Where (and when) to reap rewards
Opportunities in new dividend season
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.