Fund investors are expecting the banking sector to lower their dividend payout rate from an average of 50% to 30% this year

by DASHVEENJIT KAUR/ pic by TMR FILE

DIVIDEND-FOCUSED investors need to lower their expectations as companies will likely move to preserve cash due to earnings disruption brought by the Covid-19 pandemic.

Fund investors are expecting the banking sector to lower their dividend payout rate from an average of 50% to 30% this year, and to reduce further if the financial impact of the crisis is more severe than anticipated.

Rakuten Trade Research VP Vincent Lau said pricing wise, investors are behaving like the economy is deep into a financial crisis when in fact, it is not as bad as it appears to be.

Although less rosy than it could have been, he said it pays better to invest in a dividend-paying stock rather than fixed deposit (FD).

“We may not be in the best position, but it is still better than FD rates. There could be an emerging pattern of reduction in dividend payouts, but you won’t see many companies stopping it entirely,” he told The Malaysian Reserve recently.

Lau recommends investors to look at stocks that are experiencing a significant decline in their share prices, especially dividend-paying stocks.

“The decent dividend yields and possible capital gains when things recover would benefit investors,” he added.

Lau highlighted a good example of the better dividend stocks is Malayan Banking Bhd (Maybank).

“When stock prices are down in this volatile market, find good, cheap stocks that will perform better during the recovery,” he noted.

As defensive dividend-paying companies face tighter cashflow — no thanks to the virus outbreak — there has been a noticeable trend of cutting dividends.

Lau recommends investors to look at stocks that are experiencing a significant decline in their share prices, especially dividend-paying stocks – pic by MUHD AMIN NAHARUL

Consumer Stocks

British American Tobacco (M) Bhd (BAT), known for its generous dividends, cut its first interim dividend for the second quarter of its financial year 2020 (2QFY20) to 18 sen, almost half the 30 sen it declared for the same quarter last year.

This is the lowest interim dividend the group has declared since 1990.

The group reported a 28.39% fall in 2Q net profit to RM54.61 million from RM76.27 million a year earlier, due to lower sales that shrank its earnings per share (EPS) for the quarter ended June 30, 2020, to 19.1 sen from 26.7 sen.

Although the stock has fallen as much as 15.43% since March 1, BAT still has the highest estimated dividend yield among all consumer (staples and discretionary) stocks in Bursa Malaysia.

BAT is the only listed tobacco player in Malaysia among competitors JT International Bhd and Philip Morris (M) Sdn Bhd. It has a dividend payout rate policy of 90% of its earnings.

Another company that took the market by surprise in its move to suspend its quarterly dividend payments for the whole of FY20 was Carlsberg Brewery Malaysia Bhd. The company did so to ensure sufficient liquidity for the year.

Carlsberg said the dividend suspension was done to ensure a more prudent focus on preserving cash and liquidity, with the intent being to strike a balance between the long-term health of the organisation and dividends to shareholders.

Carlsberg earnings fell 16.7% in the 1QFY20 from the corresponding quarter a year ago, following the Covid-19 outbreak that affected its sales and the resultant containment efforts that saw the suspension of its operations.

Its net profit for the three months ended March 31, 2020, declined to RM72.96 million from RM87.6 million, while revenue dropped 10.6% to RM589.87 million from RM659.92 million.

Consequently, the group’s quarterly EPS retreated to 23.9 sen from 28.7 sen.

For its current share price of RM25.08, its dividend yield is 5.12%. Unlike in 1Q19 when it declared a 21.5 sen dividend, Carlsberg did not declare any dividend this time around. Magnum Bhd also recently announced its lowest interim dividend since November 2015, 2.5 sen per share.

Magnum’s stock has also taken a beating since March, shrinking more than 8% to RM2.21 a piece at last closing.

On the other hand, a company like Nestlé(M) Bhd has given an assurance that it will maintain its 95% dividend payout policy this year despite recording a 20.8% year-on-year drop in its 1Q net profit.

However, Nestlé’s estimated dividend yield on a trailing 12-month basis is fairly less as a heavyweight, at 1.93%, according to Bloomberg data.

Heineken Malaysia Bhd, after recording an 8% growth in net profit in 1Q20 to RM56.96 million, thanks to its Chinese New Year festivities campaigns, offered a decent dividend yield of 4.7%.

In a May 20 note, Hong Leong Investment Bank Bhd (HLIB) reckoned that Heineken’s dividend yield should prove attractive in the current volatile market conditions.

“This is to reflect the partial subsiding of ‘production risk’ now that it has been allowed to recommence operations during the Conditional Movement Control Order. In addition, FY20-FY21 yields of 4.2% to 4.9% should offer some attractiveness,” the brokerage said. HLIB has a ‘Hold’ call on Heineken, with a target price of RM22.45.

Banking Stocks

Among all the banking stocks on Bursa Malaysia, the Hong Leong group of companies took the move to cut their dividend payouts.

Hong Leong Industries Bhd for its 3Q20, proposed a second interim dividend of 25 sen per share, down from the 35 sen declared for 3Q19.

This brings the group’s dividend per share for the current year to 42 sen, compared to 50 sen for FY19.

Hong Leong Financial Group Bhd did not declare a dividend for this quarter.

Since March 1, Hong Leong Financial’s stock price has decreased as much as 8.63%, compared to Hong Leong Bank Bhd’s 1.57%.

The banking stock that has the highest estimated dividend yield is Maybank, at 7.7% based on Bloomberg Dividend Forecasts for the next 12 months, on top of a declining stock price since March.

Maybank has lost more than RM6 billion in terms of market value while its stock fell by 6.29% in the last four months. The company’s dividend yield is 8.1% on a trailing 12-month basis.

For the financial year ended Dec 31, 2019, Maybank’s full-year dividend payout remained the same at 64 sen per share, including the 25 sen interim dividend declared earlier, totalling RM7.19 billion or some 87.8% of net profit.

As for the second-largest company on the local stock exchange, Public Bank Bhd was the only banking stock that has recorded growth in share prices since March 1, as much as 8.19% to RM18.42.

The company’s dividend yield is 4% on a trailing 12-month basis and 4.1% based on Bloomberg Dividend Forecasts for the next 12 months.