Disappearing dividends not the new trend, says Imara

With a new corporate results season just around the corner there is no general expectation that South Africa is in for a ‘dividend vanishing act’ across the country’s major listed companies.

“Dividend diminution maybe; wholesale dividend disappearance NO” is the view from Illovo-based Imara Asset Management SA and it’s CEO Dave Eliot.

Concerns over dividend payouts surfaced after mining giant Anglo American and insurance heavyweight Old Mutual ‘passed’ their dividends when their last set of results came out. Investors accustomed to solid dividend distributions had to go without.

“There is no precedent for major JSE-listed companies to stop paying dividends for prolonged periods, even in a challenging economic environment,” says Eliot, a financial services veteran with four decades of experience in portfolio management and financial advice.

“South Africans forget that the precedent was set by offshore companies as both Anglo and Old Mutual now have their primary listings elsewhere. They were in good international company when they made the decision, but our local parameters are somewhat different.

“The Imara view is that non-payment of dividends is not some fashion that will now be picked up by major players on the JSE. If there is a trend it will be toward prudence and a conservative approach to dividends. So, some investors should prepare for a reduced dividend flow in the short term.”

In a recessionary environment he believes financial caution is justified.

“There are at least four good reasons for moderating dividend payments in the current situation,” says Eliot. “You strengthen the balance sheet, reduce the need to take on new debt, pay down existing debt and build up your cash position ahead of further expansion in the medium or long term.

“This is sound thinking and should reinforce an investor’s confidence that they have put their money into a solid company with good management.”

He acknowledges, however, that some investors may be disappointed that companies that have paid solid dividends for many years now see fit to review their policy on distributions.

“Short-term investor disappointment is understandable,” notes Eliot, “but reviewing one’s own position in these companies purely because of lower distributions would be an over-reaction.

“Investors usually commit to larger listed entities because they take a long view and trust these companies to deliver good returns more often than not. As a rule of thumb, if you receive an acceptable-to-good dividend stream three years out of five, you have very little to complain about.

“Don’t punish a company for one decision on dividends by exiting that share. Conservatism on the cash position may well be an indication that you are with a far-sighted business that is developing the potential for a new period of growth. In general terms, that’s the type of company you should be sticking with.”