Should Zim firms be paying out dividends?

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(File pic from Fool Singapore)

Tawanda Musarurwa

HARARE – It’s been rather rosy for some investors on the local equities market as a number of listed firms have declared dividends for the fiscal year just ended.

Among some of the companies that have declared dividends so far include TSL, BAT Zimbabwe, Zimplow, Simbisa and ZB Financial Holdings…

All things being equal, a company that pays out dividends – and on a consistent basis – is the ideal stock as dividends are basically corporate earnings that these companies pass on to their shareholders. 

Dividends can be in the form of cash payments, shares of stock, or other property.

BAT Zimbabwe, for instance, is legendary for having one of the most generous dividend pay-out ratios that is close to a 100 percent.

But within the Zimbabwean economic milieu, the question is: are locally listed companies that are increasingly doling out dividends (not singling out BAT Zimbabwe) doing this viably considering the present state of the economy?

Are these dividends even ideal for some of these companies, some of which may could have just turned the corner in the previous financial year?

For one thing, there is the considerable risk that a struggling firm may seek to attract foreign investors by simply offering dividends (and high ones at that). It has also been observed that high dividends can boost a company’s stock price.

In view of this, are current dividend payout justified?

Economic analyst Perry Munzwembiri is of the opinion that they actually are:

“In any economy, dividends are generally a function of positive free cash flows being generated by the company as well as the availability of investment opportunities to reinvest those positive cash flows to create value for shareholders in the long term.

“As long as a company is generating positive free cash flows, and there are no favourable investment opportunities the company can undertake to increase shareholder value, then it only makes sense that the company passes on the excess cash to shareholders through dividends,” he said.

Citing the example of BAT Zimbabwe’s FY2017 interims, Munzwembiri elaborates:

“For example, BAT recently  reported free cash flows of $13, 57 million for 2017, and the Board declared a total dividend of 51 cents, and with BAT`s earnings per share for the period at 51 cents, this means the company`s dividend payout for 2017 equated to 100 percent of the company`s earnings. The company can afford to do this considering the sheer size of its free cash flows, and considering that the company only needed $535 000 in capital expenditure in 2017.”

But what of the other companies within the context of a challenging economic environment.

The local economy has been dogged by mounting inflationary pressures that have been precipitated by currency disparities which have created an alternative market (read ‘black market’) for both foreign currency and hard currency (even in the form of bond notes), as well as multiple pricings depending on payment method.

“Zimplow for instance recorded a profit for FY2017, from a loss position in 2016, and still went on to declare a dividend.

“This is justifiable given the positive cash flows it had in the year, as well as the increase in the cash holdings in its balance sheet,” said Munzwembiri.

But what are the critical factors that determine a company sharing out a dividend in any one particular period?

“Lastly, there are other factors that determine dividend payouts such as nature of industry (information technology companies generally do not pay much dividends as they are constantly re-investing earnings in Research & Development of new products etc.), availability of opportunities for Mergers and Acquisitions or capital expansion.

“In such instances, companies tend to withhold dividend payouts. Again, companies generally try to maintain consistent dividend payout policies as dividends are seen to have a signaling effect to the market.

“A company that regularly pays dividends might be seen to be financially troubled if it suddenly stops paying out dividends. Similarly, a company that has not paid a dividend might be looked upon favorably if it pays out a dividend so it is this positive signaling effect that may drive companies that have just turned the corner to declare dividends.”

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