Hunt­ing down the div­i­dend

Fund man­agers tar­get the pay­ers

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Sa­sol has dropped its pro­gres­sive div­i­dend pol­icy fol­low­ing oil’s dra­matic fall over the past year. Div­i­dends from other com­mod­ity com­pa­nies are also at risk. That’s why Mar­riott As­set Man­age­ment steers clear of re­source stocks in its Div­i­dend Growth Fund. In fact, it has six fil­ters that it ap­plies to the fund to en­sure that it is left with the high­est-yield­ing stocks that will con­tinue to pay div­i­dends into the fu­ture.

It’s not just com­mod­ity com­pa­nies that Mar­riott fil­ters out — it also ex­cludes com­pa­nies with a mar­ket cap­i­tal­i­sa­tion of be­low R2bn; those that are vul­ner­a­ble to volatile eco­nomic con­di­tions; and those that op­er­ate in un­pre­dictable in­dus­tries. So don’t ex­pect to find MTN in the fund ei­ther.

The strat­egy has paid off for Mar­riott; its fund has ranked in the top quar­tile over nu­mer­ous pe­ri­ods in the past 10 years. How­ever, Mar­riott’s Dug­gan Matthews ad­mits that a num­ber of re­ally good com­pa­nies are ex­cluded in the process.

“What we try to do is ex­clude com­pa­nies that we feel aren’t pre­dictable by na­ture,” says Matthews. “If their div­i­dends aren’t pre­dictable, their price ap­pre­ci­a­tion is ul­ti­mately go­ing to be un­pre­dictable. The value of a com­pany in­creases in line with its profit growth and its div­i­dend growth.”

Sa­sol is mov­ing back to its

for­mer pol­icy of hav­ing div­i­dends cov­ered by earn­ings, so those who had come to de­pend on sus­tained div­i­dend flow from the group will have to ad­just to lower pay­outs in the fu­ture.

Kumba Iron Ore’s earn­ings and div­i­dends are un­der pres­sure be­cause of the sharp slide in the price of iron ore over the past year.

How­ever, BHP Bil­li­ton, which in­cludes both oil and iron ore in its port­fo­lio of com­modi­ties, plans to con­tinue grow­ing its div­i­dends. This has re­sulted in a warn­ing from Stan­dard & Poor’s that it could have its credit rat­ing down­graded.

“Mar­ket con­di­tions are not favourable for com­mod­ity com­pa­nies at the mo­ment,” says Ivy As­set Man­age­ment direc­tor Bruce Main. “If it is down­graded but main­tains its pro­gres­sive div­i­dend pol­icy, we’re happy as long as it doesn’t stand in the way of in­vest­ments in projects. But BHP’s projects still have a long life and it has enough new projects it can fund with in­ter­nal cash flow, so it could be a com­pany worth look­ing at.”

Ivy As­set Man­age­ment is an­other fund manager that gen­er­ally doesn’t con­sider in­vest­ing in a com­pany that doesn’t pay div­i­dends. “You’re ba­si­cally get­ting no re­turn for the com­mit­ment of your cap­i­tal,” says Main. He be­lieves the value of rein­vest­ing div­i­dends over the long term will guar­an­tee su­pe­rior re­turns. “Un­for­tu­nately in some of the big­ger in­vest­ment mar­kets, cor­po­rate fi­nanciers would rather that com­pa­nies com­mit their cap­i­tal to projects and that comes at the ex­pense of div­i­dends.”

Main says where there is a com­mit­ment by man­age­ment to pay div­i­dends to share­hold­ers — and di­rec­tors have a fidu­ciary duty to make sure they do — then the com­pany is less likely to squan­der cap­i­tal on ex­pan­sion that may not nec­es­sar­ily bear fruit in the long term.

“No man­age­ment team in a com­pany ever ex­e­cutes a busi­ness strat­egy and gets it right 100% of the time,” he says. “It makes man­age­ment a lit­tle more cir­cum­spect on their in­vest­ments if they are pay­ing out div­i­dends and have that re­spon­si­bil­ity.”

Sus­tain­abil­ity of div­i­dends is also im­por­tant. When com­pa­nies have cut back on their div­i­dends, Main says, he’ll re­main in­vested if there is a com­mit­ment to re­in­state pay­ments in the fu­ture. If the cap­i­tal is be­ing di­verted into earn­ings-en­hanc­ing projects, it could ul­ti­mately re­sult in higher div­i­dend pay­ments in the fu­ture.

“Gen­er­ally we don’t like it, though. When a com­pany was a div­i­dend payer, like An­glo Amer­i­can, and sud­denly stopped, the mar­ket re­acted quite se­verely,” says Main. “Once the mar­ket is used to a div­i­dend, don’t take it away.”

It’s not just the size of cur­rent div­i­dends that Main keeps a watch on, it’s the po­ten­tial for fu­ture div­i­dend growth as the com­pany ex­pands and new projects come to fruition.

“We value the busi­ness on its fu­ture growth prospects, so while you might get a 1,5% yield at the mo­ment, we also take a look at growth prospects, which may be sub­stan­tially higher,” he says.

Ri­cus Reed­ers, a port­fo­lio manager at PSG Wealth Sand­ton, agrees that apart from the cur­rent div­i­dend pay­out ra­tio, the po­ten­tial to pay out div­i­dends in the fu­ture should also be con­sid­ered. The small div­i­dend pay­ers of to­day could be the high yield­ers of the fu­ture.

“The yield is good for the short term, but if you think back 10-15 years, tech­nol­ogy com­pa­nies glob­ally paid no div­i­dend what­so­ever,” he says. “Th­ese days the tech sec­tor is prob­a­bly the big­gest div­i­dend payer.”

In SA, there is very lit­tle to choose from in the tech­nol­ogy space, how­ever. One ex­am­ple is EOH. Although its div­i­dend yield sits at just 0,75%, as long as growth con­tin­ues on its cur­rent tra­jec­tory, Reed­ers says, this is a com­pany that could start re­turn­ing more cash to in­vestors. The same goes for Naspers; its div­i­dend yield is just above 0,2% as strong cash flows from its TV op­er­a­tions are used to fund its fledg­ling e-clas­si­fieds and e-com­merce busi­nesses. That could change, though.

“The main point is not to be too con­cerned if the yield is low right now,” Reed­ers says.

De­spite their low pay­out ra­tios, EOH and Naspers are in the top 10 con­stituents in the Coreshares DivTrax ex­change traded fund, with re­spec­tive weight­ings of 4,9% and 4,7% in the ETF.

“The yield is low, but the div­i­dend is con­sis­tent and has grown and our prod­uct fo­cuses on that growth,” says Gareth

By tar­get­ing div­i­dends, in­vestors ben­e­fit from the power of com­pound, by rein­vest­ing the div­i­dends

Sto­bie, gen­eral manager of Coreshares at Grindrod Bank. “Naspers is a bit of an out­lier, though. The port­fo­lio on av­er­age pays a yield higher than the gen­eral mar­ket, as you’d ex­pect.”

Coreshares DivTrax tracks the S&P Dow Jones SA Div­i­dend Aris­to­crats In­dex, which tar­gets stocks which have main­tained and/or grown their ab­so­lute div­i­dends over at least five years. The in­dex is re­viewed twice a year to en­sure that div­i­dend coupons are be­ing main­tained or grown, in­clud­ing in­terim div­i­dends.

Sto­bie says by tar­get­ing div­i­dends in­vestors have the cer­tainty of hav­ing cash in hand to­day and ben­e­fit from the power of com­pound by rein­vest­ing the div­i­dends.

DivTrax in­cludes the low-yield­ing Naspers among its con­stituents.

The Sa­trix Divi ETF in­cludes some of the com­mod­ity stocks whose div­i­dends could be un­der threat from weak com­mod­ity prices. Kumba Iron Ore, Sa­sol and BHP Bil­li­ton all fea­ture in the top 10 hold­ings, with ba­sic ma­te­ri­als mak­ing up more than 30% of the fund. It repli­cates the FTSE/JSE Div­i­dend Plus in­dex, which mea­sures the per­for­mance of the top 30 high-yield­ing large and mid-cap com­pa­nies on the JSE, in­clud­ing real es­tate com­pa­nies. It’s also re­viewed twice a year, in June and De­cem­ber, so ex­pect some changes from next month.

That said, both ETFs have an av­er­age yield of about 4%, well above the av­er­age 2,9% yield for the FTSE/JSE’s All Share In­dex.

Although Ivy As­set Man­age­ment was over­weight in com­mod­ity com­pa­nies in the early 2000s, when they paid large div­i­dends, this is no longer the case. The in­dus­try has no con­trol over the price of its end prod­ucts. Main says Ivy light­ened its com­modi­ties hold­ings in 2010 and only now be­lieves that value is re­turn­ing. How­ever, it still prefers com­pa­nies that have more pre­dictable cash flow.

“If you look at com­pa­nies that can con­trol their prod­uct prices, th­ese in­clude branded food com­pa­nies and IT com­pa­nies that have in­tel­lec­tual prop­erty,” says Main. “Th­ese com­pa­nies have far more pre­dictable an­nual in­come and cash flow and ul­ti­mately if you are go­ing to be pay­ing a div­i­dend you need that.”

An ex­am­ple of a com­pany with strong branded prod­ucts is Pi­o­neer Foods, which Ivy As­set Man­age­ment ac­quired shares in when it traded on the OTC via the busi­ness Agrivoed­sel. You could buy it for R15 then. It’s now trad­ing north of R170 on the JSE and in­vestors have been re­warded ten­fold with the growth in its div­i­dends since then.

“An­other ex­am­ple is Zeder,” Main says. “Though the div­i­dend is a lit­tle lower, what is very im­por­tant is that the com­pany is grow­ing. If you can get your orig­i­nal cap­i­tal back in div­i­dend in­come in the next 10 years, you can rein­vest that in an­other four to five com­pa­nies and do the same again. The mul­ti­plier ef­fect of that div­i­dend stream into the fu­ture is as­tound­ing.”

Mar­riott also favours branded com­pa­nies and those with strong cash flows and pric­ing power. Matthews says a good por­tion of the port­fo­lio is in­vested in Bid­vest, “a very sta­ble, solid com­pany”. Re­tailer Mr Price also fea­tures. “So are the food man­u­fac­tur­ers and food re­tail­ers like Spar, which are all com­pa­nies where con­sumers have to spend their money. Be­cause of the ba­sic ne­ces­sity na­ture of those in­dus­tries, they’re able to pro­duce

While the fi­nan­cial sec­tor is a favourite for div­i­dends, growth may be more choppy as it is very de­pen­dent on the mar­ket it­self

con­sis­tent div­i­dends and con­sis­tent re­turns for in­vestors over time,” says Matthews. “In­ter­na­tion­ally, there’s a bit more to choose from. You’ve got com­pa­nies like Nestlé, John­son & John­son, Pfizer, Proc­ter & Gam­ble, all with ex­cep­tional track records go­ing back 25-30 years or even longer.”

Banks and in­sur­ers are among the high yield­ers that Mar­riott in­cludes in its Div­i­dend Growth Fund. “Yields of com­pa­nies like Stan­dard Bank and Ned­bank are close to 4%, which is quite at­trac­tive if you look at the All Share’s yield of around 3%,” says Matthews. “You’re also likely to see life in­sur­ers; MMI and Lib­erty Hold­ings for ex­am­ple, are yield­ing close to 4,5%.”

The four big banks are rel­a­tively pro­gres­sive div­i­dend pay­ers. Main says they are also ex­pand­ing fur­ther into Africa, where a lot of their fu­ture growth will come from. In some cases, this could be at the ex­pense of higher div­i­dends.

“A lot of the money that could be paid back is be­ing in­vested in fu­ture growth in Africa, so I would pre­fer to take a longer-term view on those ex­pand­ing be­cause of the con­strained growth here in SA,” he says.

The fi­nan­cial sec­tor is a favourite for div­i­dends, but growth may be more choppy as it is very de­pen­dent on the mar­ket it­self, says Reed­ers.

“Fi­nan­cial in­sti­tu­tions are not go­ing to rein­vent the wheel, so the yield may be good at some times and bad at some times,” he says.

Many in­vestors be­lieve tele­coms com­pa­nies are ex-growth. Reed­ers, how­ever, be­lieves they will grow and evolve thanks to ad­vances in tech­nol­ogy and will con­tinue to be a source of de­cent div­i­dends. Both Vo­da­com and MTN cur­rently yield more than 5%.

The health sec­tor is an­other good source of div­i­dends, in­clud­ing Life Health­care and Net­care, but Reed­ers warns against over­pay­ing.

Life Health­care has a div­i­dend yield of 3,7% and Net­care of­fers a 2,1% yield, but they are trad­ing on 22% and 25% his­tor­i­cal earn­ings re­spec­tively.

“It’s not good get­ting th­ese div­i­dends at too high a price,” he says. “Over the longer term health care may be a good place to be, but you have to bal­ance out cap­i­tal growth with div­i­dend growth.

“If your cap­i­tal growth is flat to neg­a­tive, div­i­dend growth won’t make up for it.”

Apart from listed com­pa­nies, Main says, the over-the-counter mar­ket was also a good source of div­i­dends for in­vestors. How­ever, new rules be­ing in­tro­duced by the Fi­nan­cial Ser­vices Board are cur­tail­ing that mar­ket.

“Sen­wes, for ex­am­ple, is listed on the OTC mar­ket. Close to a decade ago it was roughly 95c. You would have got your in­vest­ment back al­most four­fold just in div­i­dends,” says Main. “The shares are now trad­ing at close to R12, so your cap­i­tal has also ap­pre­ci­ated. It’s one of our best-per­form­ing in­vest­ments out­side the JSE, and a lot of that re­turn has to do with the div­i­dends.”

Main says the mul­ti­plier ef­fect of rein­vest­ing div­i­dends will have a huge ef­fect on ul­ti­mate re­turns. For ex­am­ple, R500 in­vested in stocks ev­ery month for 40 years that de­liv­ered an an­nual re­turn of 14% would be worth about R8,8m in 40 years’ time. But if the eq­ui­ties yielded an ex­tra 2% in div­i­dend in­come and those were rein­vested, the end re­sult would be R15,5m.

At Mar­riott, lo­cal and in­ter­na­tional eq­uity funds are fo­cused on pro­vid­ing a re­li­able div­i­dend stream to in­vestors, which leads to more pre­dictable cap­i­tal growth over the long term, says Matthews. It’s not just for older in­vestors look­ing for in­come.

“Be­cause of the qual­ity of th­ese com­pa­nies and the abil­ity to grow their earn­ings and their prof­its con­sis­tently over time, that in­come stream is likely to grow in ex­cess of in­fla­tion,” he says.

Whichever way you cut it, rein­vest­ing div­i­dends will add to long-term cap­i­tal growth. How­ever, with the mar­ket look­ing ex­pen­sive, Reed­ers says in­vestors have to be care­ful about the price they pay for yield.

They still pre­fer com­pa­nies that have more pre­dictable cash flow


Dug­gan Matthews … We try to ex­clude com­pa­nies that we feel aren’t pre­dictable by na­ture.

Ri­cus Reed­ers … The po­ten­tial to pay out div­i­dends in the fu­ture should also be con­sid­ered.



Gareth Sto­bie … By tar­get­ing div­i­dends in­vestors have the cer­tainty of hav­ing cash in hand to­day.

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