{"id":3675,"date":"2020-10-22T19:14:00","date_gmt":"2020-10-22T19:14:00","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=3675"},"modified":"2020-10-22T19:14:00","modified_gmt":"2020-10-22T19:14:00","slug":"dividends-make-a-comeback","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2020\/10\/22\/dividends-make-a-comeback\/","title":{"rendered":"Dividends make a comeback"},"content":{"rendered":"<p><span class=\"trx_addons_dropcap trx_addons_dropcap_style_2\">D<\/span>ividends have been thin on the ground this year. Remember, a dividend is a cash distribution of profits to shareholders. Dividends are typically declared twice a year, coinciding with the release of interim and final results.<\/p>\n<p>In an average year on the JSE, the average company might return say 12% in share price growth and 3% in dividends. It\u2019s therefore a critical component of long-term wealth creation.<\/p>\n<p>[the_ad id=&#8221;3223&#8243;]<\/p>\n<h4>Dividend payout ratio<\/h4>\n<p>Companies generally try to maintain a steady payout ratio e.g. paying out 50% of profits.<\/p>\n<p>This is one of the factors that institutional investors (like pension funds) consider when investing in a company, as dividends are needed to support payouts to investors. Established companies with regular dividends will attract institutional shareholders onto the shareholder register, an important feature of leading companies on the JSE.<\/p>\n<p>Growing companies that are still establishing themselves in the market will typically pay a lower dividend or may not even pay a dividend at all, retaining cash for investment and future growth. Investors are ok with this because they assume that the company can invest the cash and achieve attractive returns, so investors are happy to leave the cash in the hands of management.<\/p>\n<p>Textbook dividend theory tells us that dividends don\u2019t matter, because the shareholder register will attract different types of investors depending on the dividend policy. A natural adjustment should take place regardless of whether the company pays or retains cash.<\/p>\n<p>That\u2019s the theory, anyway. In practice, companies with strong dividend histories and institutional investors would usually trade at higher multiples. Companies that usually pay dividends but then cancel the dividend will experience a nasty drop in the share price.<\/p>\n<p>In summary, a company may elect a lower dividend payout ratio where:<\/p>\n<ul class=\"trx_addons_list_success_circled trx_addons_list_info_circled\">\n<li>The company has attractive investment opportunities and can generate strong returns for shareholders by reinvesting profits (rather than paying out the cash); or<\/li>\n<li>The company is concerned about the future and needs to hold on to cash to be prudent<\/li>\n<\/ul>\n<p>Over lockdown, the second option has been common across most sectors.<\/p>\n<p>[the_ad id=&#8221;3235&#8243;]<\/p>\n<h4>Dividend yield<\/h4>\n<p>The beauty of investing in shares is that you would expect to receive cash dividends as well as growth in the share price. The combination is called total return, so if you ever see a \u201ctotal return index\u201d then you know it refers to dividends as well as share price growth.<\/p>\n<p>JSE-listed companies typically trade on a dividend yield somewhere between 2% and 4%, with the exception of property companies that trade on yields closer to 10%.<\/p>\n<p>When a company declares a higher dividend than expected, or especially when it declares a dividend at a time when the market thought there might not be a dividend at all, the share price often jumps appreciably. A company trading at R90 per share that declares a R3 dividend may see the share price jump to R100, reflecting a 3% dividend yield.<\/p>\n<p>It\u2019s not quite that simple of course and this is just an illustrative example, but dividend yield is one of the valuation metrics applied by investors.<\/p>\n<h4>Altron: maintaining the dividend in tough times<\/h4>\n<p>Altron\u2019s share price jumped 20% on Thursday, which made this friendly Ghost very happy since I own shares in the group. This was thanks to strong growth in continuing operations, supported by the declaration of an interim dividend at a time when the market wasn\u2019t entirely sure what to expect.<\/p>\n<p>The performance for \u201ctotal operations\u201d was poor: a 7% increase in revenue, 1% increase in EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) and 6% drop in net profit after tax.<\/p>\n<p>This includes parts of the business that Altron wants to sell, so the company also reports based on \u201ccontinuing operations\u201d which gives a fairer view of what the future earnings might look like once the unsavoury bits have been sold off.<\/p>\n<p>In continuing operations, revenue grew 7%, EBITDA was up 17% and net profit jumped 30%. That\u2019s why the share price did so well after the result was released.<\/p>\n<p>This was driven to a large extent by Bytes UK, which delivered EBITDA growth of 51%. The Rand really helped, as \u201cconstant currency\u201d growth (which strips out the benefit to Altron of a weaker Rand) in Bytes UK was 27% &#8211; still a strong result.<\/p>\n<p>Just when you thought you understood the concept of \u201cdividend payout ratio,\u201d Altron goes and discusses \u201cdividend cover\u201d instead \u2013 don\u2019t worry, it\u2019s just the inverse. Dividend payout ratio treats the dividend as the denominator and dividend cover treats it as the numerator.<\/p>\n<p>For example, Altron\u2019s policy is to maintain dividend cover of 2.5 times headline earnings. This means headline earnings will be 2.5x the dividend declared for the period. The dividend payout ratio is therefore 40%.<\/p>\n<p>The combination of strong earnings growth from continued operations, supported by a maintained dividend policy despite economic challenges, gave investors enough conviction to give the share price a proper push.<\/p>\n<p>Year to date, Altron is up 14%. The share price is up over 80% since the March trough. I\u2019m happy to report that I\u2019m up 65%, making Altron the second-best performer in my SA portfolio.<\/p>\n<p>[the_ad id=&#8221;3234&#8243;]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Dividends have been thin on the ground this year. Remember, a dividend is a cash distribution of profits to shareholders. Dividends are typically declared twice a year, coinciding with the release of interim and final results. In an average year on the JSE, the average company might return say 12% in share price growth and 3% in dividends. It\u2019s therefore &hellip;<\/p>\n","protected":false},"author":2,"featured_media":3677,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[26],"tags":[485,403,482,481,483],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/3675"}],"collection":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/comments?post=3675"}],"version-history":[{"count":0,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/3675\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/media?parent=3675"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/categories?post=3675"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/tags?post=3675"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}