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To pay or not to pay

This article first appeared in Focus Malaysia, on June 24-30, 2017.
Published in Focus Malaysia on June 24, 2017.

When it comes to dividends, minority shareholders generally want the most generous payouts. The rule among investors then is to hunt for stocks with high dividend yields or those with generous dividend policies. Such companies pay dividends generated from profits. However, there are increasing calls from minorities for companies to distribute their large cash reserves and excess cash back to them. In this Focus List, we track companies that paid dividends from their free cash flow (FCF) in their latest financial year (FY). FCF is a measure of the amount of cash generated by a company after capital expenditure. This cash can be used to expand operations, develop new products, reduce debts or pay dividends. It measures a company’s financial performance and is one of the benchmarks used to compare and analyse financial health. Our list highlights 10 of these generous companies. Conversely, we also list 20 companies that paid meagre dividends and another 20 that did not give any dividend despite having good FCF. Our research shows that the 10 most generous companies paid a total of RM400.9 mil in dividends. Their cumulative FCF for the period was RM20.7 mil, with all paying higher dividends than their FCF. Many companies paid dividends far in excess of their latest financial year’s FCF. Therefore, they would have likely dipped into their FCF which was carried forward from previous years, or from their current year net profits. The most generous was Malaysia Smelting Corp Bhd with a dividend-to-FCF percentage of 3,278%. The smelter paid investors eight sen per share for FY ended Dec 31, translating to a total payout of RM8 mil. Property developer UOA Development Bhd was the second most generous with 3,253%, or a dividend of 15 sen per share and cumulative payout of RM244.7 mil. BP Plastics Holding Bhd was third with 1,983%. The industrial producer paid eight sen per share amounting to an overall payout of RM15 mil.

Meagre payouts

However, not all companies were so generous. We list 20 companies with rather frugal dividends despite having high FCF. Sapura Energy Bhd had the lowest percentage of 2.49%. Despite a RM2.4 bil FCF, it paid only one sen per share dividend for a cumulative payout of just RM59.63 mil. Second place PIE Industrial Bhd’s percentage was only 3.83%, translating into a dividend per share of five sen and a total payout of RM3.84 mil. OCB Bhd gave investors a mere one sen dividend per share, amounting to a RM1.03 mil total payout for FY ended Dec 31. Against its RM21.7 mil FCF, this means a percentage of only 4.75%. We wonder why some companies with reasonable FCF did not pay any dividend. Zecon Bhd had the highest FCF per share of RM1.28 and a total FCF of RM152.6 mil for FY ended June 30, 2016. The counter closed at 58 sen on June 22.  Encorp Bhd had the second highest FCF per share of 74 sen. It also did not declare any dividend despite an FCF of RM205.8 mil for FY ended Dec 31, 2016. It ended trading at 79 sen on June 20. Property player Ideal United Bintang Bhd reported a RM62.91 mil FCF for its latest full year, which amounted to an FCF of 57sen per share. However, it did not pay any dividend.

Utilising FCF

Generally, most analysts see healthy cash reserves as positive, allowing companies to pursue expansion and continue operations even during a downturn.“A company with a decent cash reserves has higher chances to withstand economic downturns and recessions, which all businesses will inevitably encounter,” says MTC Asset Management co-founder and executive director Aaron Yew. “It is absolutely crucial for companies to be FCF positive as this shows they are making cash profits after paying expenses to maintain or expand their asset base.” However, some see large cash piles as a mark of inefficiency, and argue that cash should not be kept idle. If it is not used to expand or for other useful purposes, it should be given to shareholders via special dividends, they say.

Minorities unhappy with poor payouts research analyst Tan Wei Yine says the optimal level of cash reserves differs from one industry to another. “A high level of cash reserves does not necessarily mean the company is healthy as this may indicate the management has not fully utilised its resources,” he cautions. Cash-rich companies that fail to reward shareholders has been a point of contention for many minorities. Tan thinks it is fair for investors to demand better dividends from companies with healthy FCF. “For a company with large reserves and FCF, we would expect it to pay dividends, as the company may already have sufficient reserves to weather uncertainties. “If the management has not indicated it has plans for expansion or other decent investment opportunities, it is only fair for investors to demand higher dividends if the FCF remains at a healthy level,” he says. MTC’s Yew offers a slightly different view as he believes that investors should not immediately demand higher dividends just because a company has a high FCF. “Each company is different and has different growth prospects. If the management is able to utilise that cash to invest in areas that deliver a reasonable return on the capital employed, then it may well be the right decision to keep the cash in the company rather than returning it to shareholders,” he says. However, he believes companies should use the cash to pay dividends if there are no growth prospects or if it is not growing enough to justify further investments.

How we compile the list

  • We focused on the quantum of dividends paid by profitable companies listed on Bursa Malaysia in their latest financial year.
  • The companies are segregated into three lists those that paid generous dividends, frugal dividends and zero dividend piled.
  • In the generous dividend category, we selected the top 10 companies with the highest dividend to free cash flow (FCF).
  • In the frugal dividend category, companies were ranked by dividend to FCF from the lowest to the highest. Only the top 20 companies with the lowest percentages were ranked.
  • For the zero dividend category, we picked the top 20 companies which did not pay any dividend despite having decent FCF. We ranked them based on their FCF per share.

Top 10 Generous dividend payers

These companies declared dividends much higher than their free cash flows. Although their dividends may not be high by normal standards, they were considered generous in relation to their free cash flows.

1.   Malaysia Smelting Corporation Bhd

The most generous company on our list is Malaysia Smelting Corporation Bhd (MSC). It was listed on the Singapore Stock Exchange (SGX) in 2001, and is 28.09% controlled by another SGX-listed company, The Straits Trading Company Ltd. MSC is an integrated producer of tin metal and tin-based products, and a global leader in custom tin smelting with roots dating back to 1887. In FY16, the company declared a dividend of eight sen per share, amounting to RM8 mil. However, no dividend was declared in FY15. Its free cash flow improved markedly from negative RM26.42 mil in FY15 to RM244,000 due to lower trade prepayments. Its share price surged 51.32% to RM4.01 from RM2.65 a year ago. MSC is led by CEO Datuk Patrick Yong Mian Thong.

2.   UOA Development Bhd

UOA is the only property company featured. Its free cash flow shrunk 96.23% to RM7.52 mil from RM199.5mil in FY15 due to higher capital expenditure. Despite the decline, the property developer declared a dividend of 15 sen per share in FY16, similar to FY15, amounting to RM244.7 mil. Its share price grew 21.33% to RM2.56 from RM2.11 a year ago. UOA, listed on the Australian Stock Exchange as United Overseas Australia Ltd, was founded by Kong Chong Soon @ Chi Suim and Kong Pak Lim in 1987. The company set foot in Malaysia in 1989 and is based in Kuala Lumpur. It is controlled by Chong, who is also managing director, and Kong through UOA Holdings Sdn Bhd with a 69.11% stake.

3.   BP Plastics Holding Bhd

BP Plastics was incorporated in 1990 as Lam Guan Plastic Industries, a partnership between Lim Chun Yow, Tan See Khim and Hey Shiow Hoe. It was established as a response to various government incentives to stimulate export-oriented businesses. It manufactures and markets plastic bags as well as packaging and stretch films, and is the largest polyethylene film-maker in Asia. In FY16, the Johor-based company declared a dividend of eight sen per share (FY15: eight sen), amounting to RM15.01 mil. Its free cash flow slumped 98.07% to RM757,000 from RM39.13 mil in FY15, due mainly to higher inventories. The company is controlled by its three founders through their private investment vehicle LG Capital Sdn Bhd with a 43.16% stake. It is headed by managing director Lim Chun Yow. Its share price dropped 6.58% to RM1.42 from RM1.52 a year ago.

4.   Asia Poly Holdings Bhd

Asia Poly was founded in 1993 as Asia Poly Industrial Sdn Bhd. It produces cell cast acrylic sheet products used in retail display stands, signs, furniture, noise barriers, telephone booths and interior fittings, among others. Earlier this year, it planned to acquire the entire stake in High Reserve Land Sdn Bhd and diversify its business to include property development. This is to add value to its existing products by setting up a coating plant to hard coat its cast acrylic sheets. In FY16, the cast acrylic sheet maker declared a dividend of half sen per share, similar to FY15, amounting to RM1.32 mil. It had a free cash flow of RM99,586 as of year-ended Dec 31. Its share price fell 19.61% to 20.5 sen from 25.5 sen a year ago. The company’s major shareholder is executive chairman Datuk Yeo Boon Leong with a 15.28% stake.

5.   Eng Kah Corporation Bhd

Eng Kah was established in the 70s by Ewe Eng Kah. The founder, who is also chairman and managing director, has a 39.85% controlling stake. The company is a contract manufacturer of perfumery, colour cosmetics, skin care, toiletry and household products for multinational corporations and hypermarkets. In FY16, its free cash flow dropped 93% to RM341,000 from RM4.87 mil in FY15, due mainly to lower payables and higher receivables. Nevertheless, the company paid a dividend of six sen per share, 0.5 sen lower than in FY15, taking the total annual payout to RM4.25 mil. Its share price fell 23.04% to RM1.57 from RM2.04 a year ago.

6.   Taliworks Corp Bhd

Taliworks, founded in 1965, was initially in water treatment, supply and distribution before diversifying into waste management, highway toll concessionaire, operations and maintenance as well as construction and engineering. The company is controlled by Datuk Lim Chee Meng (pic) with a 52.17% direct and indirect stake, and led by executive director Datuk Lim Yew Boon (pic).In FY16, the company declared a dividend of eight sen per share, similar to FY15, amounting to RM96.76 mil. However, its free cash flow dropped 93.34% to RM8.21 mil from RM123.2 mil in FY15 due mainly to lower operational cash flow from higher trade and other receivables. Its share price closed at RM1.52, up 7.80% from RM1.41 a year ago.

7.   Poh Kong Holdings Bhd

Poh Kong was co-founded in July 2002 by executive chairman and group managing director Datuk Choon Yee Seiong (pic) and executive director Cheong Teck Chong. It is into designing, making and trading of jewelleries. The company is controlled by Choon and Cheong via Poh Kong Sdn Bhd with a 58.29 stake. In FY16, it declared a single tier first and final dividend of one sen per share amounting to RM4.1 mil, similar to FY15. However, its free cash flow shrunk 99.44% to RM408,965 from RM72.52 mil in FY15, due mainly tower operational cast flow from higher inventories. Its share price closed at 50 sen, down two sen from 5sen a year ago.

8.   Prestariang Bhd

Incorporated in 2003, Prestariang provides education, training and certification and software licence distribution services. Its major shareholders are EkoHati Sdn Bhd (20.72%), Kumpulan Wang Persaraan (Diperbadankan) (11.33%), AIA Bhd (9.52%) and Brahmal Vasudevan (5.79%). It is led by president and group CEO Abu Hasan Ismail (pic). In FY16, the company declared a lower dividend of three sen per share, 0.75 sen lower than in FY15, amounting to RM14.48 mil. Its free cash flow fell 58.26% to RM1.51 mil from RM3.62 mil in FY15 due mainly to lower operational cash flow from reduced pre-tax profit. Its share price closed at RM2.07, down five sen from RM2.12 a year ago.

9.   New Hoong Fatt Holdings Bhd

New Hoong Fatt, founded on April 2, 1997, manufactures and markets metal and plastic automotive body replacement parts. It is controlled and led by executive chairman Kam Foong Keng (pic) with a 34.09% stake. In FY16, the company declared a dividend of 14 sen per share, three sen higher than in FY15, amounting to RM10.52 mil. Its free cash flow dropped 83.16% to RM1.32 mil from RM7.84 mil the previous financial year. The decline was due mainly to highercapital expenditure which rose 10.25% to RM34.52 mil from RM38.06 mil. Its share price closed at RM4.65, up66.07% from RM2.80 a year ago.

10.   Mintye Bhd

Mintye, founded in 1976 by Yeo Ah Tee, manufactures and distributes automotive and industrial friction materials. The company is controlled by the Yeo family via Yatee & Sons Sdn Bhd with a 59.17 stake, and led by executive chairman Yeo Kim Swee. In FY16, it proposed a first and final single tier dividend of three sen per share amounting to RM1.83 mil, two sen lower than in FY15. Its free cash flow contracted 91.45% to RM309,066 from RM3.61 mil a year ago, due mainly to lower operational cash flow from reduced pre-tax profit. Its share price closed at RM1.15, down two sen from RM1.17 a year ago

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