Dividends back in the limelight

Article #686 by Edward Rizzo - Published Weekly

It was exactly a year ago when the World Health Organisation (WHO) declared COVID-19 as a pandemic sending markets tumbling rapidly in what was the sharpest move into a bear market territory in history. It took just 16 days for the S&P 500 index to slump by 20% (bear market territory) from the all-time high of 3,386.15 points on 19 February. The S&P 500 subsequently hit a low of 2,237.40 points on 23 March 2020 (a decline of 33.92% from the high on 19 February).

It was an extraordinary period for market followers as financial markets took stock of the initial impact of the pandemic with many economies worldwide going into a strict lockdown. With revenue generation across many industries worldwide drying up quickly and in the midst of the financial reporting season, several companies decided to cancel, suspend or delay any dividend distributions to shareholders.

I had written an article on 16 April 2020 titled ‘Dividends under attack’ providing an overview of some of the decisions taken in the preceding weeks by a number of Maltese and also international companies in order to preserve as much cash as possible in such unprecedented circumstances.

This was naturally a major blow for those investors who are dependent on dividend income to supplement their pension and other sources of income.

Almost one year following that article and with the financial reporting season now in full swing in Malta, the news that emerged last week from two of the companies that published their financial statements and dividend recommendations should surely please the investing public and help lift investor sentiment at a time when the pandemic is still raging on.

BMIT Technologies plc published its financial statements last Tuesday 9 March and recommended the payment of a net dividend of €5.95 million, representing a 35.5% increase over the dividend distributed in June 2020 which was in respect of the 2019 financial year. The dividend recommended last week amounts to a net dividend of €0.02922 per share which, in turn, is almost 22% higher than the projected net dividend of €0.024 per share at the time of the Initial Public Offering in late 2018. The shares of BMIT are still trading cum-dividend and shareholders as at close of trading on 22 April 2021 will be entitled to the dividend of €0.02922 per share. In fact, the share price responded positively to the announcement as it advanced by 9.1% last week to a twelve-month high of €0.53. Despite the increase in the share price, the dividend of €0.02922 per share translates into a net dividend yield of 5.51% per annum.

The higher dividend recommendation by BMIT was possible as a result of the positive financial performance with profits after tax increasing by 6.6% to €4.74 million which exceeds the projected figure of €4.67 million published in late 2018. The profit of 2020 translates into a return on average equity of just over 41%.

BMIT noted that despite the challenging operating environment, the company managed to increase its business reflecting higher demand for cloud services, connectivity, Artificial Intelligence assistance as well as cyber-security. More interestingly, the company reiterated its ambition that market expansion beyond Malta remains a top priority and it is exploring and evaluating a number of options in this respect.

On Thursday 11 March, GO plc issued its 2020 annual financial statements and recommended a net dividend of €0.16 per share which is the highest ordinary cash dividend ever recommended by GO when excluding the special dividends distributed in November 2015 of €0.331 per share in respect of the spin-off of Malta Properties Company plc (this was a dividend in-kind) and a cash distribution of €0.41 per share in mid-2019 (amounting to €41.5 million) following the sale of 49% of GO’s shareholding in BMIT Technologies plc.

In the Annual Report published last week, GO clarified that the dividend of €0.16 per share is made up of a distribution of €0.14 per share in respect of the financial performance in 2020 and an additional €0.02 per share as partial compensation for the reduction in the final dividend distribution in respect of the 2019 financial year. On 15 June 2020, GO had announced its decision to reduce the recommended dividend in respect of the 2019 financial year from €0.14 per share to €0.10 in view of the uncertainty arising from the pandemic.

GO shares will trade with the entitlement to the net dividend of €0.16 per share until 23 April 2021. The share price of GO also reacted positively to last week’s announcement as it surged by 6.1% to €3.50. At this level, the net dividend yield on GO shares is of 4.57% per annum.

During the 2020 financial year GO generated a normalised EBITDA of just over €77 million (+1.7%) on the back of a stable performance in Malta as well as growth in the business of BMIT Technologies plc and Cablenet Communication Systems plc. GO’s profit after tax of €13.3 million in 2020 (€11.7 million in 2019) translates into a return on average equity of 11.9%.

The net dividend yields of 5.51% by BMIT and 4.57% by GO may surprise certain investors especially given the challenging economic environment brought about by COVID-19 as well as the low yields available across the bond market. Many international financial commentators regularly draw a comparison between the yields generated on shares and those on sovereign bonds to gauge the attractiveness of one asset class over another.

The 10-year yield on a Malta Government Stock is currently only 0.38% per annum while the longest-dated 25-year MGS gives a yield to maturity of 1.21% per annum. With the European Central Bank last week stating that it would conduct emergency bond purchases at a significantly higher pace over the next quarter to counter the recent recovery in eurozone yields, it is very unlikely for yields on these MGS’s to move higher in the short-term.

In view of the historically low interest rate environment, the yields being derived from the equities of BMIT (5.51%) and GO (4.57%) should be viewed as particularly attractive.

This ties in with last week’s article where I referred to the letter by Warren Buffett to the shareholders of Berkshire Hathaway Inc in which the legendary investor spoke negatively about the bond market. Warren Buffett and other like-minded value investors have had a negative view on the bond market for quite a while now in view of the very low yields and the ensuing price risk should yields begin to recover towards more normalised levels especially across the US. The yield on the 10-year US Treasury briefly surpassed the 1.60% level in recent weeks (from a low of 0.30% on 9 March 2020) and some market commentators anticipate this to keep rising towards the 2% level by the end of 2021 and up to 3% in the longer term.

When investors who require to maximise the income generation on their investment portfolio contemplate the appropriate allocation between bonds and shares, it is important for them to gauge the sustainability of dividends from the equity component of the portfolio. Investors should analyse the strength and structure of a company’s balance sheet and understand the business model to ensure that revenue and cash generation is not dependent on specific events or contracts materialising.

The very difficult operating conditions across the world since the start of the pandemic last year should not be seen as the norm. Investors may tend to forget the unprecedented times we are living in. Despite this, however, the recent announcements from companies like GO and BMIT show the strong ability of certain businesses to still generate a positive return for shareholders and distribute very attractive dividends despite operating in the midst of a pandemic. Hopefully, as the vaccine rollout gathers pace across the world in the weeks and months ahead, the economic outlook will improve and conditions start stabilising.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon.

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