Dividend growth is a ‘vote of no confidence’ in SA

DIVIDEND growth in SA’s equity market has overtaken earnings growth for the first time in 30 years, suggesting an “investment strike” as companies remain reluctant to further invest in local enterprises.

The increased return of money to shareholders in the past few months shows a vote of no confidence in SA’s economy, says Absa investment analyst Chris Gilmour. “Companies are finding less avenues to invest money.”

The trend indicated companies are seeing fewer opportunities for growth, given a rigid labour market, policy uncertainty, global economic weakness and subdued consumer and business confidence.

Mr Gilmour said the late Anton Rupert, founder of Remgro, was said to once have told shareholders that paying a dividend is “an admission of defeat”.

Dividend cover does tend to decline during times of recession when companies look after their shareholders to compensate for a lack of earnings growth, he said.

But this was the first time in 30 years that he had seen dividend growth above earnings growth.

In the past few years, dividend cover — the ratio of profits to dividends — has declined from about 1.7 times to 1.1 times.

“This is probably going to be lower unless we get vast improvements in the economy,” he said.

The trend could feed into claims by trade unions and the government that the private sector is unpatriotic for sitting on large cash piles. Mr Gilmour disagrees: “It is more of a damning indictment on the state of the economy with its appalling

growth rate of 2% or less.”

The private sector has been accused of sitting on R1.3-trillion in cash — although that figure is disputed. But Mr Gilmour said companies have an obligation to return cash to shareholders if they cannot get a better return elsewhere.

He raised the case of BMW SA, which recently dropped SA as a potential site for the production of a new model, following a crippling seven-week strike. “Wherever companies look, they are stymied on the investment front.”

Even after the US has finalised a compromise on its debt ceiling, SA would still face slow growth and tighter global financial conditions, said Craig Pheiffer, head of private client asset management at Absa.

He forecasts economic growth of 2% for 2013 and 2.8% next year. This aligns with the International Monetary Fund’s forecast of 2% growth this year and 2.9% in 2014.

Finance Minister Pravin Gordhan’s medium-term budget policy statement next Wednesday is not expected to offer much hope for improved economic growth or narrowing the current account deficit.

“There is not a lot of room to manoeuvre,” Mr Pheiffer said.

The US Federal Reserve might only begin tapering its quantitative easing programme in March next year, he predicted.