PETER HODSON’S WORKSHEET FOR THE CONCERNED INVESTOR.
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 ana- lyst Maher Yaghi also found 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 a prime candidate 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 anytime soon, taking the view 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.