What does USD dividend signal?
The market is elated that dividends in the United States dollar are back, I for one am overjoyed. I take time to dissect what this means in the context of the economy, impact on shareholders perceptions and the wide-ranging impact of this development in this country.
We are currently in the reporting season wherein listed companies are either publishing their full year results or half year results as of 30 June 2022. Just to mention a few US dollar dividend declaration per share; African Sun Limited declared 0.0545 cents, Simbisa Brands Limited 0.58 cents, Delta Corporation Limited 0.06 cents, Meikles Limited 0.1725 cents, Zimre holdings Limited 0.01374972 and First Mutual Properties declared a total US dividend of 120,000 while First Mutual holdings Limited US$125,000 and lastly Rainbow Tourism Group US dollar 250,000.
Now Caledonia Mining Plc pays a quarterly dividend of US$0.14 cents per share. “3 years ago, the Company was paying less than half the current quarterly dividend. Some of the mentioned companies declared the US dividend on top of a ZWL denominated dividend while the likes of Simbisa and Meikles were fully US dollar dividends. Who would have dreamt at the beginning of the year that six months into the year, this will be the development.
US dollar dividends could not have come at a better time than this, a season where the ZSe was at record low levels and investors on paper were losing value in real terms. In my last article, I explored the issue of free cash generation where I highlighted that dividend payments are a strong indicator of a company's ability to generate free cash and that such companies are every investor's dream. It will not surprise me if non-US dollar dividend paying companies are feeling right now when they see what their peers are doing.
What it means
Firstly, it is very clear that the numerous statements made by the government and top business leaders in this country that we do not have a US dollar problem were very right. US dollar liquidity is indeed not a fallacy, it might not be the same case for every player but there is an indication that companies do have the dollars. In his midterm monetary policy statement, the Reserve Bank of Zimbabwe governor announced that for the first six months of the year 2022, total foreign currency receipts amounted to US$5.45 billion compared to US$4.07 billion received during the same period in 2021, representing a 33.6% increase.
Across the board, companies have recorded significant shifts in the currency of purchase by consumers with increased skew towards US dollar sales. These companies would not attempt to pacify the egos of the shareholders by declaring US dollar dividends if they were not generating US dollars. It is unheard of, let alone unethical, for a corporation to declare a US dollar dividend which they intend to finance with a US dollar loan.
Secondly, the market needs to applaud the boards of these companies and management for such an impressive performance. It is not easy to declare a US dollar dividend.
This indicates that management has done well in the thrust to harness the foreign dollars into the formal channels of the economy, and they were not greedy enough to put away the funds in security safes somewhere but are rewarding their shareholders also in a stable currency.
Declaring dividends in dollars indicates superior cash generation in real currency. A company will not put dividend payments ahead of maintenance capital expenditure or tax payments or working capital funding.
These companies are also not going to the auction market to get the cash for the dividend, my guess is that they are paying from their own coffers. Paying dividends in dollars has ripple effects on the economy, you increase circulation of dollars into the formal economy and multiple nostro accounts will be credited since dividend payments are not to only majority shareholders or institutional investors but to all shareholders at the stated dividend date. If you combine the few companies I stated above, millions will move across the formal economy.
Related dividend taxes, fees for share management companies that do the dividend payments and the IMTT are examples of the ripple effects of a US dollar dividend payment as all these stakeholders get to share a piece of the pie. Most listed companies have employee trusts which also get a portion of the dividend, this means even general employees of these companies get a piece of the US dollar dividend. Is there a link between the government measures on forward pricing by government contractors and careful release of payments into the market and the general stabilisation of the parallel market rate?
There is evidence to this, industry has seen the local dollars being scarce in the market such that as companies battle to repay loans, at the same time want to pay dividends, there might be not having enough local dollars to pay the dividend hence opting to pay it in US dollars.
The interbank has moved significantly in the last two months such that the premium with the alternative rate has dropped significantly, this might be an impetus which causes companies to consider dividend payment in US dollars. Recently, the central bank announced that the limit on the maximum amount per transaction on the interbank market was reviewed upwards from US$20 000 to US$100 000 a week which in my view is a great move as it also allows a company to buy its US dollars on the legal formal market and reward its shareholders in the same currency.
On the flipside, a US dollar dividend also comes with administration hurdles which might even result in certain shareholders not receiving their dividend. It is unimaginable that any of these dividends will be paid as cash-no ways hence each shareholder needs a nostro account and those details the administration house will have to collate the data, verify it, and pay the dividend, this can be an arduous process. My advice to any shareholder, get your nostro account details ready and furnish your broker.
Lastly, can these US dollar dividends be an indicator that such companies with superior dollar generation ability will de-list from the ZSe and move to the Victoria Falls exchange, we await to see.
Simbisa has already shocked the market in their recent announcement of them changing the bourse. how sustainable are US dollar dividends going forward and are we likely to see a trend of investors demanding payment in dollars. If so, does this push the economy further into full dollarisation or might this be a short-lived heavenly moment.
Only time will tell.
Will ZIMRA go after the same companies paying dividends in US dollars and open audits of past periods to try and ascertain noncompliance in respect of paying QPDs and other tax heads in dollars?
In conclusion, it is refreshing to see local companies paying US dollar dividends. I wish to see more of a blended dividend currency payment model as it balances cash flows in both currencies.