Short-term pain as dividends come under pressure

Singapore

SINGAPORE companies may have managed to maintain stable dividend payouts this year but analysts caution that persistently lacklustre corporate earnings will bring pressure to bear in the coming months.

They also add that firms should not feel obliged to maintain steady dividends at all costs - even if reducing payouts will be painful for shareholders and for the company's market value in the short term; conserving cash by cutting back on other expenses such as manpower in order to keep regular dividend payments could come back to haunt companies in the long run.

So far this year, traditional dividend plays such as telcos and banks have kept payments steady while only a handful of the 30 Straits Times Index (STI) component stocks have reduced dividends. These were mainly from the battered offshore and marine (O&M) and shipping-related sectors.

"The STI has yielded about 3.5 per cent historically with the component stocks yielding about 4 per cent on average. . . This year, dividend yield may drop closer to 3.5 per cent rather than the upper range of 4 per cent due to weakness in certain sectors," says NRA Capital research head Liu Jinshu. He calculated that year-to-date, at least four out of the STI stocks that have announced interim results have lowered dividends: rig builders Keppel Corporation and Sembcorp Marine; SembMarine's parent Sembcorp Industries and port operator Hutchison Port Holdings Trust.

"However, I do not anticipate a drastic drop in yields as the number of companies that have cut dividends is actually a relatively small proportion of the overall index," he adds, noting that companies will generally try to sustain absolute dividend payouts or at least maintain their historical dividend yields.

Market observers say companies tend to resist lowering dividends as much as possible due to shareholder and market expectations, though those in sectors such as O&M should do so in order to prepare themselves for a prolonged crude oil slump.

Telco dividends are also under pressure as the entrance of a fourth telco looms, they add, warning that shareholders should brace themselves for cuts in the near term.

"There will, and should, be some dividend cuts but those will be related to sectors such as energy and stock-specific factors," says Hugh Young, managing director of Aberdeen Asset Management Asia.

Kum Soek Ching, head of South-east Asia Research, private banking research, Credit Suisse, says O&M companies "have been reducing their dividend payouts consistently over the last few years as they hunker down and brace themselves for leaner times", adding that those with over-geared balance sheets would be more susceptible to further dividend cuts. "We have also seen lower dividend payouts from the telco sector, and can anticipate payouts to be trimmed if a fourth telco player emerges."

Analysts note that companies in an earnings crunch may face the difficult prospect of having to choose between lowering dividends and reducing outflows in other areas such as staff wages. It is also important to know the reason for the earnings slump to determine the optimal way to conserve cash.

If the company has "a simple inefficient cost issue and say 10 useless senior managers at S$10 million each, then the choice is straightforward and it can keep its dividends", Mr Young says. "Of course it rarely is so straightforward."

IG market strategist Bernard Aw notes that both cutting dividends and cutting staff cost have their disadvantages. "News of a dividend cut will likely trigger an adverse market reaction while news of staff reduction signals the firm is facing substantial cost pressure. The nuances of either measure are key to how market is going to react." If a company "needs to conserve cash for a major project, which could potentially improve their earnings, then a dividend cut may be more palatable", he adds.

Analysts say that even though there may be strong market expectations for certain companies to keep dividends stable, that should ideally not come at the expense of long-term business sustainability.

Maintaining steady dividends as far as possible is "an admirable intention on paper" but if done "at all costs it could be (at) the expense of the very company itself", Mr Young cautions. "It depends - if they're overstaffed and inefficient, then of course they should address that problem; if they're efficient but the balance sheet is stretched, then the dividend should be cut. Often it's a combination of the two - shades of grey."

CMC market analyst Margaret Yang adds: "Dividend cut is more of a short-term pain. . . Cutting manpower, especially the core business units and key talents, will affect the business operation and also hurt the morale of existing staff."

Sean Quek, head of equity research at Bank of Singapore, says that if companies are facing low profitability in the near future, it may be more prudent for them to temporarily lower dividends rather than cut staff or other fixed costs, which "could come back to haunt them". "The decisions on cutting costs and paying dividends are essentially issues that management of a listed company needs to address separately," he adds.

Aside from cutting dividends or staff strength, another way to conserve cash would be to reduce costs in other areas such as trimming bonuses or finding cheaper rent, market watchers say.

"There are other cost-cutting measures to undertake before considering more drastic options such as cutting dividends or trimming manpower," such as reining in bonuses, Mr Aw says.

Ernest Kan, deputy managing partner for markets at Deloitte Singapore, notes that the STI dividend yield has steadily increased from 2.93 per cent in 2012 to 4.15 per cent in 2015, but fallen slightly to 3.98 per cent in 2016 year-to-date as at Aug 11.

"Aside from cutting dividends and staff costs, companies can also choose to cut other high operating costs such as office leases. For example, Google Inc moved its operations from the CBD to a business park on the city's fringe, which saw its rent cut by half, and banks such as Barclays, Standard Chartered PLC and Credit Suisse Group AG have also consolidated their existing work offices," said Mr Kan.