On dividend pay outs by undercapitalised firms

24 May, 2019 - 23:05 0 Views
On dividend pay outs by undercapitalised firms (File pic from Fool Singapore)

eBusiness Weekly

A month ago, I was surprised in reading that the Rainbow Tourism Group (RTG) would pay a dividend to its shareholders.

The board’s decision made no sense to me. RTG and other former State-owned Enterprises (SOEs) such as Dairibord, Cottco and so on are informative case studies on the merits of reforming SOEs through privatisation and listing on a stock exchange.

Today, these former parastatals are anchors of the private sector in Zimbabwe. They are arguably miles ahead of their former selves with regard to corporate governance, financial performance and readiness to evolve.

RTG has an enviable portfolio of assets strategically located across the country. However, the assets are in a glaring need of refurbishment.

In 2018, a paltry $2 million (I’m not quite sure how much that actually is) against a budgeted $4 million was spent on capital investment which is a far cry from what is necessary to transform the group into a formidable regional player. Yet, the Board saw it fit to return $1 million to shareholders within a year of asking the very same people to inject more money in it.

Market analysts seemed to celebrate the dividend. They seemed to suggest that RTG had turned the corner. I didn’t think so but was obviously cautious is expressing my contrarian voice in the midst of such a reverberating praise chorus.

But as a former trader in the market, I revere the importance of a sincere analysis. Whether the analysis is eventually proven right or wrong is not the point.

The point is that all analyses collectively boost the price discovery mechanism of the market and reduce volatility because investors would be aware of so many views on the listed company.

With that in mind, I threw a quick comment from my Twitter handle to test the market on my view. I doubt if anyone read it. So, I decided that once the praise chorus had subsided, I would express my view on how confounding it is for undercapitalised businesses to be paying dividends.

The RTG dividend is by and large forgotten now, so we can talk.
I have fond memories of the Sheraton (now Rainbow Towers) being built.

It was a pleasure to see a leading global franchise on the other side of Samora Machel Avenue. The hotel advertised itself so well especially in that jingle with the lyrics “come to Sheraton” which would play on television showing people of different races and age groups to mirror the diversity of envisaged clients.

It is very strange that today, RTG is scoffing at international franchises arguing that being in a franchise is expensive and unnecessary and that the company will build its own Afro-centric brand.

These are short-sighted if not emotional arguments especially in an era where globally rated brands are key determinants of tourists’ traffic.
RTG should be reinvesting its earning and sprucing-up its image so as to attract capital that is large enough to unlock the value of its enviable assets rather than asking for money from shareholders this year and scrambling to return some of it in the next.

It is understandable though why RTG and other companies are returning money to shareholders. Minority shareholders have in recent years complained that executives are paying themselves good money while shareholders get nothing.

There are more reasons.
For instance, the reported profit is usually too small in relation to the ideal capital expenditure requirements. In an environment of high inflation and a depreciating currency it would be irresponsible for directors to retain earnings for future capital expenditure. In that regard, a dividend pay-out makes sense.

But the fact that most businesses in Zimbabwe need recapitalisation must not be taken likely. The local capital market i.e. the stock exchanges, are platforms on which such capital can be raised. But there is no capital locally.

This was clearly demonstrated when only 28 percent of RTG shareholders followed their rights to inject more capital into the business early 2018.
A year before that, the Econet Rights Issue was also significantly under-subscribed. A couple of weeks before election last year, Seedco issued a circular to its shareholders effectively slicing away its local operations from the group’s international units.

The international operations are now listed on the Botswana Stock Exchange.

The Seedco Board rightfully reasoned that the local capital market lacked the capacity to fund international expansion and that capacity related not only to the unavailability of surplus institutional funds in Zimbabwe but political risk and an unpredictable monetary policy.

It’s been long since the Zimbabwe Stock Exchange performed its primary function of raising fresh capital. Recent listings have been superficial — conglomerates spinning off subsidiaries.

It is the Reserve Bank that has in fact been most active in facilitating medium- and long-term finance for government and the private sector through the so-called quasi-fiscal activities.

This practice by the central bank, it can be argued, has stifled capital markets development and the creativity of players therein. It has also birthed a parasitic industrialist who instead of exploring alternative ways of raising capital would direct pleas to the central bank, the saviour of last resort.

But to hear industrialists pleading for support on one hand and read of them dishing out dividends, special dividends in the case of Delta recently, evokes a sense of a citizenry being somewhat short-changed.

It seems fair that, in the spirit of austerity, when private enterprises benefit from facilities by the saviour of last resort some tangible benefit be seen to be accruing to the general citizenry otherwise industrialists will be seen as having their cake and eating it all up. That smacks of a grave social injustice.

Share This:

Sponsored Links