The importance of dividends

The primary objective of investors in equities is capital appreciation over time, however, the consideration of an adequate regular dividend is hardly ever overlooked by such investors. This is probably more pronounced with Maltese investors who invariably look at the potential annual income from any investment they make before anything else.

Among the companies listed on the Malta Stock Exchange, 13 currently pay dividends whereas another six do not pay dividends primarily because they are incurring losses. HSBC Bank Malta plc has historically been the company which many investors regarded as the one paying the highest annual dividend. This has been so until a few years ago and was possibly the main reason for the steep rise in the share price over the past decade.

However HSBC shares now rank in ninth place in terms of dividend returns to shareholders. The table published with this article lists the dividend yield on a net basis (after tax) in order to make a proper comparison with those companies which distribute dividends from tax-free profits such as Simonds Farsons Cisk plc. Interestingly some of the smaller companies provide a better dividend yield than that of HSBC (based on the recent dividend announcements and current share prices).

Moreover, BoV's dividend at 3.8 per cent per annum is superior to that of HSBC while the dividend on Medserv is only marginally below HSBC's 3.31 per cent. Also, Farsons, which has historically not been regarded as a company which provides a high dividend, now trades on a net dividend yield of 3.5 per cent per annum following the company's recent announcement that it will be recommending the highest dividend payment for a long number of years.

On the other hand, the total net dividend of HSBC of €0.102 per share in respect of the 2009 financial year is the lowest payment in the past six years. In 2005 the total dividend distribution by HSBC amounted to €0.328 per share (including a special dividend of €0.184). At the time of this high dividend payment HSBC's share price had risen strongly and this clearly shows the responsiveness of the market to dividend announcements.

This was also very evident in the performance and trading activity in the equity of Maltapost. The number of shares which changed hands in the postal operator surged to a value of €1.5 million since the start of the year as investors became aware of the attractive dividend of this company following the September 2009 full-year results announcement on January 21. The improved trading activity also led to a 21 per cent increase in the share price in the past four months, placing Maltapost as the third best performing equity so far this year.

The top performer on the MSE Official List during the first four months of this year is Malta International Airport with an increase of over 33 per cent in its share price. As the company announced that it expects a return to passenger growth in 2010 and confirmed a strong dividend to shareholders, trading activity in the shares of the airport operators increased. Over €700,000 worth of MIA shares changed hands since the start of the year as the market responded positively to the various announcements and the forthcoming two for one share split.

On the other hand, however, although Plaza Centres continues to rank as the highest dividend yielding equity, trading activity in Plaza shares remains very low indicating that the shares are very tightly held by a small number of shareholders. The latest dividend announcement and confirmation of the company's steady financial performance was overshadowed by the launch of the new shopping centre, The Point. Investors' main concern is the impact of this new shopping destination on the occupancy level and financial performance of the Plaza and this is undoubtedly affecting sentiment towards the company. Moreover Plaza is one of the smaller companies in terms of number of shareholders (totalling just 420) coupled with a large percentage of shares in the hands of a few investors.

Invariably, every year the highest trading activity takes place in the equities of the two large banks with BoV accounting for just over €4 million of the total followed by HSBC at €2.9 million in the first four months of 2010. These are the two companies with the largest number of shareholders - BoV at over 18,000 and HSBC at circa 10,400 - and the wider shareholder base naturally leads to increased trading activity taking place.

Go plc is the third largest company in terms of number of shareholders totalling 8,500 and as a result this equity ranks as the fourth highest in terms of trading activity. Despite the telecoms company having incurred a loss in 2009, it is recommending a dividend of €0.10 per share confirming a good return to shareholders. This helped the equity maintain its strong gains over the past few months as the share rallied by 60.7 per cent after dropping to an all-time low of €1.40 in March 2009.

On the other hand, it is worth noting that International Hotel Investments, the third largest company on the Malta Stock Exchange, saw only €200,000 worth of trades passing through the market in the past four months. Although the shareholder base is quite large (at over 3,000), the low number of trades indicates low investor interest due to the lack of a cash dividend. Clearly the IHI situation shows the relevance of dividends to shareholders. Furthermore, the low level of activity has prohibited the share price from surpassing the nominal value of €1.00 for an extended period of time.

The importance of IHI to the local MSE Share Index (being the third largest capitalisded company) is likely to increase further with the planned growth being pursued by this company. The Sunday Times of London recently reported that IHI is planning a new share issue in conjunction with a listing on the London Stock Exchange. The new issue of shares could enable IHI to surpass BoV which is currently the second largest capitalised company on the local market.

Investors appreciate that a number of listed companies offer attractive returns on a regular basis coupled with capital appreciation over time. Therefore trading activity in such shares should remain healthy as evidenced this year by the volumes transacted in Maltapost and MIA. As such, companies currently listed on the Borza and others intending to tap the market through an equity issue should note the importance of dividends. Companies seeking to go public with a high percentage of profits distributed to shareholders thereby offering a sustainable and stable cash dividend are likely to stand a better chance of success with local investors.

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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 issuer/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. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.

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