Dividends as added attraction to investors

For dividend-oriented stock investors, the rest of 2012 has a lot of promise as many analysts project stable, if not higher, payouts from listed companies.

Steady and increasing dividends from companies that are past their high-growth phase are often an indication of sound fundamentals and say a lot about future prospects. The Philippine companies that are likely to declare good dividends this year include those from the telecom, utilities and media sectors, analysts say.

Amid low interest rates and volatile markets, dividends are likely to be an incentive for new and existing investors to own stocks.

“You can view it from this perspective. If a stock is cheap in terms of valuation (low price-to-earnings, low price-to-book ratios) and I like its long-term fundamental outlook, I would be more inclined to buy it if it can give me a cash dividend that will match what I expect to earn from my placement in the bank,” says April Lee-Tan, research head at CitisecOnline.

Lee-Tan adds that “cash dividends should at worst be flat compared to 2011,” noting that companies in general have room to increase cash dividends provided that profits increased in the past year.

Likely big payers

For this year, Philippine Long Distance Telephone Co., Globe Telecom Inc., Bank of the Philippine Islands, Semirara Mining Corp. Aboitiz Power Corp., Manila Water Co Inc., First Philippine Holdings Corp., ABS-CBN Corp. and GMA Network Inc. are among companies that are likely to declare good dividends, she says. Filinvest Land Inc. also offers high rate of dividends because its share price is depressed and valuation is cheap, she adds.

Dividends, which are paid by companies regularly to shareholders and taken from earnings, are one way of boosting shareholder value. Dividend payments can also be a gauge of financial well-being of companies. They may come in the form of cash, stock, or property. Property dividends—which can be shares in a subsidiary company or physical assets—are rare, though. Over the past 12 months, the only Philippine companies that have distributed property dividends are Manila Electric Co. and RFM Corp.

Investment driver

Companies that are still growing, however, rarely offer dividends as they opt to reinvest all of their profits to help sustain high growth.

“Dividends are becoming an important driver (of investments) especially in this all-time low-interest rate environment,” says Paul Joseph Garcia, senior vice president and equity fund manager at Bank of the Philippine Islands. He points out that the share of dividends to the total return of the stock market over the past 10 years was about 40 percent. Although capital appreciation is the main source of returns, dividends are proving to be a significant contributor.

Also, dividends are taxed 10 percent for resident individual investors and zero for corporate investors compared to 20 percent withholding tax for fixed income investments, he says.

“Dividend play will be important this year,” says Garcia. “Investors now are very conscious about investing in companies that give dividends. Right now, that’s the trend that we’re seeing.”

Market participants say one can’t blame investors for this trend. Last year, for instance, the Philippine Stock Exchange Index registered a 4.5-percent rise while the average dividend yield was about 3 percent, resulting in total return of around 7.5 percent. Dividend yield is calculated by dividing the annual dividends per share with the price per share.

Impressive returns

This kind of return is indeed impressive considering the slower economic growth and challenging external market environment last year as the eurozone debt crisis mounted.

In its listing of top dividend yields since 2009 in February, stock brokerage DA Market Securities ranked as No. 1 infrastructure holding firm Metro Pacific Investments Corp. with 9.34 percent average dividend yield, followed by PLDT (7.32 percent), Globe (6.78 percent), GMA 7 (4.14 percent) and Pepsi Philippines (3.82 percent). Also on the top 10 of its list were ABS-CBN, China Bank, Nickel Asia, Semirara Mining and Bank of the Philippine Islands. In all cases, those dividend yields either compensated for the decline in stock prices or enhanced the total returns.

Jose Vistan, research head at AB Capital Securities, sees dividend yields declining this year due to flat earnings growth last year, although they may be higher in absolute or peso terms.

He cautions that when it comes to investing, dividends should be an added, rather than the main, attraction.

“It’s hard to find companies that pay dividends that are higher than the money market,” Vistan says. “In this low interest-rate environment, investors would like to invest in the dividend-paying companies as an added incentive.”