As reflected by the flat and in some cases poor financial results that have been published by listed companies since the third quarter of 2013, it is clear that corporates are under a lot of distress.
The distress is from the tough operating economic environment as well as the liquidity constraints that continue to bedevil the local financial sector.
However, the year 2013 was only the beginning of tough times for local companies, as we believe through our research that the year 2014 is going to be even worse.
What this means is that we expect corporates to be more conservative in their business planning and strategies especially with regard to their cash generating capacity and level of borrowings (leverage).
It is against this background that we have noted with concern a very disturbing trend amongst listed companies on the Zimbabwe Stock Exchange, where some companies are declaring dividends on borrowed funds.
There are five key factors that determine a company’s dividend policy these are namely, the ownership structure, leverage, profitability, liquidity, and growth.
The shareholding of a company often is key in determining the dividend policy of a company. The shareholding argument is premised on the fact that a company’s dividend payout tends to bring a decline in the stock value, thus, a conflict of interest for the insiders.
Empirical evidence suggests that companies with higher insider ownership tend to have a more conservative dividend policy compared to companies that have shareholdings that are dominated by institutional investors who see dividends as an important component of their investment return.
However in Zimbabwe it seems the opposite applies, as insider shareholders are actually keener on dividend payouts than institutional investors.
There is an inverse relationship between the dividend rate and leverage of a company, in other words implying that companies with high interest payments should pay lower or no dividends.
Profitability and liquidity move hand in hand, because although high profitability may increase the probability of high dividends, if the firm does not generate free cash flows to payout the dividend, then declaring a dividend may actually constraint the firm’s liquidity.
Finally, the stage in which a company is positioned in its growth cycle is also a key factor determining its dividend policy, with younger (high growth) companies usually opting to retain most of their earnings while mature companies (slower growth) usually opting to payout most of their earnings as a reward to loyal shareholders.
Applying the above factors to the local economic scenario, we should see only a few cash rich companies declaring dividends, as most companies are still recuperating from the devastating effects of the lost decade of hyperinflation.
Furthermore a number of listed companies are still overwhelmed by interest costs from debt that was taken on at the inception of dollarisation and also legacy debt from the hyperinflationary era.
There is also another group of companies that might not have any debt problems but are not in a position to payout dividends because of their relatively low profitability and therefore precarious liquidity position which makes paying dividends unsustainable for such firms.
Although the Securities and Exchange Commission of Zimbabwe had in good faith pleaded with listed companies in solid financial footing to declare dividends, it seems this message was wrongly interpreted by managers or shareholders of certain listed companies, who despite generating negative cash flows from operations went on to declare and finance their dividend from borrowings.
For example Masimba Holdings after generating negative cash flow from operations of $809 079 went on to declare a final dividend of $259 200 which in our opinion did not make any sense.
Furthermore, it is also disturbing to note that certain listed companies after purportedly making a profit after tax from property revaluations, go on to declare a dividend.
In our opinion, property revaluations are a time bomb that in the near future are going to have serious negative ramifications for both investors and corporations, as the value of property cannot sustainable increase in the absence of liquidity.
On the other hand, there are companies such as Edgars Stores Limited which despite recording profits and posting positive cash flows have taken a good decision to retire debt to sustainable levels and exploit more investment opportunities instead of declaring a fat final dividend.
While there might not be any immediate cash for the shareholder, if this decision is viewed positively by the shareholders “ceteris paribus”, the corresponding capital appreciation in the share price should compensate for the non-dividend payment and if strategies employed by the company yield fruit, dividends will then be declared at a later period on a more sustainable basis.
Such decisions inform us that management is conscious of the realities in this economy at this juncture and have made a deliberate decision to forego short-term gratification in favour of obtaining future sustainable benefits.
In early 2009 the then Finance Minister pleaded and almost forced local banks to lend as much as possible to enable the economy to grow, but the end result was that some banks carelessly extended credit and five years down the road, non-performing loans have spiralled out of control whilst the financial sector liquidity crunch continues unabated.
The same scenario in our opinion may occur with dividend payouts, as companies in no financial position to declare dividends continue to take enormous risk in doing so.
This article was written by Zimnat Asset Management for FinX.