Expect more dividend reinvestment plans

> Such arrangements give companies more room to manage capital position in current economic climate

PETALING JAYA: More companies, especially banks, are expected to offer dividend reinvestment plans (DRPs), even though such schemes are not among the most popular arrangements here, because of the additional flexibility they accord companies to manage their capital position given the current economic climate.

Rakuten Trade head of research Kenny Yee said it is possible that more companies will launch DRPs.

“I don’t think it (DRP) is catching on yet because if the (dividend) yield is good for the year, most would opt to take the dividend. If the yield for the year is 5%-6%, most would want to realise the dividend,” he told SunBiz.

He said, currently, the dividend yield of companies is not exceptionally high, averaging some 2%-3%.

“If you exclude those traditionally high dividend yield stocks, maybe investors would opt to reinvest,” Yee said, adding that the option to realise the dividend or to reinvest depends on what shareholders want.

Banks that have offered DRPs include Malayan Banking (Maybank), CIMB Group, AMMB Holdings, BIMB Holdings, Affin Holdings and the former RHB Capital. The first DRP in Malaysia was proposed by Maybank in March 2010. Other companies that have offered DRPs include Axiata Group, Telekom Malaysia, SP Setia, Malaysia Airports Holdings and more.

DRPs typically provide companies with additional flexibility in managing their capital position while providing shareholders with an opportunity to enhance the value of their shareholdings by investing in new shares at a discount.

Yee said companies that launch such schemes tend to improve their cash flow, rather than pay out all dividends in cash.

“The small caps would want to preserve their cash flow for future growth, while big caps have ample cash holdings, so it’s more likely that the big caps will offer DRPs.”

He said it does not mean that once a DRP is announced, shareholders will opt for the plan, as it also depends whether the company has a steady business. For companies that have a sustainable business, a DRP can be a better option.

“If they (shareholders) are looking for long-term (play), of course a DRP should be okay. But if they want to realise their dividend gains, they would just pick the dividend. If they’re confident of the long-term prospects of the company, then the DRP will be a better offer. If the dividend is too little, you might as well reinvest it. It’s up to the individual and the company that they have vested interest in,” explained Yee.

For banks, he said, a DRP will be a better option for shareholders as it believes that banks are growing and has a relatively stable business. By reinvesting, returns would be higher than the dividend yield.

A chief investment officer (CIO) with an asset management firm concurred, agreeing that more companies will launch DRPs.

“One of the reasons is they don’t have to pay out cash, but instead convert that cash that is supposed to paid out to shareholders into shares. It is one form of enhancing the capital base, although sometimes it can be earningsdilutive,” he said.

The CIO pointed out that banks are more likely to initiate DRPs as banks are in more need to conserve and raise capital. Banks also need to maintain certain amount of liquid and common equity tier 1 capital according to Basel III standards, unlike other companies.

He said the choice to take the dividend or reinvest largely depends on the discount or the pricing of the dividend reinvestment of the stock.

“If the discount is good, I would advise to reinvest. The discount would have to be more attractive than taking the cash dividend, then it makes more sense to invest. If it’s a 5 sen dividend, and the discount is more than 5 sen, then it makes sense to reinvest, but this will depend on the individual shareholder’s preferences, whether the person prefers an income stream,” he said.