Big dividends stage return in the UAE
After the austerity of the global downturn, more companies in the Emirates are resuming profit-sharing, but with the practice comes a debate about whether such payments are too much, too soon.
April 18, 2011
Updated: April 18, 2011 04:00 AM
Generous dividends are back in fashion on local markets, and with them a revived debate about whether such payments are a wise move for companies.
Many companies suspended dividends after the global financial crisis first jolted Gulf bourses at the end of 2008, but this year cash dividends – money distributed to shareholders out of a company’s earnings – are again being paid.
In fact the dividend yield, which is the ratio of payouts in dividends each year relative to share price, continues to be higher in this region than in some of the world’s major markets.
The MSCI Gulf index’s dividend yield was 3.32 per cent last year compared with 2.22 per cent for the MSCI Emerging Markets Index. The yield of the Standard & Poor’s 500 Index was 1.87 per cent, and the Dow Jones Industrial Average’s was 2.41 per cent.
Dividend payments are often seen as a sign of confidence by management but some analysts wonder whether local companies are paying out too much, too soon.
Gulf shareholders have traditionally not been shy about pressing companies to be liberal with dividends.
At the Dubai developer Emaar Properties, the board last month yielded to shareholder pressure and decided to pay a 10 per cent dividend, the company’s first distribution of profit to shareholders since 2008.
The forcefulness of Emaar shareholders has also put pressure on other developers to begin paying dividends.
Shehzad Janab, the head of asset management and advisory at Daman Investments in Dubai, says there is a downside to “vociferous” shareholder demands for dividends from established and growing companies.
“Companies that are still on the growth trajectory should have more retained earnings to plough into the business rather than pay out,” Mr Janab says. “Returns should be channelled into paying down their obligations and getting the company back on track.”
More established companies with healthy balance sheets and steady cash flows can more easily afford to pay dividends.
Etisalat, the country’s biggest company by market capitalisation, is a case in point. The 30-year-old business has been a regular dividend payer.
The telecommunications giant is also among the companies that are regarded as good performers even in hard times.
Etisalat proposed a final dividend of 35 fils a share for last year, bringing the total dividends for the year to 60 fils. This represents a dividend yield of about 6.8 per cent, more than double Emaar’s dividend of about 3 per cent.
Air Arabia, a low-cost carrier that is also perceived as a good stock for diversifying away from the beleaguered property sector, distributed a cash dividend of 8 fils a share.
Maali Qasem, the chief executive of Schema, a corporate governance consultancy that advises Middle East companies on boosting transparency, said a company’s board of directors should balance the long-term business needs of the company against the short-term rewards shareholders want.
“It’s about quick wins for shareholders versus long-term losses [for the company],” Ms Qasem said of cases overly-generous dividend payments.
At some companies, where a small number of major shareholders control a substantial part of the capital, dividend distribution is less a business strategy than “a cash cow” for investors, says Fathi ben Grira, the chief executive of Menacorp Alternative Investments.
Others say some investors place too much emphasis on dividends.
“If as a shareholder you are not happy with the business strategy of the company or don’t believe in its management, you should not invest in that company, regardless of the dividend policy,” Mr ben Grira says. Dividends are “a mere consequence and not the cause of a well-run and growing business”.
Another way companies have responded to shareholder pressure, without cutting into their margins, is by issuing bonus shares instead of paying cash dividends.
“It’s a paper gain for shareholders. It costs [the company] nothing and keeps people happy,” says Malek Kanawati, the chief executive of the online brokerage Mubasher.
The construction company Arabtec went down this route last month when it announced a distribution of 25 per cent of bonus shares to shareholders.
Investors have traditionally kept a keen eye on the banking sector as a reliable source of dividend income, but the Central Bank last year asked banks to distribute no more than 50 per cent of their profits.
Although the financial regulator has yet to renew this warning, the perception that provisioning for bad loans has peaked has led banks to resume dividend payments.
Emirates NBD distributed a cash dividend of 2 fils a share, while Union National Bank has distributed bonus shares.