THE removal of taxes on dividends distributed by listed companies has re-focused attention on dividends and re-affirmed their importance to shareholders. When dividends are paid, they have a psychological value - they provide shareholders with a sense of satisfaction that is more immediate and less nerve-wracking than waiting for the daily fluctuations to lead to the longer-term price appreciation of the shares they own."Now that our dividend payments are fully tax-free, it has not only put an end to the double taxation issue but I can also tell you that our shareholders are much happier receiving the full amount of their share earnings," said the financial officer of a major dividend paying company.
JSE Chairman, Roy Johnson, believes that increased shareholder satisfaction is an important foundation on which to continue the development and strengthening of the local market. "Satisfied shareholders should lead to increased market activity which, in turn, could encourage companies that are not now listed on the Stock Exchange to come to the market. This would go a long way towards providing the market with the depth and the liquidity that we need," he said.
Dividend policies
Mr. Johnson also said that this could be an opportune time for listed companies to examine their dividend policies. "In the first place, do they have one? Is it written down? How are dividend policies determined and what factors are taken into consideration in their formulation?"
Representatives of all 13 of the listed companies that paid out dividends each year for the five-year period 1996-2000 said that their company had a dividend policy but only two, Grace and Scotiabank had written policies.
The attitude of those not having written policies could be summed up in what a senior executive of one company had to say. "We much prefer to have our dividend policy speak for itself in the year after year payouts that we make. We are of the view that publishing a written policy might create expectations among our shareholders that could be troublesome if they were not fully met."
Clearly neither the management of Grace nor of Scotiabank share that view. In recent years, both have published their dividend policies in their annual reports. Grace's policy is, "to pay at least 10 per cent of after tax profits as dividends" each year. Over the five-year period 1996-2000, Grace paid out $311.73 million, which was 10.8 per cent of after tax profit for the period.
Scotiabank's 2001 annual report says that the company's policy is to retain, "a close correlation between earnings trends and dividends payments, while ensuring that adequate levels of capital are kept for the purpose of protecting depositors and growing the bank..." the bank's payout ratio has generally been between 40 per cent and 50 per cent. During the same five-year period, Scotiabank paid out $4.33 billion, which was 45.1 per cent of after tax profit for the period.
Globally, this is how most firms set their dividend policy. They target a proportion of earnings that will be paid out and do so quarterly or semi-annually.
The trouble with most dividend policies, according to Warren Buffett, is that they are often reported to shareholders but seldom explained.
What shareholders need to know from the companies in which they have invested, the world-renowned chairman of Berkshire Hathaway went on to say in a 1984 letter to his shareholders, is not just the statement of a goal to pay out a set percentage of earnings over stated periods of time. Shareholders need analysis to help them determine whether retained earnings could create greater value for them - "a stronger long-term competitive position, greater financial strength and produce incremental earnings equal to, or above, those generally available to investors... for every dollar retained by the corporation, at least one dollar of market value must be created for the owners."
In his letter to shareholders last year, Buffett said that a key objective of Berkshire is to take a long-term investment view that will create maximum intrinsic value for the company's shareholders, 98 per cent of whom he proudly says are the same year after year. He defines intrinsic value as an estimate of the discounted value of the cash that can be taken out of a business during its remaining life.
Berkshire Hathaway has not declared a cash dividend since 1967, two years after Buffett acquired it. But he says that the company has provided shareholders with increased value of at least 25 per cent each year since then.
The operating principles of Lascelles, de Mercado & Company come closest to the Berkshire/Buffett business philosophy. Lascelles is at the bottom of the list of the JSE's 13, consecutive five-year dividend payers, having paid out a mere $10.4 million or 0.53 per cent of after tax profit for the period, while being first in share price appreciation. Its share price moved from $23.70 to $35.85 over the five-year period for a 51.3 per cent increase.
"Lascelles is strictly a growth oriented company," said managing director Billy McConnell. "We reinvest our earnings, we grow our business and our shareholders don't trade their stocks. Our market needs to encourage both growth and income stocks so that investors will have diversified choices. Diversity needs to be projected."
