Where (and when) to reap re­wards

Op­por­tu­ni­ties in new div­i­dend sea­son

Finweek English Edition - - FRONT PAGE -

THE DIV­I­DEND SEA­SON will soon be open­ing for com­pa­nies that an­nounce their full-or half-year fi­nan­cial re­sults at end-June. There could be a few in­ter­est­ing re­sults for in­vestors. Div­i­dend farm­ers – in­vestors who aim at get­ting three div­i­dends in 13 months – could again be rub­bing their hands in glee. The gen­er­ally strong bal­ance sheets of South Africa’s lead­ing busi­nesses, plen­ti­ful cash and low in­ter­est rates will hope­fully make the pay­ment of hand­some div­i­dends the pre­ferred – rather than a grudg­ing – de­ci­sion.

At the head of com­pa­nies to watch is, ob­vi­ously, Remgro. As usual, this com­pany has far too much cash – cur­rently more than R6bn – and ap­par­ently few op­por­tu­ni­ties to make use of it. In­deed, it has one of the lazi­est bal­ance sheets among the Top 40 listed com­pa­nies. “Lazy” doesn’t re­fer to its man­age­ment. A lazy bal­ance sheet is de­fined as one with too much cash and where no use is made of the ben­e­fit of fi­nan­cial lever­ag­ing.

Remgro has in the past sur­prised its share­hold­ers with spe­cial div­i­dends to make the to­tal dis­tri­bu­tion for the year more at­trac­tive. It paid spe­cial div­i­dends in 2004, 2005 and 2006. How­ever, af­ter the un­bundling of its in­ter­est in Bri­tish Amer­i­can To­bacco, the group was far more ret­i­cent in pay­ing div­i­dends. For its cur­rent fi­nan­cial year ended 30 June a mod­est in­terim div­i­dend of 101c/share was de­clared.

In­vestors pre­pared to pay as much as R113 for the share are clearly ex­pect­ing more than last year’s mod­est fi­nal div­i­dend of 125c/share. The mar­ket ap­pears to be think­ing, or hop­ing, for spe­cial and fi­nal div­i­dends to­talling around 400c/share. Along with the in­terim div­i­dend of 101c, that will give a to­tal of 500c for the year. At its cur­rent price of R113, that puts the share on a his­tor­i­cal div­i­dend yield of 4%. That’s good, but noth­ing to get par­tic­u­larly ex­cited about in an en­vi­ron­ment where sev­eral busi­nesses with more dy­namic growth prospects than Remgro are trad­ing at lev­els with sim­i­lar or even bet­ter re­turns.

With­out a spe­cial div­i­dend in Au­gust of this year, Remgro’s shares now look very ex­pen­sive and in­vestors may be bet­ter off look­ing for greener pas­tures else­where.

Bri­tish Amer­i­can To­bacco (BAT) was Remgro’s div­i­dend milch cow in the past but now in­vestors can in­vest di­rectly in the com­pany, which, in terms of mar­ket cap­i­tal­i­sa­tion, is still the big­gest on the JSE. But there are quite a few nig­gling con­cerns re­lated to BAT that in­vestors should un­der­stand clearly. The com­pany de­clares its div­i­dends in ster­ling and that cur­rency doesn’t buy many rand these days. So what could look like a good in­crease in terms of ster­ling be­comes rea­son­ably di­luted in rand.

An­a­lysts ex­pect BAT to de­clare an in­terim div­i­dend of at least 400c/share for the six months to June 2011, to be fol­lowed by a fi­nal div­i­dend of 1050c early next year. So the to­tal div­i­dend for the share for the next 12 months (or make that 15 months) could be around 1450c/share. That’s still a div­i­dend yield of al­most 5%, which is much bet­ter than lo­cal “fugi­tives” can earn on their ster­ling in­vest­ment on some re­mote is­land some­where. Rather con­vert your ster­ling to BAT on the LSE in good time. That’s a much bet­ter hedge against a fu­ture weaker rand – and per­haps Julius – than ster­ling it­self.

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