The return on equity represents the profitability achieved in percentage terms compared to the capital invested by the shareholders, but another important ratio which is widely followed by investors is the dividend yield. This represents the dividend received by an investor compared to the current market price of the share.

Dividend income is an important consideration for a large majority of local investors. Naturally, if an investor purchased the shares at a different price to the current market price, the yield for such an investor is different to the one quoted in this table – the higher the purchase price, the lower the yield and vice versa. However, it may not be ideal to only use the yield based on the original purchase price. Investing is all about future returns and when purchasing shares, one is not guaranteed a dividend every year. The dividend is decided upon by the directors of a company annually and recommended for approval by shareholders based upon a number of factors including profitability, company strategy, funding requirements, etc. As such, investors should look at the opportunity cost of retaining an investment in a certain company as opposed to investing in another company and among the factors to be considered, investors must also look at the sustainability of the current dividend and whether there are better opportunities elsewhere.

The dividend league table is based on the latest annual financial statements published by each company. As the reporting season for 2013 recently came to a close, the dividend league table represents the dividend paid in respect of the 2013 financial year compared to the current market price. The yields of those companies that do not have a December year-end (Bank of Valletta, Simonds Farsons Cisk, MaltaPost and Crimsonwing) are based on their most recent financial year.

It is important to highlight that the league table is based on the net dividend yield and not the gross yield. The net yield provides a better comparison due to the different tax situations in certain companies. Dividends distributed by Middlesea Insurance, Simonds Farsons Cisk, RS2 Software and Medserv are tax free in the hands of shareholders due to the beneficial tax situations of these companies.

Investors should look at the opportunity cost of retaining an investment in a certain company as opposed to investing in another company

Two of the three retail banks again rank among the top three dividend yielding companies. BOV tops the ranking with a net yield of 5.3 per cent per annum. The yield is based on the dividends distributed in respect of the 2012/2013 financial year which came to an end on September 30, 2013.

However, investors must also bear in mind that during the first half of the current financial year, BOV reported a 22 per cent decline in profits and likewise the interim dividend declared on April 25, 2014, and payable on May 23 is also 22 per cent below last year’s interim dividend. As such, the dividend yield for the current financial year is most likely to be below the 5.3 per cent level. BOV’s recent dividend declaration was not impacted by the new amendments to Banking Rule 09 since BOV had probably set aside sufficient reserves in the past.

On the other hand, the final dividend recently approved by shareholders of HSBC Bank Malta was severely impacted by the new legislation as well as the lower profitability generated and as a result of both factors, the final dividend declined by 34 per cent. The full-year adjusted dividend of €0.089 per share represents a net yield of 4.2 per cent per annum. One must also mention that the dividend yield of both banks improved in recent weeks following the decline in their respective share prices. The equities of both banks suffered double-digit declines in the first five months of 2014 with BOV down 12.4 per cent and HSBC showing a loss of 10.6 per cent.

The second highest ranking equity in terms of dividend yield is Grand Harbour Marina at 4.6 per cent. The decision by the directors to declare a dividend despite not concluding a superyacht berth sale in 2013 probably came as a surprise to many. However, it is a clear indication of the company’s policy of distributing excess cash to shareholders. The latest berth sale of €3.1 million took place in December 2012. In March 2013, GHM paid a net dividend of €0.12 per share and, more recently, the company declared a further dividend of €0.084 per share. The total payout since the recent berth sale amounted to €2.04 million. This probably indicates that future dividends are dependent on further berth sales to materialise.

In the property sector, Malita Investments and Plaza Centres rank in fourth and fifth position with yields of 4.12 per cent and 3.81 per cent respectively.

Tigne Mall ranks in 12th position but the recent dividend announced is not comparable to that of its peers since it was the maiden dividend following last year’s Initial Public Offering. Tigne Mall has a policy of distributing dividends every six months. If one were to include an estimate of the interim dividend that should be declared in September to the recent final dividend, the net yield would rise towards the 3.8 per cent level.

The business model of these three companies supports a sustainable and aggressive payout to shareholders since rental income is contracted and costs are mainly fixed, providing clear visibility on future financial performance. In fact, the equities of these three companies are mainly held by institutions or retail investors seeking regular income. The added advantage of holding shares in these companies for their dividend income, as opposed to a bond, is that the revenue of these companies is largely linked to inflation rates. Revenue should therefore rise over time with a consequent positive impact on profits and dividends. Such equities are therefore normally regarded as a hedge against inflation.

There are four other companies with yields within the range of 3 per cent to 4 per cent, namely Middlesea Insurance, Maltapost, Go and Malta International Airport. While Middlesea’s performance is very much dependent on financial market conditions and therefore the dividend is subject to possibly wide volatility, the distributions of Maltapost, Go and MIA may be considered more sustainable.

Others generally have also started to appreciate the importance of gaining an exposure in their portfolio to companies with potential for capital growth

The past financial year of these three companies was not impacted by any major one-off items. This is different to last year’s league table when Go’s dividend for 2012 was above expectations as a result of the one-off gains from property and possibly also due to the fact that no dividend was distributed the previous year. Go’s dividend of €0.07 per share for 2013 seems sustainable going forward given the EBITDA and cash flow generation from operations as well as current banking facilities in place to finance upcoming investments. MIA’s yield has declined over the years not because of a reduction in dividend payments but due to the consistent increase in the share price. Likewise, the dividend of Maltapost has also remained constant but the increase in the share price also negatively impacted the yield when viewed on the basis of the current market price.

As one would expect, the companies in the IT sector are not ranked highly in terms of the dividend yield. Currently, 6pm is the highest at 2.65 per cent while RS2 and Crimsonwing are both below 1 per cent. These yields are not only low due to the requirement by such companies to maintain sufficient reserves to finance their ongoing international expansion but also in view of the strong increase in share prices in recent years. As an example, the total dividend of RS2 remained at €1 million for the 2013 financial year but following the increase in the share price by 165 per cent over the past 12 months, the yield dropped from 2.45 per cent in 2013 to 0.93 per cent.

The yield of Crimsonwing is based on the dividend declared for March 2013. Following the 28 per cent increase in interim profits for the period to September 30, 2013, the expectations are that profits would have also continued to rise during the second half and likewise the dividend to shareholders being recommended in the coming weeks, once the directors approve the March 2014 financial statements, will also improve over last year. This would increase the dividend yield from the current level of only 0.76 per cent.

Medserv recently reinstated a dividend which was approved at last week’s annual general meeting. The yield is currently at 1.85 per cent. The decision by the company to recommend a dividend of €600,000, notwithstanding that in 2013 profits after tax amounted to €390,000, gives a clear indication of the company’s dividend policy. This was highlighted by chairman Anthony Diacono in his brief address to shareholders at the AGM. Mr Diacono explained that although the company raised €20 million in debt to finance the company’s expansion in Malta and Cyprus, the directors still believe that shareholders should be rewarded accordingly in future years. If Medserv manages to achieve its financial projections, one would expect an increase in dividends next year in line with the payout ratio adopted in previous years.

IHI does not rank in the league table since the recent dividend was not declared in respect of the 2013 financial year. It was announced on April 11, 2014, in conjunction with the sale of 11 of the London apartments. The dividend was also an interim dividend and did not require shareholders’ approval. In fact, it was paid to all shareholders last week. The dividend of €0.03 per share gives a net yield of 3.75 per cent on the current price but this could be considered as a one-off since it was financed by the sale of the residences. Although the company’s strategy is to continue to dispose of non-hotel assets and this was highlighted again in last week’s interview with chairman Alfred Pisani, due to political developments, it is unlikely that the commercial centre in St Petersburg would be sold in the coming months to finance another dividend next year. However, the chairman also mentioned the possibility of selling some of the hotels. Although it would take a considerable time to conclude, a sale of any of the hotels could imply another attractive one-off dividend to shareholders in the future.

Although dividend income features among the more important considerations for a large majority of local investors, others generally have also started to appreciate the importance of gaining an exposure in their portfolio to companies with potential for capital growth and not only regular dividend income. In the initial years since the setting up of the Malta Stock Exchange, significant price appreciation by the two large banks rewarded shareholders and, more recently, MIA and Maltapost also recorded strong share price gains. Similarly, in the past two years, the significant share price appreciation by the IT companies proves the relevance of having exposure to carefully selected equities in one’s portfolio.

The equity market requires further companies to obtain a listing to provide added opportunities to investors to primarily seek dividend income, as well as other companies with business growth potential to provide capital growth to investors.

Data as at May 16, 2014

Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stock-brokers) Ltd.

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