Increased dividend payouts, bad sign for the economy

17 Nov, 2017 - 00:11 0 Views
Increased dividend payouts, bad sign for the economy

eBusiness Weekly

Kudzanai Sharara Taking Stock
In an economy that is generally described as under-performing, the increased dividend payouts by local companies is a reason to celebrate. But higher dividend payments could actually be a bad sign for the overall economy.

In recent months, we have seen Zimbabwe Stock Exchange listed entities going out of their way and even outside their normal dividend policies to pay out increased dividends.
Delta Corporation for example paid a dividend of 5,45 cents per share for the year ended 31 March 2017, which is 96 percent of earnings per share of 5,70 cents resulting in a 6,16 percent dividend yield.

For the half year to September 2017, Delta has since paid a handsome dividend of 2,25 cents per share, which is 85 percent of its earnings per share of 2,64 cents.

In the last year or so, we have seen Delta paying what it termed special dividends, which was paid on top of the normal dividend.

And it’s not only Delta that has gone outside the norm. This year we saw Econet declaring a first quarter dividend for the first time since dollarisation.

In that unprecedented move, Econet declared a dividend of 0,386 cents per share amounting to $10 million for the first quarter ended May 31, 2017. At the release of its results for the half year to August 31, 2017, the telecoms Group declared a further dividend of 0,579 cents per share. The total dividend paid for the six months amounted to $25 million.

Under normal circumstances investors would have never been happier, as this is one of the reasons they invested anyway — to get a return. The increased payouts could be a sign that business is booming and the companies are recording solid profits.

Investors also see a dividend payment as a sign of a company’s strength and a sign that management has positive expectations for future earnings, which again makes the stock more attractive.

Paying a dividend also helps investors capture a return on their investment. This is especially true for established companies that are profitable but too big or established to grow rapidly.

The question, however, is not about companies paying or not paying dividends, it is about the increased payouts that we are seeing locally.

Higher dividend payments could actually be a bad sign for the specific company and the overall economy.

The ideal situation would be for companies to plough profits back into its business to expand operations and to improve profits unless, as said above, they are too big or established to grow rapidly. But generally that is not the case in Zimbabwe. There are very few companies that we could say have reached a point where growth is no longer necessary or is now very limited. There aren’t many companies that could put up their hand and say they can’t use the additional funds, being used to pay increased dividends, to diversify into new activities or even to acquire new firms.

There is no doubt that the country has lots of opportunities for businesses to expand their tentacles. You only need to look at the shopping shelves to see the large number of foreign products that are dominating. This means for every imported products, at least most of them, there is a chance to produce locally given the right operating environment.

There is no valid reason why we continue to see imported products in the snacks category (potato crisps), when our farmers are producing enough potatoes to meet market demands. Even if the current produce is not meeting demand, we believe we still have enough land to increase production of such products.

So where is the problem?
What we can tell from the market at the moment is the fact that companies, that have the potential to be the major growth drivers for the economy, are finding it hard to find better alternatives for their spare cash than to pay dividends.

Sadly, the current economic environment does not allow businesses to redeploy profits as access to foreign currency has become a major albatross.
Testimonies are abound of companies, despite their huge cash piles, are finding it hard to bring in raw materials, let alone equipment. It’s disheartening to hear that some of our local companies have to cut back on production or even shut plants simply because they are failing to access foreign currency and yet other players are getting the same foreign currency to import trinkets.

The increased dividend payouts speak to the fact that companies are admitting that they no longer believe they can make use of the cash they are generating than paying dividends.

Delta, for example, is currently sitting on a huge stockpile of available money of more than $100 million, which unfortunately cannot be used freely to pay for its foreign obligations or import requirements.

National Foods, Dairibord and many other companies have had to suspend the production of some of their products because of failure to bring in raw materials.

This inability by businesses to freely process payments is a deterrent to growth and need to be addressed especially considering the things that companies aren’t doing with the money they’re paying out in dividends.

To name a few, by paying increased dividends it means these companies are not hiring new employees; they are also not taking on new projects in an effort to expand their business reach. Overall these companies are not investing in new opportunities that would lead to the job creation the economy so badly needs right now.

In short, while getting a dividend cheque is nice for shareholders, it could be a symbol that companies are giving up on creating new hires or developing new projects.

At a time economic growth rates are far from the desired 7 percent, it’s worrying that companies aren’t focusing on making profitable investments with their spare cash, a situation which could bode ill for the health of the economy.

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