The Stock market and mean dividend policy
Share Price
Many years ago, the PPP administration sought to make the issue and investment of shares in public companies an attractive proposition, exempting from capital gains tax the gain any transfer of shares. That is on top of a change in the law during the
Desmond Hoyte administration when dividends paid on shares in Guyana companies were made nontaxable. We also saw the advent of the Stock Exchange in 2003.
This second Economic Commentary looks at the more recent performance of the
Guyana Stock Exchange measured by what is called the Stock Exchange Index or in
Guyana’s case the market capitalisation, measured by adding the total of the issued shares of each of the companies whose shares are traded on the Exchange times the unit price for those shares. By this measure, the market capitalisation at January 2024 was $795,207 million, down 25% from a high of $1,062 213 million at July 2022. As stock exchanges go that is quite significant, made worse by the fact that public companies, particularly the larger ones, have been reporting massive increases in profits.
Trying to put this into some kind of context is equally bewildering. Between January 2021 and July 2022, the market capitalisation had increased from $397,067 million, translating into an increase of $665,146 million or 68%. It is difficult, perhaps impossible, to identify let alone justify the circumstances accounting for this meteoric rise and Icarian tumble. What is not difficult is to understand the impact on those pension funds and other institutional investors, especially those which had adjusted their investments and calculated their actuarial assets and liabilities based on July 2022 balances.
The six companies that mirrored these changes are listed in the Table below. As can be seen, the largest movers between January 2021 and January 2024 are Demerara Bank Limited by an unbelievable 301% followed by Demtoco and GBTI in treble digits, Banks DIH Limited (97%), DDL (79%) and RBL 12%.
Between July 2022 and July 2024, the price of the shares in Demtoco and GBTI had a more terrestrial growth of 6% and of 9%. For the others, the slide was: DemBank, 28.7%, Banks, 39%; DDL, 48.8% and RBGL, 13.6%.
Because of the lack of investment opportunities, and the total absence of new shares
over more than 25 years, shareholders tend to hold on to their shares and not many shares change hands. Had this not been the case, the logical thing for small shareholders especially to do would be to sell their shares while the price is still relatively good. One sympathises with those shareholders who did not cash in on the high prices at July 2022 and now see the value of their shares in many of the companies having fallen by significant percentages. The hope for a quick recovery is to expect more on sentiments than objective fundamentals such as higher dividends. .
Dividend payout
I previously commented adversely on the low payout ratio of dividends to market price which in the case of the twins – Banks DIH and DDL – are some of the lowest in the country. There are two consequences of this stingy dividend policy: a low dividend yield and a high level of retained/accumulated profits. Of our top six companies DDL has the worst dividend yield (0.5%) with GBTI and RBGL – two banks at 1.6%, while Demerara Bank is 0.6%. A decent dividend yield should be around 2.5% - 4 %, depending on the maturity of the company, among other factors.
A low dividend yield should affect share price since the company is not an attractive proposition for persons hoping to earn dividend income. That’s the type of thing that no chairman ever raises at shareholders’ meeting or even wants its small shareholders to know.
The other consequence is that the company does not ever need to raise by the fresh issue of shares or develop a good mix of financing from equity, long-term and shortterm debts. There is a rule of thumb that the company can have debt equivalent to four times equity. But instead, our public companies use shareholders’ funds to finance capital expenditure. For example, DDL ten years ago, had $4.7 Bn in debt. Now it is nil. The repayment of those debts and subsequent capital expenditure have come from shareholders’ funds.
Let us take one other metric as a measure of a company’s dividend policy. And that is the number of years of most recent dividend cover measured by the distributable accumulated profits. Meaning that even if they make no profits for those years, they would still be able to pay a dividend. Again, it is DDL with the most dividend cover in reserve (35 years), followed by Banks DIH (29 years), Dembank (24 years) and GBTI (19 years).
Shareholders have to demand more from their directors and the so-called independent and institutional directors must show some regard for the small shareholders.
Next week, we do a detailed analysis of Banks DIH Annual Report for 2023.