Lower volatil­ity among ben­e­fits for man­age­ment, too


You’ve prob­a­bly heard the ar­gu­ment be­fore: com­pa­nies that pay dividends are bet­ter in­vest­ments than those that don’t.

The data cer­tainty sup­ports this the­sis, most re­cently, with an anal­y­sis from Des­jardins Cap­i­tal Mar­kets look­ing at 20 years of stock per­for­mance in Canada and the U.S. It showed that com­pa­nies that ini­ti­ate and grow their div­i­dend usu­ally out­per­form broader in­dexes.

Me­dia and technology an­a­lyst Ma­her Yaghi also found that com­pa­nies that de­cide to pay dividends see higher trad­ing mul­ti­ples and lower volatil­ity.

Some of the im­pact is felt im­me­di­ately, with the de­ci­sion to pay a div­i­dend pro­duc­ing a one to three per cent share price out­per­for­mance on the next trad­ing day. That trend holds up over the longer-term too, as com­pa­nies that ini­ti­ate dividends see their share prices out­per­form their re­spec­tive in­dexes by a greater mar­gin over both one and three years, when com­pared to same pe­ri­ods that pro­ceed the move.

“We were not sur­prised by the re­sults given that some pen­sion funds have re­stric­tions on how much of their port­fo­lios they can in­vest in non-div­i­dend-pay­ing stocks, and given the pro­lif­er­a­tion of in­dex funds geared to­ward in­come gen­er­a­tion and de­mand for in­come by re­tail in­vestors, es­pe­cially in the cur­rent low in­ter­est rate en­vi­ron­ment,” Yaghi said.

While pay­ing a div­i­dend cer­tainly at­tracts new in­vestors, it also raises the risk that a com­pany will be viewed as hav­ing lower growth prospects. If that’s the case, in­come in­vestors would sim­ply re­place growth in­vestors, and the pos­i­tive im­pact would be neu­tral­ized.

How­ever, Yaghi noted that new div­i­dend-pay­ing stocks see sig­nif­i­cantly higher trad­ing vol­umes – in­creas­ing an av­er­age of 21 per cent and 45 per cent an­nu­ally in the U.S. and Canada, re­spec­tively, fol­low­ing the an­nounce­ment of a div­i­dend. Those num­bers jump to 58 per cent and 41 per cent in the sub­se­quent three years, com­pared to the three years prior.

When it comes to volatil­ity, pay­ing a div­i­dend also helps, as the pol­icy change sig­nals “an im­proved sense of de­pend­abil­ity and lower gen­eral per­ceived risk­i­ness by in­vestors,” the an­a­lyst said.

Av­er­age volatil­ity dipped six per cent and 15 per cent in the year that fol­lowed a div­i­dend an­nounce­ment for U.S. and Canadian stocks, re­spec­tively, and 20 per cent and 19 per cent over three years.

While ev­ery­one from U.S. names like Mi­crosoft Corp., Or­a­cle Corp. and Ap­ple Inc. to Open Text, Gil­dan and Dol­larama in Canada, have started to pay dividends in re­cent years, Yaghi high­lighted CGI and Shopify as clear out­liers that do not. In the U.S., Google, Face­book and Ama­zon.com have also re­sisted the urge.

With this in mind, Yaghi sug­gested that CGI Group Inc. should con­sider ini­ti­at­ing a div­i­dend pay­out. The an­a­lyst said it stands out as prime ben­e­fi­ciary that could ben­e­fit from such a move.

“Given the strength of the com­pany’s oper­a­tions, free cash flow gen­er­a­tion, low debt lev­els and pos­i­tive out­look, we be­lieve a re­view by the board of its cur­rent pol­icy of not pay­ing a div­i­dend could ben­e­fit most stake­hold­ers, yet still al­low it to pur­sue fur­ther ac­qui­si­tions,” Yaghi said.

CGI has made it clear to in­vestors they shouldn’t ex­pect a div­i­dend soon, tak­ing the view that a pay­out would re­duce flex­i­bil­ity when it comes to M&A and or­ganic in­vest­ment. Ex­tra free cash flow is then used for share buy­backs and pay­ing down debt.

But if ini­ti­at­ing a div­i­dend ben­e­fits both in­vestors through higher re­turns and liq­uid­ity, and man­age­ment in the form of lower volatil­ity and im­proved mul­ti­ples, CGI and oth­ers might want to take a closer look at this ad­vice.


Me­dia and technology an­a­lyst Ma­her Yaghi rec­om­mends that com­pa­nies like Shopify, with its of­fice in Toronto, above, and CGI should con­sider ini­ti­at­ing a div­i­dend pay­out as there is plenty of data to sup­port the ben­e­fits of the move.

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