Why Bursa’s no to Affin Bank dividend waiver is a positive

AT a time when many large enterprises are shaving their dividend payments to conserve cash, the case of Affin Bank Bhd is noteworthy.

This week, the bank said that its bid to cut its full-year dividend for 2019 to five sen a share from seven sen was rejected by Bursa Malaysia.

The announcement sent shock waves throughout the capital market.

Did it mean that the exchange has the authority to determine how much companies pay out in dividends?

The answer to this question is both a yes and a no.

Here’s why: In Affin Bank’s case, the main point to note is that the bank had back in February declared a final dividend of seven sen per share in respect of the financial year ended Dec 31, 2019 (FY19).

That declaration would have guided investors of the bank and would have been factored into Affin Bank’s current share price.

Reducing a dividend declared earlier also sends a wrong message to the investing public.

“If Affin Bank is allowed to reduce its dividend, more companies may try to follow suit and reduce paying out what they had promised” points out one fund manager.

Following the rejection, the dividend of seven sen will be reinstated, Affin Bank has since clarified.

Do note that Affin Bank had explained that the rationale for its attempt to lower its dividend payout was in order to preserve capital and liquidity in view of the economic slowdown and its support of Bank Negara’s measures amid the Covid-19 outbreak.

The move would have been in line with what some major banks across the globe have done. For example, last month, HSBC said that it was scrapping its dividends for FY19 to save capital.

Other banks like the Royal Bank of Scotland and Barclays have also said they would cancel any outstanding dividend payments.

In Malaysia’s case, no other banks are known to have sought to reduce their dividend payouts. In Affin Bank’s case, Bursa Malaysia says that once a dividend is announced to the exchange, its listing requirements prohibit any alteration to the dividend entitlement declared or proposed to shareholders.

The rationale for such requirements, says the exchange, is to safeguard investor and shareholder interest since dividend entitlement and payment forms part of the key considerations in making their investment decision.

“Bursa Malaysia seeks to ensure certainty to the market once such an announcement is made by a listed company,” it adds.

However, the quantum of dividends to be paid falls solely within the prerogative of the board of directors of a listed company, having considered the company’s financial standing (solvency test) and performance, as well as its dividend payout policy, if any.

Dividend payment is also governed under the constitution of the listed company, clarifies the exchange.

The exchange says the decision was made after considering both the application of Affin Bank and shareholder interest. “In this regard, the exchange is unable to approve the proposed waiver unless payment of the dividend declared cannot be authorised by the board under the relevant laws such as the Companies Act,” it says.

No doubt, the ongoing Covid-19 pandemic has prompted a lot of companies to take a cautious and cash-conserving stance. But how much cash would Affin Bank save by lowering its dividend from seven sen to five sen? To be noted is that in Affin Bank’s case, there is a dividend reinvestment plan (DRP) in place.

This is where shareholders have the option of opting for shares instead of cash. In fact, it is understood that Affin Bank’s major shareholder, the Armed Forces Fund Board (LTAT), which controls 35.33%, will opt for the DRP.

This means the cash outflow would have been minimal.

The total payout based on seven sen a share would be Rm139.02mil compared with Rm99.3mil for a five-sen payout. Assuming the major owner opts for the DRP, the total cash payout for seven sen would be Rm90mil versus Rm64.5mil on a five-sen payout. This means that Affin Bank would have enjoyed savings of Rm25.5mil if it were to lower its dividend payout to five sen. That amount is a mere 5% of its FY19 net profit of Rm516mil.

If the move to reduce the dividend payout was driven by a need for the major owner to receive cash, that too has another solution.

“Generally, the major shareholder opts for the DPR, but it can choose to sell shares of the bank if it wants to raise cash,” points out an analyst.

In 2015, A&M Realty Bhd was publicly reprimanded by Bursa Malaysia after a subsequent alteration of the company’s dividend entitlement.

In this instance, the company had proposed a final dividend of 15 sen per share for FY14 ended Dec 31. However, it had the next day made an amended announcement of the proposed dividend to 1.5 sen per share.

In reprimanding A&M Realty then, the exchange said it did not condone any subsequent alteration to the dividend entitlement which is expressly prohibited and it viewed such contravention seriously as it affects market integrity.