iii Payment of cash dividends or committed share repurchases often lowers management's temptation to pursue goals that do not maximise shareholder value.


Comment:

Loves the dividends but if the company can reinvest this at high rate of returns, it is also fine for it to retain the cash in the company to generate the high returns on retained equity.

Share repurchases enhanced value of existing shareholder's value of the company. Long term shareholder's value is determined by the long term business of the company. Parkson repurchased a lot of its shares for many years. Alas, its company's business has changed fundamentally. The share repurchasing did not create value for the pre-existing shareholders.
21/05/2019 6:48 AM
3iii Agency Cost

Why management would not employ assets in a way to maximise shareholder value, since managers often hold a large equity stake in the firm?

- The reason is that there may exist a conflict between the goal of the shareholders, and the goals of the management, which may include prestige, control of markets, and other objectives.

Economists recognise the conflict between the goals of managers and shareholders as AGENCY COST, and these costs are inherent in every corporate structure where ownership is separated from management.


Comment:

Many fail to realise the importance of AGENCY COST.

When the managements' actions are those of a business owner, that is the ideal.

For this, companies like Nestle, DLady, those controlled by Robert Kuok, Heim, Carlsberg, those controlled by Teh Hong Piow ... the managements' goals are align with those of the shareholders.
21/05/2019 6:54 AM
3iii Reinvestment of earnings:

Many investors claim that this is the most important source of value, but this is not always the case.

If retained earnings are reinvested profitably, value surely will be created.



-----


Comment:

This is the MOST IMPORTANT SOURCE OF VALUE in my book too.

I will screen for those companies with the ability to maintain or grow its ROE at greater than 15% per year for many years consistently.

A start up growing very fast may have ROE with little or no or negative FCF. I generally avoid the company at this stage of its history. This company is higher risk for investors.

A company having grown its business for a few years and showing obvious stable consistent growth, having low capex to CFO ratio (<25%) and now generating strong FCF is the one I would love to spot and own early.

If it pays dividends, this is a bonus, though not an absolute requirement, provided it is giving high returns on its retained earnings.


But ALWAYS BEWARE THAT THE MANAGEMENT IS NOT MISUSING RETAINED EARNINGS (SEE BELOW).








Fear of misusing retained earnings

However, retained earnings may tempt managers to pursue other goals, such as overbidding to acquire other firms or spending on perquisites that do not increase the value to shareholders.

- Therefore, the market often views the buildup of cash reserves and marketable securities with suspicion and frequently discounts their value.

- If the fear of misusing retained earnings is particularly strong, it is possible that the market will value the firm at less than the value of its reserves.

- Great investors, such as Benjamin Graham, made some of their most profitable trades by purchasing shares in such companies and then convincing management (sometimes tactfully, sometimes with a threat of takeover) to disgorge their liquid assets.
21/05/2019 7:11 AM
3iii Investors vary in their preferences. Some prefer high dividend pay-out rates and others prefer high capital gains: yet others may invest to gain control. Investors have to first establish their preferences.

https://myinvestingnotes.blogspot.com/2009/05/interpretation-and-analysis-of.html
21/05/2019 7:22 AM
upfed555 Of course it is. Cash in shareholders pockets better than in directors pockets.
21/05/2019 9:11 AM


 

357  292  521  747 

ActiveGainersLosers
Top 10 Active Counters
 NameLastChange 
 HSI-C5P 0.34-0.035 
 HSI-C5J 0.255-0.045 
 HSI-H6Q 0.30+0.035 
 ARMADA 0.210.00 
 SUMATEC 0.010.00 
 FOCUS 0.16+0.015 
 SAPNRG 0.315+0.005 
 LAMBO 0.065+0.005 
 BJLAND 0.195+0.005 
 REACH 0.195-0.015 
Partners & Brokers